KAZAKHSTAN: 2007 INVESTMENT DISPUTES REPORT UPDATE

UNCLAS ASTANA 001650

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN - O'MARA;

E.O. 12958: N/A
TAGS: EINV ECON ETRD ENRG KIDE KZ
SUBJECT: KAZAKHSTAN: 2007 INVESTMENT DISPUTES REPORT UPDATE

REF: State 55422



1. (SBU) This cable responds to reftel. The United States
Government is aware of two (2) claims by United States persons that
are outstanding against the Government of Kazakhstan (GOK).


2. (SBU) a. Claimant A

b. 1996

c. Although it has faced a number of regulatory issues, Claimant A
is currently dealing with two disputes that may rise to the level of
expropriation.

Claimant A's dispute on electricity deliveries with the state-owned
power transmission monopoly (now known as KEGOC) and the Government
of Kazakhstan (GOK) dates back to 1996. Claimant A ultimately
signed two memoranda of understanding (MOUs) with KEGOC and the GOK,
outlining how the dispute would be resolved. However, the claimant
states, as of early June 2007, KEGOC continues to be in breach of
some of the contracts arising from the MOUs. According to Claimant
A, this contractual breach by KEGOC amounts to contract repudiation.
Although KEGOC and the GOK have submitted to international
arbitration (which is currently ongoing),Claimant A is concerned
that KEGOC may not comply with the arbitration decisions.
Furthermore, Claimant A states that KEGOC has, on numerous
occasions, used underhanded methods to pressure the Claimant. Such
actions often involve making it difficult for third parties to
conduct business with Claimant A.

Claimant A states that discriminatory regulatory actions by regional
authorities also amount to expropriation. According to the
Claimant, a regional government - with the support of some officials
in the central government - has forced the Claimant to choose
between lowering its rates (which would be politically expedient to
the local authorities) or facing severe regulatory actions.
Claimant A maintains that this is an example of tactics, which
sometimes include threats of criminal prosecution, to extract
financial benefits from the Claimant.



3. (SBU) a. Claimant B

b. 2001

c. In July 2001, the Kazakhstan Ministry of State Revenue (MSR)
performed an audit and determined that Claimant B, a subsidiary of a
U.S. parent company, owed $29 million in taxes. The assessment was
based on MSR's finding that $100 million received by the Claimant
from a customer as reimbursement for capital expenditures incurred
by claimant in modifying a barge rig, was taxable income. (The
customer was the operating consortium of the offshore Kashagan oil
field.) Claimant B 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 B subsequently contacted the
USG. In early June 2006, the Claimant's attorneys had successfully
filed a stay of the collection process triggered by the Supreme
Court decision, and were planning an appeal. In April 2007, the
Kazakhstani Supreme Court granted to Claimant B a Supervisory Panel
Appeal. As of early June 2007, Claimant B is awaiting the
consideration of its appeal by the court.


4. (SBU) Claimant A: AES Corp.

Claimant B: Parker Drilling, Inc.

ORDWAY