Identifier
Created
Classification
Origin
06ASTANA51
2006-06-15 14:48:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

2006 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS

Tags:  EINV EFIN PGOV KIDE OPIC KZ 
pdf how-to read a cable
VZCZCXRO0352
RR RUEHAST
DE RUEHAST #0051/01 1661448
ZNR UUUUU ZZH
R 151448Z JUN 06
FM USOFFICE ASTANA
TO RUEHC/SECSTATE WASHDC 0136
INFO RUEHAST/USOFFICE ASTANA 0138
RUCPDOC/USDOC WASHDC
UNCLAS SECTION 01 OF 03 ASTANA 000051 

SIPDIS

SENSITIVE
SIPDIS

SCA/CEN - MUDGE

E.O. 12958: N/A
TAGS: EINV EFIN PGOV KIDE OPIC KZ
SUBJECT: 2006 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS
- POST INPUT


UNCLAS SECTION 01 OF 03 ASTANA 000051

SIPDIS

SENSITIVE
SIPDIS

SCA/CEN - MUDGE

E.O. 12958: N/A
TAGS: EINV EFIN PGOV KIDE OPIC KZ
SUBJECT: 2006 REPORT ON INVESTMENT DISPUTES AND EXPROPRIATION CLAIMS
- POST INPUT



1. (SBU) This cable is Sensitive But Unclassified and contains
business-sensitive information. Not for Internet distribution.
Please handle accordingly.


2. (U) This cable responds to Reftel request for input to the
2006 report on investment disputes and expropriation claims.


3. (SBU) Post knows of three claims by United States citizens
outstanding against the Government of Kazakhstan (GOK). The
claimants are identified at the end of this cable. One of
the three cases (Case 2 / Claimant B) has been resolved.





Case 1
--------------

a. Claimant A

b. 1996



c. In the summer of 1996, when the Kazakhstani government sold
Claimant A a large power station in northern Kazakhstan, the
government agreed that its state power company,
Kazakhstanenergo, would pay a specified amount for power
deliveries. However, Kazakhstanenergo fell far behind in making
payments, and as of June 1998, Claimant A calculated its arrears
at approximately $150 million. Claimant A offered the
government a wide range of remedies to cover its debt. Claimant
A also filed for international arbitration as provided for in
its contract. Ahead of an expected June 23, 1999, arbitration
decision in London, the GOK and Claimant A signed a memorandum
of understanding (MOU) calling for a negotiated solution, and
subsequently negotiated a
second MOU on how the dispute would be resolved.

At first, the GOK made progress in fulfilling its obligations,
completing four of six contracts called for by the settlement,
under which debt was swapped for management rights in the
electricity distribution business in Eastern Kazakhstan. The
GOK's performance under the other two contracts, however,
continues to be an issue.

One of the two problematic contracts, signed by Claimant A and
the Ministry of Energy, provided for preferential deliveries of
power (at 10% discount off the standard rate) to Russia on the
Omsk line. In fall 2005, KEGOC, a state-owned power
transmission company and a co-party to the contract, refused to

deliver electricity on the line. In response, Claimant A has
commenced an arbitration action with the London Court of
International Arbitration (LCIA). The GOK has tried to resolve
the issue in a local court in Pavlodar. The Pavlodar court has
refused to hear the case. At issue for Claimant A is the
principle of contract sanctity - the notion that KEGOC cannot
stop power transmission at will. Notably, the Ministry of
Energy is supportive of the claimant and encouraging KEGOC to
settle.

The second source of contention is the contract for completion
of power and hydroelectric plants. Negotiations continued until
summer of 2002, and then broke down. In December 2002, the GOK
attempted to invalidate the underlying contract in Kazakhstani
court, but the court dismissed the suit, since the contract
provided solely for international arbitration with the LCIA to
resolve disputes. The GOK refused to submit to arbitration, and
in April 2003, initiated a new suit in Kazakhstani court, this
time seeking to revoke only the arbitration clause of the
contract. According to the claimant, the GOK stated to the
court that it was "not aware of such an institution" in
reference to the LCIA, London. In January 2004, the Kazakhstani
Supreme Court ruled that the international arbitration clause,
as written, was invalid (the written summary of the decision
states that a re-worded clause might be acceptable.)

At the moment, a key issue for Claimant A is what it views as
"creeping expropriation" by the GOK through the royalty
mechanism. Claimant A is charged royalties by the Finance
Ministry's State Property Committee for concessions -
specifically, for the right to use (for 20 years up to 2017) two
hydro-electric plants on the Irtysh River in Eastern Kazakhstan.
The Committee, however, is charging the claimant a rate 50%
higher than what the claimant sees as warranted by the contract.
The Committee refuses to provide the claimant with an
explanation of its calculation method.


ASTANA 00000051 002 OF 003


Recently, the Financial Police, which operates under the
umbrella of the Finance Ministry, initiated criminal prosecution
against the two plants' accountants and general directors. The
charges currently focus on four to six people, all of them
Kazakhstani nationals. Claimant A, however, has expressed the
concern that prosecution could spread to include U.S. citizens.
Claimant A sees the criminal prosecution as a way to force
settlement. Claimant A, however, reports that it is close to
reaching a settlement with the Ministry of Finance on the
substantive issues.

The Embassy's support of Claimant A in its difficulties with the
Kazakhstani government began in 1999 and continues to this day,
as Claimant A is continuously subjected to various types of
harassment. In July of 2005, two of its local employees were
convicted of accounting improprieties in a trial that even the
presiding judge admitted was dubious. Both avoided prison terms
by benefiting from a pardon under the Presidential Amnesty Act.
One of the two convictions has subsequently been overturned; the
other, with an identical set of facts, is on appeal.

In a separate dispute, Claimant A purchased a bankrupt coal mine
in 2001 to ensure fuel supplies for its primary generation
facilities, spending over $30 million to discharge debts and
improve facilities. From the same year, Kazakhstani parties
claiming to be owners of the mine filed a series of actions in
regional courts. In many cases, neither Claimant A nor its
counsel were advised of hearings or proceedings until days, or
even hours, before they were to take place, making it extremely
difficult to make travel arrangements to attend such
proceedings. In October 2003, the Pavlodar Oblast court ruled
that a Kazakhstani company was rightful owner of the mine, and
thus entitled to dispose of its assets and require Claimant A to
vacate the site. At Claimant A's request the Secretary of
Commerce raised the dispute with President Nazarbayev.
Subsequently, a higher court reversed the Pavlodar Oblast
court's decision, and reestablished Claimant A's ownership of
the mine.

However, in June 2005, armed agents of the Kazakhstani tax
authorities raided Claimant A's offices at the Maikuben mine.
They ejected Claimant A's employees from the building, took over
the telephone switchboard and computer server room and demanded
documents. This raid was ostensibly done in connection with an
ongoing tax enforcement case, although the agents were seeking
documents from a time period outside the scope of the inquiry.


Claimant A reports that, based on the documents forcibly seized
from it in the June 2005 raid, it is being pressured by a
regional environmental protection agency to pay an unofficial
fine.





Case 2
--------------

a. Claimant B

b. 2000



c. In December 1998, Claimant B approved an $18 million
investment in a 75-unit residential compound in Almaty. The
claimant invested in a joint venture with a local real estate
development firm and lawfully acquired the land needed for the
compound. In February 2000, the GOK announced a plan to
establish a national arboretum on land that overlapped the
boundaries of the claimant's. In July 2000, the claimant
requested that the GOK convene a special working group to settle
the dispute, as provided for by the law. The GOK continued to
assert its right to take the claimant's land and started
construction of the arboretum in February 2001. Subsequently,
the police prevented the claimant's workers from entering the
claimant's entire plot of land. The GOK failed to offer the
claimant satisfactory compensation for the taking.

In 2002, the case went to arbitration at the International Court
for the Settlement of Investment Disputes (ICSID). In October
2003, ICSID found for the claimant and awarded damages in excess
of $10 million.

Post actively supported Claimant B. The Ambassador and senior
officials of the State and Commerce Departments frequently and
forcefully reminded the highest GOK officials of Kazakhstan's

ASTANA 00000051 003 OF 003


obligation under the U.S.-Kazakhstan Bilateral Investment Treaty
to honor the arbitral award and warned of negative consequences
for Kazakhstan's investment and debt ratings if the GOK failed
to pay.



Following extensive USG encouragement, the GOK reached a
settlement with Claimant B consistent with the arbitration
decision and made a requisite payment in late April 2006.





Case 3

--------------



a. Claimant C



b. 2001



c. In July 2001, the Kazakhstan Ministry of State Revenue (MSR)
performed an audit and assessed a $29 million tax claim on
claimant, a subsidiary of a U.S. parent company. The
assessment was based on MSR's finding that $100 million received
by claimant from a customer (the operating consortium of the
offshore Kashagan oil field),as reimbursement for capital
expenditures incurred by claimant in modifying a barge rig, was
taxable income. Claimant C challenged the decision in Astana
City Court, which ruled in the claimant's favor, holding that
the reimbursements were not, in fact, taxable income. Following
an appeal by the MSR, Kazakhstan's Supreme Court ruled in favor
of claimant in March 2002.



The Kazakhstani tax authorities have persisted in appealing the
case in subsequent years, bringing the case to the Supreme Court
a total of four times. In May 2006, the Supreme Court ruled in
favor of the Kazakhstani tax authorities. Claimant subsequently
contacted the USG, though to date has not requested or
recommended any specific Embassy intervention. By early June
the claimant's attorneys had successfully filed a stay of the
collection process triggered by the Supreme Court decision, and
were planning an appeal.



-------------- --------------




4. For Department information only:



Claimant A: AES Silk Road Corporation



Claimant B: AIG Silk Road Capital Management



Claimant C: Parker Drilling Company
TRACY