KYRGYZ BUSINESS CLIMATE CHALLENGES GOLD AND STEEL

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000668

SIPDIS

DEPT FOR SCA/CEN (GEHRENBECK)

E.O. 12958: DECL: 06/26/2018
TAGS: EMIN ECON PREL KG
SUBJECT: KYRGYZ BUSINESS CLIMATE CHALLENGES GOLD AND STEEL
INVESTORS

REF: A. BISHKEK 588

B. BISHKEK 593

C. 07 BISHKEK 316

D. 07 BISHKEK 155

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Classified By: Acting Deputy Chief of Mission Robert Burgess, Reason 1.
4 (b) and (d).


1. (C) Summary: The Canadian operators of the Kumtor gold
mine continue to face serious difficulties. Negotiations
with the government over a new framework agreement are
stalled (Ref A),and a Kyrgyz court entered a $2.6 million
judgment against Kumtor Operating Company (KOC) for a land
tax levy that is the subject of international arbitration.
Despite government-orchestrated pressure against the largest
foreign investor in Kyrgyzstan (KOC),other foreign investors
are still prospecting for deals here. For example, we have
seen Indian firms scouting opportunities for steel mills, and
one Indian firm, Abhijeet, is committing itself to a $500
million investment. However, Abhijeet's concerns about
electricity and transportation challenges, not to mention
corruption, may render such private sector investment
unviable. Continued pressure may eventually force Kumtor to
adopt a more conciliatory negotiating stance in the short
term, but at the longer-term expense of limiting sustainable
private sector investment in Kyrgyzstan. End summary.

Continued Impasse over Kumtor Project
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2. (C) Amidst no apparent progress towards a renegotiated
agreement between the Kyrgyz government and the Canadian
parent companies of the Kumtor gold mining operation (reftel
A),a Kyrgyz court ordered that approximately $2.6 million of
the Kumtor operation's bank accounts be "frozen." A Kumtor
Operating Company (KOC) official told Embassy June 24 that
his staff picked up a copy of the court's "determination,"
but that KOC's local bank had not taken any action towards
KOC's accounts as the bank had not yet received any court
decision. The KOC official viewed the court action, taken at
the behest of Deputy Speaker of Parliament Kubanychbek
Isabekov, largely as a public relations ploy.


3. (C) The KOC official told Embassy that KOC plans to
appeal the court's "determination," and confirmed that the
amount corresponded roughly to a disputed recalculation of a
land tax assessment for the Kumtor site. KOC contends that
the mining operation is exempt from the tax assessment, and
has restarted arbitration proceedings to contest the land
tax. According to the official, the June 23 preparatory
arbitration meeting was moved to London, where the Kyrgyz
side has retained legal counsel. There has been no public
comment about the scheduled meeting.

Indians Scout Steel Prospects
--------------


4. (C) Despite the ongoing impasse over Kumtor and growing
concerns about Kyrgyz electricity supplies (reftel B),some
Indian firms have expressed interest in building ferroalloy
and/or steel facilities in Kyrgyzstan. Kyrgyz officials have
long sought major industrial projects, and they may have
secured a significant investment from Indian firm Abhijeet.
An Abhijeet executive told Embassy June 20 that his firm
would be signing, in the coming days, an agreement with the
Kyrgyz government regarding construction of a $500 million
steel mill. The agreement requires that the Indian firm make
a substantial deposit after signing the deal.


5. (C) Confirming that production would be 100% exported,
the Abhijeet executive noted repeated difficulties
communicating with Moscow-based authorities regarding rail

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cars. (Note: Another expatriate businessman, who wants to
export Kyrgyz marble, has also advised Embassy of rail car
complications. Embassy understands that many freight rail
cars used in Kyrgyzstan are managed by Moscow. End note.)
When questioned about guaranteed electricity supplies, the
executive said that Kyrgyz officials indicated supplies might
be limited for a couple of months and seemed receptive to the
construction a coal-fired electricity plant alongside the
steel mill. The executive also admitted that his company had
sweetened the deal for certain Kyrgyz officials and three
unnamed opposition politicians.


6. (SBU) Embassy has received separate confirmation of
previous reports that a team representing India's Mittal
Group traveled to Bishkek by corporate jet this spring to
scout potential industrial sites in southern Kyrgyzstan.

Comment
--------------


7. (C) While Prime Minister Chudinov has recently both
publicly praised Kumtor mining operations and privately
criticized KOC's Canadian parents, other public Kyrgyz
institutions seem less conflicted. Financial, tax and audit
authorities continue to peruse KOC's files. The KOC official
told Embassy that an investigative body request for KOC
documentation to be translated from English to Russian was
not sent to KOC, but to Deputy Speaker Isabekov. Isabekov
continues to maintain his high profile in the Kyrgyz media
and has secured favorable court decisions, often without
KOC's presence. While KOC continues its main mining
operations, the undetermined pace of arbitration regarding
the $2.6 million levy, the collapsing value of KOC's parent
companies' stocks, and growing Kyrgyz investigative activity
into KOC will likely increase the pressure for a more
conciliatory Canadian negotiating stance.


8. (C) Although some senior Kyrgyz officials acknowledge
that the Kumtor impasse is clouding the Kyrgyz investment
climate, these same officials are still courting investors
attracted by Kyrgyzstan's mineral resources. Indian firms
are the latest to be prospecting here, but they will likely
encounter the same challenges other potential private sector
investors have faced here -- electricity shortfalls, limited
transportation corridors, and corruption. Enthusiasm for
state-financed projects may help fill the investment void,
but sustained private sector investment will continue to be
stymied by the clouded Kyrgyz investment climate.
YOVANOVITCH