RESOURCE NATIONALISM: GRAB WHAT YOU CAN \

131470 2007-11-26 07:50:00 07TASHKENT2029 Embassy Tashkent CONFIDENTIAL 07STATE150999 VZCZCXRO5017\ PP RUEHDBU\ DE RUEHNT #2029/01 3300750\ ZNY CCCCC ZZH\ P 260750Z NOV 07\ FM AMEMBASSY TASHKENT\ TO RUEHC/SECSTATE WASHDC PRIORITY 8834\ INFO RUEHAH/AMEMBASSY ASHGABAT 3490\ RUEHTA/AMEMBASSY ASTANA 9703\ RUEHBJ/AMEMBASSY BEIJING 1062\ RUEHEK/AMEMBASSY BISHKEK 4106\ RUEHDBU/AMEMBASSY DUSHANBE 3969\ RUEHBUL/AMEMBASSY KABUL 2002\ RHEHNSC/NSC WASHINGTON DC\ RHMFISS/DEPT OF ENERGY WASHINGTON DC\ RHEFDIA/DIA WASHDC\ RUEAIIA/CIA WASHDC\ RUCPDOC/DEPT OF COMMERCE WASHDC C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 002029 \ \ SIPDIS \ \ SIPDIS \ \ DEPT FOR SCA/CEN AND EEB B. GLEN GRIFFIN \ ENERGY FOR CCALIENDO \ \ E.O. 12958: DECL: 11/26/2017 \ TAGS: ECON EMIN EPET PGOV UZ SUBJECT: RESOURCE NATIONALISM: GRAB WHAT YOU CAN \ \ REF: STATE 150999 \ \ Classified By: CLASSIFIED BY ECON OFF B. OLSEN FOR REASONS 1.4 (B, D). \ \ ¶1. (C) The natural resources sector is strictly controlled by \ the Government of Uzbekistan (GOU). Its equipment and \ infrastructure is antiquated and, out of economic necessity, \ it relies on foreign firms to help extract and export \ resources. Foreign firms operate in joint ventures with \ state-owned companies, and hold minority stakes. Natural \ resources, especially natural gas and gold, are Uzbekistan's \ most lucrative industries and attract the attention of the \ elite who vie to profit privately. Due to Uzbekistan's \ corrupt and arbitrary business environment, foreign firms \ encounter many difficulties. In 2006 and 2007, the GOU \ aggressively pushed out numerous foreign companies, the \ majority of which worked with natural resources. \ \ Hydrocarbon Sector \ -------------- \ \ ¶2. (SBU) U.S. companies are not involved in the direct \ extraction of hydrocarbons in Uzbekistan. The few U.S. \ companies that work in the sector perform seismic surveys, \ refine petroleum products and sell equipment. To date, these \ companies have not lost market access due to resource \ nationalism. However, some companies have reported \ discrimination in the tendering process based on their \ affiliation with the U.S. \ \ ¶3. (SBU) Numerous state-owned and partially state-owned \ petroleum companies operate in Uzbekistan as joint ventures. \ These include Gazprom, Lukoil, Petronas, the China National \ Petroleum Corporation, and the National Iranian Oil Company. \ While some companies, such as Lukoil, report problems with \ the GOU, to date these companies have not completely pulled \ up operations. \ \ ¶4. (SBU) In 2007, China's Sinopec pulled out of a \ non-functioning joint venture with state-owned Uzbekneftegaz. \ The joint venture, created in 2003, planned to invest USD \ 113 million to rehabilitate oil fields and explore for new \ deposits. Sinopec cited high local resources taxes as the \ main reason for its departure. \ \ Mineral Resources Sector \ -------------- \ \ ¶5. (SBU) Foreign companies in the mineral resources sector \ have had considerable problems with the government in the \ past two years. The GOU expropriated Newmont, a U.S. gold \ mining company, in 2006 from its joint venture that processed \ gold tailings. Before arbitration hearings began, the \ disagreement was resolved in September 2007. The GOU bought \ Newmont out of the joint venture, though for a sum much less \ than Newmont's expected profit over the remaining life of the \ joint venture. \ \ ¶6. (C) The GOU attempted the same with Oxus, a British \ company, in 2006. Oxus struck a deal with the Uzbek-Swiss \ company Zeromax. Zeromax bought 16 percent of Oxus and the \ British company's problems ended. (Note: Zeromax \ unofficially belongs to President Karimov's daughter, Gulnora \ Karimova. It is registered in Switzerland, but in practice \ is an Uzbek company.) \ \ ¶7. (SBU) U.S-owned Nukem has an exclusive contract to export \ the majority of Uzbek uranium. It encountered problems in \ 2007, including delay of payments and the GOU refusal to \ abide by the contractual provisions. While the situation is \ improved, it could again deteriorate at any time. In October \ 2007, the GOU expropriated the Israeli company Metal-Tech \ Ltd. that processed molybdenum and tungsten. The dispute is \ unresolved. \ \ Comment: Who Gains? \ -------------- \ \ ¶8. (C) The GOU is not necessarily predatory towards foreign \ \ TASHKENT 00002029 002 OF 002 \ \ \ firms in the natural resources sector. However, if a foreign \ company enjoys strong profits, it comes to the attention of \ elite Uzbeks who want a share of the profit. Two elite \ figures have the most to gain from natural resources: Gulnora \ Karimova and Minister of Finance Rustam Azimov. Zeromax is \ the "middle man" for all oil and gas contracts, thereby \ interfacing with Gazprom and Lukoil, which siphon 80 percent \ of Uzbekistan's natural gas exports to Russia. Through \ Karimova's control of Zeromax, she is squarely in control of \ the hydrocarbon sector. Azimov reportedly led the state \ seizure of Newmont and Metal-Tech Ltd., and is in the \ position to unofficially profit from the GOU's control. \ BONNER \