KUMTOR RAISES THE STAKES IN KYRGYZ GOLD DISPUTE

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000391 SIPDIS SIPDIS DEPT FOR SCA/CEN (GEHRENBECK) E.O. 12958: DECL: 04/10/2017 TAGS: ECON EMIN EINV PREL KG SUBJECT: KUMTOR RAISES THE STAKES IN KYRGYZ GOLD DISPUTE REF: A. BISHKEK 316 ¶B. BISHKEK 155 BISHKEK 00000391 001.2 OF 002 Classified By: Ambassador Marie Yovanovitch for Reasons 1.4 (b) and (d) ¶1. (C) Summary: Kumtor Operating Company (KOC),the Canadian operator of the Kumtor gold mine, is holding open the possibility of fresh negotiations with the Atambayev-led government, following the government's rejection of a deal KOC negotiated with former First Deputy Prime Minister Usenov that would have increased payments to the government in return for extending the term of the KOC's concession. Although draft legislation in parliament threatening to nationalize KOC's concession may have been merely a "pressure tactic" for the negotiations, KOC is taking precautions. KOC has notified the government of its intent to utilize arbitration to address wage and/or tax issues. In addition, KOC is prepared to take additional measures if the draft legislation is passed. Prime Minister Atambayev told the Ambassador April 6 that he opposed nationalization, and Finance Minister Japarov confirmed April 10 that the government was interested in new negotiations with KOC. End summary. Two Steps Back... -------------- ¶2. (C) In March, former First Deputy Prime Minister Daniyar Usenov negotiated directly with the Canadian-run Kumtor Operating Company (KOC) a new deal that would have increased payments to the government in exchange for extending the term and area of KOC's gold concession, but the government subsequently rejected the deal. (See reftel A for details.) An observer told emboff April 6 that the Cabinet had feared that the controversial Usenov would have gained too much stature from the proposed deal. Andy Lewis, president of KOC, told emboff March 29 that Prime Minister Isabekov's resignation and related turmoil had disrupted any further discussions with the government. However, KOC Vice President of Finance Phil Yee told emboff April 10 that new Prime Minister Atambayev had called for renewed negotiations. Minister of Finance Akylbek Japarov confirmed the offer in an April 10 conversation with the Ambassador. ¶3. (C) Although the new Atamayev-led government has offered to negotiate, KOC is worried about recent actions in the Kyrgyz parliament. Lewis expressed disdain for Kyrgyz parliamentarian Arslanbek Maliev, who introduced the legislation in March challenging KOC's current mining concession. Maliev, Lewis claimed, had promised not to take any legislative action while negotiations were underway, but introduced the Kumtor-related legislation the following day. (Note: Lewis also stated that Maliev, who represents a district near the Kumtor mine, repeatedly has sought financial aid from KOC ostensibly for projects in his constituency. End note.) Although the draft legislation has not yet had its second reading in parliament, KOC's parent company labeled the legislation a "pressure tactic" in a March 26 press release. Maliev reportedly confirmed that Kumtor's nationalization was not planned. Another observer told emboff that the legislation had not been properly debated in committee; and, as a result, President Bakiyev would have grounds to return the bill to parliament. Calling the Bluff -------------- BISHKEK 00000391 002 OF 002 ¶4. (C) Yee told emboff KOC had recently sent Kyrgyz authorities a letter expressing KOC's intent to bring recent Kumtor financial issues (tax and/or wage problems) before international arbitration. The letter, Yee recounted, outlined possible actions such as placing future tax payments in escrow. In addition, if parliament passes the legislation after a second reading, KOC is considering halting its operations. Yee added that the Canadian ambassador, who is based in nearby Almaty, recently returned from Canada and will be presenting a "forceful" letter to Kyrgyz authorities regarding problems at Kumtor. Comment -------------- ¶5. (C) The Canadian operators of the Kumtor mine clearly view the Kyrgyz parliament as the main obstacle in reaching a new arrangement over the mining concession. Parliament is currently in recess. According to KOC's Yee, residents of Maliev's district are signing petitions protesting government actions that might threaten KOC's operations and their livelihoods. This legislation, combined with recent parliamentary measures to set electricity and certain telephone tariffs and lower the retirement age, represents a populist trend in parliament that interferes with the business environment. While the legislation represents a potential serious threat to KOC's interests, the prime minister and the finance minister have both told us the government is not interested in nationalizing the concession, and they hope to pursue new negotiations. YOVANOVITCH