KAZAKHSTAN: AES FILES FOR ARBITRATION, BUT

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 001432 SIPDIS STATE FOR SCA/CEN, EEB/ESC STATE PLEASE PASS TO USTDA AND USTR E.O. 12958: DECL: 03/06/2059 TAGS: PGOV ECON ENRG EINV SOCI KZ SUBJECT: KAZAKHSTAN: AES FILES FOR ARBITRATION, BUT WILLING TO COMPROMISE REF: A. ASTANA 0555 ¶B. ASTANA 0837 Classified By: Ambassador Richard E. Hoagland, 1.4 (b),(d) ¶1. (SBU) SUMMARY: On August 10, U.S. power company AES notified the government that it will go to international arbitration to appeal more than $200 million in fines assessed for allegedly monopolistic behavior. This action would be the final step in a long, public, legal battle between the company and the government, and it could impact the continued presence of the company in Kazakhstan. During the Ambassador's visit to the East Kazakhstan region on August 20 (septel),AES Vice President Mike Jonagan (protect throughout) and East Kazakhstan governor Berdybek Saparbayev both said they were optimistic about an amicable resolution of the issues. Jonagan, however, privately told the Ambassador that other forces were at play, including the personal interest in the hydropower plants managed by AES shown by President Nazarbayev's billionaire son-in-law Timur Kulibayev. The government,s management of this dispute will test its commitment to creating a favorable investment climate, as powerful interests attempt to influence the outcome. END SUMMARY. ARBITRATION TRIGGER LETTER ¶2. (SBU) On August 10, AES sent Prime Minister Masimov a Notice of Dispute letter, which is the "trigger" for arbitration but does not start the arbitration process itself. The Notice of Dispute initiates a cooling-off period, in which both sides are expected to negotiate in good faith. If no settlement is reached during that period, arbitration begins. Jonagan told the Ambassador on August 4 that there are three possibilities for arbitration: (1) the London Court of International Arbitration; however, that is probably too limiting because it deals only with contracts; (2) the Energy Charter Treaty (NFI); (3) Kazakhstan,s bilateral investment treaties with the United States and the Netherlands; AES would probably choose the U.S. treaty, especially because it provides the possibility of claiming attempted expropriation. Jonagan told the Ambassador that AES would prefer to avoid arbitration and would be willing to amend its 1997 Altai Agreement, in which AES obtained the hydro-energy plants in East Kazakhstan. He said the amendment could result in Kazakhstan getting "a slightly bigger piece of the pie." Jonagan admitted that Kazakhstan had sold AES the hydro plants much too cheaply in 1997 but added, "that,s Kazakhstan,s problem, not AES.," THE NEW GOVERNOR IN EAST KAZAKHSTAN ¶3. (SBU) Berdybek Saparbayev became Akim (governor) of the East Kazakhstan oblast (region) in March. Like all Akims, he was personally selected and appointed by President Nazarbayev. Originally from the southern city of Shymkent, Saparbayev served previously as Minister of Labor and Social Protection, Vice Minister for Economy and Budget Planning, head of the Customs Committee, and Vice Minister of Finance. According to Jonagan, Saparbayev became embroiled in a political scandal soon after taking office. In response to the economic crisis in this heavily industrial region, the Akim has embarked on an ambitious and expensive renovation of the oblast administration building and surrounding areas. He also removed several tall evergreen trees to improve his view of the city and ordered that all street curbs in the city be torn out and replaced with new prefabricated concrete ones -- manufactured at a factory in Shymkent owned by his son. Enterprising local investigative journalists disclosed the terms of this lucrative contract and, according to Jonagan, a major public outcry followed. This reaction did not stop the Akim's renovation projects. However, jonagan said it indirectly helped AES, because the Akim was more willing to ASTANA 00001432 002 OF 003 listen to ways in which the company could contribute to economic growth in the region. "When he first took office," said Jonagan, "(Saparbayev) said he was going to run AES out of Kazakhstan. After this early scandal, he realized he didn't need to create any new enemies." POLITICAL WILL TO WORK THINGS OUT ¶4. (SBU) During a public meeting/press event with the Ambassador on August 20, Saparbayev called AES a "valued and reliable partner" that employs 4,200 Kazakhstanis and pays more than three billion KZT (approximately $20 million) in taxes annually. He acknowledged that there are some outstanding issues between AES and the oblast and central governments, but, he said, "these are not serious problems, and we fully expect to resolve them with AES senior management." ¶5. (SBU) Later that day, during a joint press conference with the Ambassador, the Eurasia Foundation, and AES's Jonagan, First Deputy Akim Serik Abdenov praised AES for demonstrating "good corporate social responsibility," employing thousands of Kazakhtanis, and paying its corporate and social taxes on time. (NOTE: Over dinner at a mountain ski resort, Abdenov said he was surprised to learn that AES employs only two expatriates in Kazakhstan. "Sometimes I forget that we're targeting AES,s Kazakhstani employees as well," he said, "but then I realize that their first loyalty is to AES anyway, not to Kazakhstan. END NOTE). In response to a journalist's question, Jonagan said that AES's concession agreement to manage two hydropower plants in East Kazakhstan expires in October 2017, and there have been no negotiations about the possibility of a follow-on contract. He added, however, that the contract stipulates that the assets will return to the government in 2017, and AES is operating under that assumption. Deputy Akim Abdenov quickly added that the contract is between two parties and "of course, AES will have something to say about whether or not the contract is extended." IS KULIBAYEV AFTER THE HYDROS? ¶6. (C) During a private meeting on August 20, Jonagan briefed the Ambassador on the company's ongoing dispute over $200 million in fines levied by the government for allegedly monopolistic behavior. He said that when AES filed for international arbitration, the company simultaneously filed an injunction with a London court to prevent a Kazakhstani joint stock company from obtaining confidential information about the ownership and registration of shares in the two hydropower plants managed by AES. Jonagan said this joint stock company, which he suspects is owned or controlled by Timur Kulibayev, has "made a strong push" for the hydropower plants. "Two or three years ago," he said, "someone -- most likely Kulibayev -- gave the order to start these court cases against us. Kulibayev has a personal interest in buying shares in these hydropower companies. He's now back in the game," as Deputy Chairman of Samruk-Kazyna, which owns Samruk Energo, which is the beneficial owner of the hydropower plants. "He got these legal issues started, and now it's taken on a life of its own." ¶7. (SBU) In response to AES's decision to go to international arbitration, Jonagan said the government has engaged an international law firm to represent their interests, the same firm that represented them during litigation with K-Mobile. (NOTE: According to Jonagan, during that dispute, Kulibayev "stole the company" for $1,000, then sold it to Russian mobile phone operator Beeline for $350 million. END NOTE). Jonagan said he hopes the dispute can be settled out of court and said AES is willing to amend the hydropower contracts in the government's favor, in order to "normalize relations and move forward with a ASTANA 00001432 003 OF 003 clean slate." AES APPEALS FOR AN HONEST BROKER ¶8. (C) Jonagan expressed frustration that no senior government leaders have apparently read the agreement. He said the Akim told him on August 17, "No one ever signed that contract, so why are you making all these claims and taking us to court?" Jonagan told the Ambassador that the Prime Minister did, in fact, sign the original contract, but not all of the associated addenda. He complained that statements such as the Akim's have helped to create an urban myth that AES has taken advantage of the government and is interested only in turning a quick profit. ¶9. (C) For six years, Jonagan said he has tried to meet with Prime Minister Masimov and his predecessors in order to discuss AES's operations in Kazakhstan, "but they will not meet with us." He asked the Ambassador to raise the issue during his next meeting with the Prime Minister, and the Ambassador agreed to do so. "They need someone with a cool head to give them good advice and complete information," said Jonagan. "They need someone to explain the risks and opportunities, and help them make the right decision. We want to be here for a long time, and we're willing to make concessions to make that happen." ¶10. (SBU) COMMENT: Although there are issues between AES and the government of East Kazakhstan, the Akim values the company,s tax payments and social contributions. If this were solely a local dispute, it would likely be resolved amicably. However, Kulibayev,s potential efforts to acquire these hydropower plants through political and legal pressure could complicate resolution of the ongoing court case and adversely impact AES,s long-term presence in Kazakhstan. END COMMENT. HOAGLAND