KAZAKHSTAN: NEXT STEPS ON BIOKOMBINAT

C O N F I D E N T I A L ALMATY 003915 SIPDIS DEPARTMENT FOR EUR/CACEN (J. MUDGE),EUR/PRA (D. LINNET) E.O. 12958: DECL: 10/31/2015 TAGS: KZ PARM TBIO WMD POLITICAL SUBJECT: KAZAKHSTAN: NEXT STEPS ON BIOKOMBINAT REF: A. 04 STATE 271994 ¶B. ALMATY 1436 Classified By: Ambassador John Ordway, reasons 1.4 (e) and (h). ¶1. (C) Summary: The owners of the privatized Biokombinat facility in Almaty are willing to transfer ownership of 69 fermenters to the Nonproliferation and Disarmament Fund for destruction in return for $500,000 plus taxes. Post recommends that the Department act quickly to formalize agreement on the fermenters in Almaty, as they pose a serious and immediate proliferation risk. After the fermenters have been destroyed, post believes it would be appropriate to approach Betta Star, the private firm which purchased Biokombinat in 2001, with a request that they abandon their plans to manufacture anthrax vaccine in Stepnogorsk. If Betta Star does not agree to this request, interagency discussion of whether to urge the GOK to step in and limit Betta Star's commercial activities would be necessary. Post believes that the GOK's reaction to any such request is likely to be negative. See paragraph 7 for action request. End summary. Background -------------- ¶2. (SBU) After learning this summer from contacts at the Ministry of Education and Science that the owners of the Biokombinat facility in Almaty intended to dispose of several large fermenters, which posed a potential proliferation threat, post gathered additional information and relayed it to the department in August. Interagency discussion resulted in a decision that the Nonproliferation and Disarmament Fund (NDF) would address the problem. POEC chief met with Gaisha Kashikova, director of Betta Star (which owns Biokombinat), on September 8 to inform her of the Department's interest in addressing this potential proliferation threat. At that meeting, Kashikova explained that when her firm purchased the complex from the State Committee on Property in 2001, they were required to commit to maintaining the "profile" of the firm for five years. Kashikova indicated that this commitment obligated Betta Star to maintain vaccine production. ¶3. (C) As a result of the inspection conducted at U.S. request (reftels),Betta Star was ordered to move vaccine production out of the Almaty oblast. Kashikova indicated that she is under pressure to re-establish production as quickly as possible so as not to be found in violation of the privatization agreement. She noted that Betta Star was a real estate development firm that had gotten into vaccine production "accidentally" by purchasing the six-hectare Biokombinat complex in central Almaty. The firm plans to build retail and residential space on the lot. ¶4. (SBU) Kashikova explained that, after searching unsuccessfully for a suitable location in the Almaty region, she settled on Stepnogorsk as the only place with the appropriate facilities, workforce, and utility rates. Renovation of the building and installation of fermenters was already underway as of September, according to Kashikova. She indicated that Betta Star was doing the minimum required to fulfill the requirements of the privatization agreement. NDF Visit -------------- ¶5. (C) NDF and Embassy representatives held initial discussions with Kashikova on September 19 and visited the Biokombinat facility in Almaty briefly on September 21. During the visit, it was apparent that the complex is lightly guarded and almost abandoned; only three or four Biokombinat employees were on site as caretakers. Most of the 69 remaining fermenters are still in the main building; two are lying in the courtyard. ¶6. (SBU) During a September 22 meeting with NDF representative Pat O'Brien, Kashikova presented an elaborate business plan for the Stepnogorsk facility, describing production of six vaccines and bottling of a seventh from imported concentrates. Kashikova agreed to transfer ownership of the 69 fermenters remaining in Almaty to the USG for destruction for $500,000. She indicated that she would be willing to sell the entire new facility in Stepnogorsk to the USG for an additional $3.5 million, once Betta Star's vaccine production requirement has been fulfilled (i.e. October 2006). Kashikova indicated that the $500,000 figure was after taxes, including VAT and corporate income tax. In a September 30 letter to POEC chief, Kashikova revised the proposal to $1.2 million if an agreement was signed covering only the Almaty fermenters, or $4.14 million for the entire package. After POEC chief met with Kashikova on October 4 to discuss the discrepancy, Kashikova sent an email on October 5 requesting a total of $687,306 for the Almaty fermenters, including $65,217 in VAT and $122,089 in corporate income tax. Next Steps/Action Request -------------- ¶7. (SBU) Action request: Post understands that NDF will be ready to sign an agreement on the Almaty fermenters as early as November 4. Post requests department guidance on responding to Kashikova's October 5 offer. The question of taxes needs to be addressed, given the verbal agreement of September 22. Kashikova has requested an advance copy of the NDF agreement for review by Betta Star's lawyers in order to be prepared to sign as quickly as possible. Post recommends the NDF send a letter as soon as possible to Kashikova, via the embassy, outlining how much the Department is willing to pay Betta Star and explaining which taxes we believe are applicable and why. Post also recommends that the letter include a draft of agreement for Kashikova's review. It is essential to move quickly with the destruction to ensure that cooperation with the U.S. continues to make financial sense for Betta Star and to address the real threat posed by these 69 poorly protected fermenters. ¶8. (C) The question of whether and when to purchase the 80 fermenters that Betta Star has moved to Stepnogorsk requires further discussion. Post believes that it would not be wise for the USG to agree to Kashikova's price of an additional $3.5 million for the Stepnogorsk facility, as it remains to be seen whether Betta Star actually intends to invest sufficient funds to create a functioning business or is merely using its ambitious business plan to drive up the asking price. In her first conversation with the USG on this subject, Kashikova minimized the size and value of the intended facility in Stepnogorsk. Only after learning that the USG might be willing to compensate her firm for the fermenters did she begin to describe ambitious investment plans. In so doing, she has increased the per unit price for the fermenters from $7250 (Almaty) to $43,750 (Stepnogorsk). Even allowing for the fact that Betta Star has chosen to move only newer, more commercially useful equipment to Stepnogorsk, this appears to be a bargaining tactic. Post recommends allowing the market to decide. If in October 2006, Betta Star has a commercially-viable vaccine production facility in Stepnogorsk, the U.S. should not prevent them from selling it to a legitimate buyer. Such a course of action would be consistent with our policy of supporting economic diversification and the peaceful employment of former weapons scientists. If no such buyer appears, then the U.S. would be able to offer a far lower sum for the facility. Anthrax and Stepnogorsk -------------- ¶9. (SBU) In the business plan shared with NDF on September 22, Betta Star described plans to manufacture six vaccines (anthrax, brucellosis, gangrene, braxy, swine erysipelas, and listeriosis) at its new Stepnogorsk facility, and to bottle FMD vaccine from imported concentrates. The business plan indicated that vaccine production at Biokombinat had been relatively low in recent years, resulting in only $144,000 revenue from government contracts in 2002. According to Kashikova, most if not all of Biokombinat's revenue since privatization came from anthrax vaccine. ¶10. (C) Post understands that there is significant interagency concern regarding the establishment of anthrax vaccine production capability in Stepnogorsk, given the expense and difficulty of the CTR project to liquidate the remains of the Soviet Union's weaponized anthrax program at the same location. In informal discussions of the issue, Dr. Yerlan Ramanculov, former CDC researcher and director of Kazakhstan's new National Center for Biotechnology, has stressed that there is no comparison between the production of anthrax vaccine using attenuated strains, and the Soviet-era production of weaponized anthrax. According to Ramanculov, the supplies and procedures for vaccine production pose no proliferation threat and extremely minimal public health risk. ¶11. (C) Given the potential for the situation to be distorted if picked up by the media, post believes it would be appropriate to discuss with Betta Star officials the possibility of dropping anthrax vaccine from their production plans in Stepnogorsk. It is essential that NDF reach agreement with Betta Star on the destruction of the fermenters in Almaty, transfer the funds, and complete the destruction first, however. Broaching the subject prematurely could endanger the agreement with Betta Star by creating the impression that the USG intended to use diplomatic pressure to force the firm to do something that would violate the terms of its privatization agreement. As the company is completely private and there are no domestic laws or international agreements that prevent them from moving the fermenters within Kazakhstan, there in fact is no way to compel them to cooperate with the USG. During meetings, Kashikova has more than once said that she is ready to go to court to fend off any USG or GOK action that could threaten Betta Star's ownership of the extremely valuable Biokombinat plot. ¶12. (C) If Betta Star does not agree to drop its plans to manufacture anthrax vaccine in Stepnogorsk, interagency discussion of the option of demarching the GOK would be necessary. Post notes that officials in the Ministry of Education and Science are extremely critical of what they describe as the U.S. "failure" to support commercial development in Stepnogorsk through the defense conversion, and often bring up the subject of the tableting line provided by the U.S. that has sat unused in Stepnogorsk for many years. They allege that in Stepnogorsk, the U.S. "only destroys, it never builds." It would therefore be an uphill battle to approach the GOK with a request to impose limits on the business activities of a start-up biotechnology firm in Stepnogorsk, particularly given the lack of a convincing argument that production of anthrax vaccine creates a proliferation risk. If it comes to this stage, post recommends that the relevant agencies weigh carefully the political cost of beginning what is likely to be a dispute with the GOK against the actual risk, if any, posed by Betta Star's proposed activities. It is also important to consider the fact that preserving good relations with Betta Star would ensure USG access to the Stepnogorsk facility and preserve the option of purchasing the remaining fermenters in 2006. Any action perceived as threatening the firm's ability to operate could end the cooperative relationship. ORDWAY NNNN