GOING FOR THE KYRGYZ GOLD -- WILL USENOV TAKE THE

C O N F I D E N T I A L SECTION 01 OF 04 BISHKEK 000316 SIPDIS SIPDIS DEPT FOR SCA/CEN E.O. 12958: DECL: 03/23/2017 TAGS: PGOV EAID ECON EFIN PREL KG SUBJECT: GOING FOR THE KYRGYZ GOLD -- WILL USENOV TAKE THE HONORS? REF: A. BISHKEK 194 ¶B. BISHKEK 155 ¶C. BISHKEK 126 BISHKEK 00000316 001.2 OF 004 Classified By: Amb. Marie L. Yovanovitch, Reason 1.4 (b) and (d). ¶1. (C) Summary: First Deputy Prime Minister Usenov has continued to consolidate control over Kyrgyz economic and business activity since the new cabinet was named in February. He led the (successful) campaign against the HIPC initiative, and he has advocated ousting the IMF and the World Bank altogether. Under the new government structure, Usenov has expanded his responsibility over all ministries and state agencies that deal with economic, tax, and resource issues, and a mid-March decree granted him authority to coordinate contact with the international financial institutions. Usenov recently negotiated directly with the Canadian operators of the Kumtor gold mine on a proposal to restructure the existing agreement to increase government revenues in exchange for an expanded concession, tax clarity, and parliamentary approval. Now Usenov has targeted the Central Bank, looking to take $200-300 million in "excess" Central Bank foreign exchange reserves to use for a national development fund. Usenov is also suspected to be behind bribery allegations against the Central Bank governor, who opposes Usenov's plan. ¶2. (C) There are rumors that, amidst the growing fears that Usenov is gaining too much power, he may be headed for a fall. Former Prime Minister Kulov's claim that Usenov admitted to paying $300,000 in bribes to get his job added to the controversy; Usenov has since threatened to sue Kulov for libel. Nevertheless, Usenov survived a March 20 parliamentary vote of no confidence over his alleged role in recent attempted privatizations of state assets, and at this point he seems intent on maximizing his control over Kyrgyz business and economic life with minimal (western) scrutiny. End summary. Foreign Exchange, Bribes,... -------------- ¶3. (C) Having led the successful campaign to keep Kyrgyzstan out of the Highly Indebted Poor Countries (HIPC) debt relief initiative (Ref B),and having expanded his authority over all ministries and state agencies dealing with economic, tax, and resource issues under the new government structure (Ref C),First Deputy Prime Minister Daniyar Usenov has continued to push to consolidate his control over Kyrgyz economic and business activity. Usenov has now targeted the Central Bank, proposing to use $200-300 million in "excess" foreign exchange reserves to provide start-up capital for his pet project, a national development fund. Central Bank Governor Marat Alapayev strongly opposes Usenov's plan, and others are alarmed about the potential threat to Central Bank independence, as well as the possible negative macroeconomic impact of the development fund. ¶4. (C) According to IMF resident representative James McHugh, Alapayev believes that Usenov was behind rumors that the IMF bribed Alapayev to support the HIPC initiative. These allegations, first lobbed during the debate over HIPC initiative, have now resurfaced. McHugh told Emboff that Alapayev was worried that he would be asked to step aside, and added that Alapayev was conferring with Prime Minister Azim Isabekov and Finance Minister Akylbek Japarov regarding BISHKEK 00000316 002.2 OF 004 next steps. (Note: Emboff encountered Alapayev departing the IMF offices March 15, and a subsequent call from Alapayev to McHugh about the allegations cut emboff's meeting short. Deputy Central Bank Governor Maksat Ishenbaev, who was widely regarded as a competent professional, resigned in late February and reportedly blamed Usenov as an underlying cause for his departure. End note.) ...the IMF and Audiotape -------------- ¶5. (C) Usenov also appears to be going after the IMF, which he has previously pledged to force out of Kyrgyzstan by December 2007. Not only did Usenov gain increased authority over business and economic affairs under the new government structure (Ref C),a mid-March presidential decree granted him authority to coordinate all official contact with international financial institutions. Usenov led the (successful) campaign against Kyrgyzstan joining the HIPC debt relief initiative (Ref A),and he has now brazenly called on the IMF and World Bank to forgive $200 million of Kyrgyzstan's foreign debt -- the portion he attributes to "consultancy service" fees that were "eaten away" by foreign consultants. ¶6. (C) Following conflicting accounts of visiting IMF Assistant Director Paulo Neuhaus' meeting with Usenov, the Kyrgyz state press service revealed, to the IMF's consternation, that the Usenov meeting had been recorded. The state press service issued the following statement: "The press service of the Government of the Kyrgyz Republic appeals to IMF representatives . . . to consider the issue of writing off a portion of external debt of the Kyrgyz Republic formed as a result of consultancy services, not to misinform the public of the Kyrgyz Republic." The IMF's McHugh told emboff that such statements mischaracterize the IMF's free technical assistance. ¶7. (C) McHugh rationalized that Usenov viewed the IMF as a threat to his personal ambitions to control Kyrgyzstan's economic assets. Of all the international institutions present in Kyrgyzstan, the IMF, McHugh argued, maintains the closest attention to the government's fiscal and financial accounts, and would subsequently be best positioned to highlight any questionable actions by Usenov. Putting the Squeeze on Kumtor -------------- ¶8. (C) Usenov has also focused his attention on the activities of the Kumtor Operating Company (KOC),a subsidiary of the Canadian firm Centerra, at the large Kumtor gold mine in eastern Kyrgyzstan (see Ref B). Amidst comments from parliamentarians advocating nationalization of the mine, Usenov requested, during February negotiations held with Centerra in Moscow, compensation for the "lost" value associated with Centerra shares sold by the previous Akayev government. (Note: Centerra's stock price has increased significantly since that sale. End note.) In addition to increasing government revenues from the mine, subsequent discussions held in Bishkek focused on: 1) expanding the term and size of the mining concession, 2) tax clarity, and 3) parliamentary approval of a renegotiated agreement. KOC Vice President for Finance Phil Yee told emboff that Centerra hoped to conclude negotiations before opposition protests, scheduled for the second week of April, begin. BISHKEK 00000316 003.2 OF 004 ¶9. (C) Usenov claimed $2.5 billion in revenues would accrue from a new Kumtor agreement. KOC President Andy Lewis downplayed Usenov's claims by noting that a significant portion of the estimated 700-750 tons of gold reserves in the expanded mining concession cannot be economically extracted. In addition, Lewis told emboff March 14 that Kyrgyz government pressure to increase mineworkers' salaries 37% to an average monthly wage of $1200 (approximately three-four times greater than a government minister's official salary) resulted in Centerra's decision to seek international arbitration. Upsetting Usenov's One Man Act -------------- ¶10. (C) Some commentators have suggested that Usenov may be on the "edge of a fall," and may be "sacrificed" by Bakiyev as part of a political settlement with Kulov. On March 20, parliament barely failed to pass a largely symbolic no confidence vote on Usenov. Usenov's opponents pushed for the vote because of allegations surrounding Usenov's role in the less-than-transparent attempted privatizations of two state properties, as well as the accusation that Usenov bribed parliamentarians in order to secure his position. According to a source close to the Kumtor negotiations, the prospect of Usenov securing a lucrative deal with Centerra has senior government officials worried, and GKNB Chief Sutalinov told the Ambassador that Usenov clearly has cut a private deal with Kumtor. Although the proposed agreement is ready for Cabinet review, there is the possibility that a "problem" may arise which might require President Bakiyev's intervention. As a result, Bakiyev would negotiate a 10% increase in revenues and claim credit for securing the deal. Impact of the Development Fund -------------- ¶11. (C) In addition to the Central Bank's foreign exchange reserves and funds from a renegotiated Kumtor deal, Usenov has suggested the sale of the Kyrgyz government's remaining shares in Centerra as a source of capital for the establishment of one or possibly two development funds. Usenov's $600 million capital goal for the fund would roughly match the asset base of the Kyrgyz commercial banking network. As a result, the inflationary impact of the fund could be significant. Usenov has cited Kazakhstan's development fund as a model, and has declared gold to be Kyrgyzstan's "oil." However, as KOC's Lewis noted to emboff, the lack of significant gold discoveries in Kyrgyzstan since the Soviet era is a result of a difficult investment climate, and gold is possibly an unwise foundation for securing Kyrgyzstan's development. Comment -------------- ¶12. (C) Success in securing authority over the economic and business portfolio, as well as the defeat of the HIPC initiative, has only emboldened Usenov to push harder. As a local embassy employee who attended school with Usenov noted to emboff, Usenov has no scruples. As a result, his pressure on Kumtor and the Central Bank is not surprising as he seeks to enhance his ability to shape the business and economic climate, mainly to his own advantage. His disdain for international financial institutions and limited interaction BISHKEK 00000316 004.2 OF 004 with western officials underscore his dislike of scrutiny. Bakiyev, whose views on the economy tend to reflect his former position as a Soviet factory manager, relies on Usenov for economic decisions. Though we have no proof, there are persistent rumors that Usenov acts as the "family banker" for Bakiyev, securing his position with a piece of each deal. However, too much "success" eventually may force President Bakiyev and others to check Usenov's power, and, as some commentators have suggested, there is a chance he will be "sacrificed" as part of a political settlement with Kulov. YOVANOVITCH