Identifier
Created
Classification
Origin
08ASTANA1164
2008-06-23 06:32:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE

Tags:  KIDE CASC EINV OPIC PGOV KZ 
pdf how-to read a cable
VZCZCXRO0694
OO RUEHLN RUEHVK RUEHYG
DE RUEHTA #1164/01 1750632
ZNR UUUUU ZZH
O 230632Z JUN 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2656
INFO RUCNCIS/CIS COLLECTIVE 0533
UNCLAS SECTION 01 OF 02 ASTANA 001164 

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB/IFD/OIA AND L/CID

E.O. 12958: N/A
TAGS: KIDE CASC EINV OPIC PGOV KZ

SUBJECT: KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE

REF: STATE 43784

UNCLAS SECTION 01 OF 02 ASTANA 001164

SENSITIVE
SIPDIS

DEPARTMENT FOR EEB/IFD/OIA AND L/CID

E.O. 12958: N/A
TAGS: KIDE CASC EINV OPIC PGOV KZ

SUBJECT: KAZAKHSTAN - 2008 INVESTMENT DISPUTES REPORT UPDATE

REF: STATE 43784


1. (SBU) This cable constitutes post's response to reftel. The
United States Government is aware of recent claims by two (2) United
States persons against the Government of Kazakhstan (GOK). Claimant
B's dispute was fully resolved during the reporting period.


2. (SBU) a. Claimant A

b. 1996

c. Although it has faced a number of regulatory issues, Claimant A
has had two disputes that raise expropriation concerns.

Claimant A's dispute on electricity deliveries with the state-owned
power transmission monopoly (now known as KEGOC) and the Government
of Kazakhstan (GOK) began in 1996. Claimant A ultimately signed two
memoranda of understanding (MOUs) with KEGOC and the GOK, outlining
how the dispute would be resolved. Claimant A, however, considered
KEGOC to be in breach of some of the contracts arising from the
MOUs. KEGOC and the GOK submitted to the case to international
arbitration. Claimant A prevailed in a December 2007 ruling, and
the Kazakhstani side paid it compensation, which appears to have
resolved the matter.

Claimant A also asserts that discriminatory regulatory actions by
regional authorities 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 for the local authorities) or facing severe regulatory
actions. Claimant A maintains that this is an example of improper
tactics to extract financial benefits from the Claimant. Claimant A
also complains of improper threats of criminal prosecution, which
forced Claimant A's expatriate manager to depart Kazakhstan. In
April 2008, an Almaty Court ruled in favor of local regulatory
authorities, levying a USD 148 million fine against Claimant A for
alleged anti-trust violations in its electricity sales. On May 30,
2008, Claimant A publicly announced it had completed the sale of its
ownership stake in a local power plant and coal mine to a
Kazakhstani company, though it would continue to serve as manager
and operator of the two facilities. While the sale was reportedly
very profitable for Claimant A, it appears to have been partly
motivated by Claimant A's regulatory problems with Kazakhstani
authorities.

The USG is in regular contact with Claimant A and has on multiple
occasions appealed to the Kazakhstani government in support of a
just and fair resolution of the company's disputes with the
authorities.


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 USD 29 million in taxes. The assessment
was based on MSR's finding that USD 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 B in March 2002.

The Kazakhstani tax authorities subsequently appealed the March 2002
decision. In May 2006, the Supreme Court reversed itself, ruling in
favor of the Kazakhstani tax authorities. Claimant B subsequently
contacted the USG. The USG's efforts to negotiate a final
resolution with the Kazakhstani authorities in accordance with our
bilateral tax treaty did not meet with success. In April 2007, the
Kazakhstani Supreme Court granted to Claimant B a Supervisory Panel
Appeal. In July 2007, the Supreme Court's Supervisory Panel ruled
against Claimant B. Claimant B subsequently appealed the interest
assessed on the tax liability. In February 2008, the Atryrau
Economic Court ruled that the interest was payable only from October
2005, not from the original 2001 tax assessment date. In March
2008, the Claimant publicly announced that, in accordance with this
ruling, it had made a reduced tax payment, and that it now
considered the tax dispute to be resolved. Claimant B noted that
it would receive a foreign tax credit for this payment against
future payments which would otherwise be paid to the U.S. Treasury.



4. (SBU) Claimant A: AES Corp.; Claimant B: Parker Drilling, Inc.


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