TALCO SETTLES MULTI-MILLION DOLLAR LAWSUIT IN BRITISH

UNCLAS SECTION 01 OF 02 DUSHANBE 001470

SENSITIVE
SIPDIS

DEPARTMENT FOR SCA/CEN

E.O. 12958: N/A
TAGS: ECON EIND EMIN PGOV TI
SUBJECT: TALCO SETTLES MULTI-MILLION DOLLAR LAWSUIT IN BRITISH
COURTS


1. (SBU) Summary. On November 27, Tajik Aluminum Company (Talco),
Tajikistan's largest enterprise, settled a three-year lawsuit in
British courts against former Talco managers and suppliers, whom it
alleged defrauded the company of $500 million. Details of the
settlement have not been released, but embassy contacts say Talco
got $200 million in the deal. The lawsuit, which had grown into one
of the most expensive cases in UK legal history, has already cost
Talco at least $134 million in legal fees, fueling charges that the
government of one of the world's poorest countries has misplaced
priorities. Such accusations perhaps played a role in the decision
to settle this case, but have not ended the legal wrangling. There
is talk that Talco may now be considering a suit against Russian
aluminum giant Rusal, which it accuses of participating in the
fraud. End summary.

SETTLEMENT ANNOUNCED


2. (SBU) On November 27, Tajik Aluminum Company (Talco) withdrew its
$500 million lawsuit in British courts against the Ansol company,
run by former Talco supplier Avaz Nazarov. The suit had gained
international notoriety as one of the most expensive cases ever
litigated in the United Kingdom, with legal bills topping GBP 90
million ($134 million) -- equivalent to over 3.6% of Tajikistan's
2007 GDP. (An Embassy source says that Talco's bills have actually
topped $150 million, although this has not yet been reported in the
press.) According to a brief statement issued by Talco and
confirmed by Ansol, the parties reached a settlement in the case
with no admission of liability by either side. Ansol dropped a $130
million countersuit it filed against Talco. Talco said it would
hold a press conference to reveal further details about the
settlement.


3. (U) Talco initiated the lawsuit in 2005 against its former
director, Abdukadir Ermatov, and his son, Cherzod, accusing them of
accepting lavish bribes from the company's main supplier of alumina,
a group of companies controlled by Nazarov. According to lawyers
for Talco, the defendants conspired to divert more than $500 million
in profits between 1996 and 2004, when President Rahmon ousted the
Ermatovs and Nazarov. The defendants denied the charges and
launched their counterclaim against current Talco management,
including members of the President's family and inner circle. The
case has had an international character as well, with claims
emerging that Russian billionaire Oleg Deripaska, who controls the
aluminum giant Rusal, was involved in the scheme with Nazarov.
Talco lawyers alleged that Ansol partnered with Rusal to sell the
smelter alumina at grossly inflated prices, then buy processed
aluminum at a bargain rate. Rusal has denied wrongdoing.


4. (U) After the ouster of Talco's former management team in 2004,
control of the operation -- and its substantial profits -- was moved
offshore to the British Virgin Islands. Under the new management
arrangement, a company called CDH Investments, which reportedly is
controlled by President Rahmon and several other prominent Tajik
figures, pays Talco a straight "tolling fee" for the use of the
smelter. CDH provides Talco with inputs, including alumina, and
reaps whatever profit (or loss) emerges from sale of the smelter's
output on the world market. Since Tajikistan imports all of the raw
materials required for aluminum production and lies at the end of a
long and difficult supply line, Talco's single competitive advantage
Qlong and difficult supply line, Talco's single competitive advantage
has been the country's bargain-basement electricity prices, which
are kept below generation costs by the political leadership.
Critics, including the defendants in the London court case, accuse
the government of defrauding its citizens by directing crucial
energy resources to the smelter and then exporting its profits
offshore, so that the state coffers see little in the way of income
or tax revenue. At the same time, Tajikistan's citizens continue to
suffer from chronic energy shortages, with most parts of the country
currently limited to six or seven hours of power per day.

TALCO RUMORED TO GET $200 MILLION IN DEAL


5. (SBU) While no details about the settlement have appeared in the
press, an Embassy contact with ties to Talco reported to us that
Ansol had agreed to compensate Talco in the amount of $200 million
by transferring property in Tajikistan belonging to Nazarov,
including several buildings, schools, and other real estate, to the
Tajik government and by repaying debt to Tajikistan's state
electricity company Barki Tojik for electricity used during the late
1990s and early 2000s. Reportedly, Ansol also agreed to repay
Talco's debt to Gerald Metals, a U.S. firm which sued Talco for
non-delivery of aluminum for which Gerald paid $25 million.


6. (SBU) Another Embassy contact, who works for an international
financial institution in Dushanbe, said that if the $200 million
settlement figure was real, it would be a considerable achievement

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for Talco in a case that has otherwise been an embarrassment for the
company. He had seen some circumstantial evidence that Talco was
happy with the settlement. At a party he attended earlier this
week, Talco Deputy Director Sherali Kabirov showed up unexpectedly,
"a little tipsy" and in exceptionally high spirits, and clapped
everyone on the back. When asked why Talco might have decided to
settle now, our contact speculated that it was connected with the
low price of aluminum on world markets. Talco management might have
doubted there was much more to gain from Ansol, which is also
affected by the slump.


7. (SBU) Many top Tajik officials were in London to participate in
the case, including Murodali Alimardon, Deputy Prime Minister and
former head of the National Bank; Faizullo Kholboboev, Tajikistan's
representative to the Eurasian Economic Community in Moscow and
former advisor to President Rahmon on economic policy; Hasan
Asadullozoda, chief of Tajikistan's largest private bank, Orion
Bank; Jamshed Ziyaev, head of TajPromBank and Chief Prosecutor of
the city of Tursunzade, where TALCO is located; and Gulomjon
Bobozoda, Minister of Economic Development and Trade.


8. (SBU) According to Embassy's contact, Talco had some documentary
evidence against Deripaska's Rusal company and was now planning to
file a case against the Russian aluminum giant. Our contact
speculated that this strategy was a dangerous one, however, because
Rusal was likely to have similarly incriminating evidence against
Talco that it could reveal in open court.

TOUGH TIMES FOR TALCO


9. (SBU) Even with the rumored $200 million settlement -- which
comes out to only some $50 million after the company pays its legal
fees -- these are difficult times for Talco. In the face of the
world economic crisis aluminum prices are as low as $1,400 per ton,
over 50% off their summer high. Our contact reports that some
50,000 tons of aluminum currently lie unsold in Talco's warehouses.
While because of the tolling arrangement this will not have a direct
impact on Tajikistan's economy -- since profits are taken off-shore
the country in fact did not benefit when times were good -- it may
have an indirect effect as the President and other Talco
beneficiaries cast about for ways to replace their lost income.


10. (SBU) Comment: If the $200 million figure proves to be accurate,
Talco did better than expected in the settlement. Initial
speculation suggested that Talco settled the case for little or
nothing in order to stem its hemorrhaging legal expenses and
international embarrassment. Rumors that President Rahmon himself
might be called to testify may have been another inducement to end
the case. In the end, however, the primary consideration may simply
have been cold, hard cash. End comment.

QUAST