KAZAKHSTAN: COURT REFUSES TO ENFORCE BYELKAMIT

UNCLAS SECTION 01 OF 02 ALMATY 000256

SIPDIS

DEPT FOR EUR/CACEN (J. MUDGE),EUR/PRA (J. CONLON),EB/IFD
(K. TUMINARO)
TREASURY FOR CENTRAL ASIA DESK OFFICER M. GAERTNER

SENSITIVE

E.O. 12958: N/A
TAGS: EINV PGOV PREL PINR KZ ECONOMIC
SUBJECT: KAZAKHSTAN: COURT REFUSES TO ENFORCE BYELKAMIT
ARBITRATION AWARD

REF: 05 Almaty 3173 and previous


1. (SBU) Summary: A Kazakhstani court has refused to
enforce the London Court of International Arbitration's
award of legal fees to U.S. firm Byelocorp Scientific Inc.
(BSI). BSI will contest the ruling, which asserted that
enforcement of the LCIA award would be "detrimental to
public order in Kazakhstan." In the meantime, the
politically influential Kazakhstanis behind the original
effort to expropriate BSI's 65% stake in Byelkamit have
stripped the defendant companies of all assets and are
threatening additional legal action against BSI. The final
decision in the case will have a significant impact on the
Kazakhstani investment climate, particularly for small and
medium sized investors likely to rely on arbitration. End
summary.

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LCIA Finds in Favor of BSI
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2. (U) On November 22, 2005, the London Court of
International Arbitration (LCIA) ruled in favor of Byelocorp
Scientific Inc. (BSI) in its dispute with Kazakhstani firms
that had tried to expropriate its shares in Byelkamit
(reftel). LCIA awarded BSI 194,365.89 in legal fees. BSI
then turned to the Kazakhstani courts to enforce the
decision against defendants Kulan Group, Giprosvyaz, and
Web.KZ.

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Kazakhstani Defendants Play Dirty...
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3. (SBU) On December 20, the Astana Economic Court issued a
ruling freezing the assets of the defendants pending a
decision on enforcement. According to BSI lawyer Yerlanbek
Zhussupov, however, the three defendant firms were stripped
of assets before the court order took effect. On November
7, all the shares of Web.KZ and Kulan Group were sold to
Giprosvyaz. On December 13, all shares and property of
Giprosvyaz were transferred to a firm called Gidromash Group
LLP.


4. (SBU) Zhussupov shared with POEC chief a copy of a
December 31 letter from Kazakh Institute of Oil and Gas
president Serik Burkitbayev's assistant Yermek Ashkenov to
BSI president Lowell Mintz. In the letter, Ashkenov demands
that BSI pay damages and transfer its remaining two percent
stake in Byelkamit. Ashkenov threatened further legal
action in Kazakhstan and London in the event agreement is
not reached. In what appeared to be an open threat to use
political leverage, Ashkenov wrote "as the election campaign
is over and the political situation is stable, there is a
good chance that legal action will result in the complete
satisfaction of HOZU Engineering's demands..."


5. (SBU) Ashkenov also alleged that Byelkamit possessed
documents related to the manufacture of equipment for the
"strategic chemical complex in Iraq" by BSI subsidiary
Supcodue S.R.L. Zhussupov told POEC chief that the claims
regarding Iraq were completely spurious and could not be
used against BSI. According to Zhussupov, an Italian
company owned by the same person who owns Supcodue
participated in the Oil-for-Food program. The participation
was completely above board, he stressed, and unrelated to
BSI or its activities in Kazakhstan.


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...and Court Refuses to Enforce Award
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6. (U) On January 23, the Astana Economic Court announced
its decision not to enforce the LCIA ruling. The court
pointed to the fact that LCIA did not specify how the
defendants should divide up the legal costs among
themselves. As a result, the judge reasoned, enforcement of
the order would be "detrimental to public order in
Kazakhstan." He cited Article 228, para. 2 of the Civil
Code, as well as Article 33 of the law "On International
Commercial Arbitration," as justification of his decision.


7. (SBU) Zhussupov characterized the ruling as "far-fetched"
and surmised that pressure had been successfully applied to
the court. BSI will appeal the ruling, according to
Zhussupov, and has the option of applying to either the
Almaty or Astana city court.

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Comment
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8. (SBU) Comment: As BSI successfully defended its interests
in this case and obtained $5 million for its shares in
Byelkamit, the question of whether it ultimately receives
roughly $346,000 in legal fees is somewhat secondary. The
case is an important precedent for other potential foreign
investors, however. To date, Kazakhstan has dragged its
heels on enforcement of one arbitration ruling (AIG) and
refused to enforce a second (BSI). A final decision to
reject implementation of an international arbitration award,
particularly on such laughable grounds, would undermine
Kazakhstan's ability to attract foreign investors.

ASQUINO