KAZAKHSTAN: RUSSIAN HAND IN KAZATOMPROM DRAMA?

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 002197

SIPDIS

STATE FOR SCA/CEN, EUR/RUS, DRL

E.O. 12958: DECL: 12/18/2009
TAGS: PGOV PREL ECON ENRG EMIN ETRD TRGY RS KZ
SUBJECT: KAZAKHSTAN: RUSSIAN HAND IN KAZATOMPROM DRAMA?

REF: (A) ASTANA 0943
(B) ASTANA 1914
(C) ASTANA 0209

Classified By: Ambassador Richard E. Hoagland: 1.4 (b),(d)


1. (C) SUMMARY: The case against Mukhtar Dzhakishev, former head of
the state-owned nuclear company Kazatomprom (KAP),finally is heading
to court, as rumors intensify about the reasons behind his arrest.
In videos posted on YouTube on November 4, Dzhakishev asserts that
his arrest is linked to an alleged Russian strategy to limit
Kazakhstan's independence in production of nuclear-fuel products.
According to some independent Kazakhstani and Russian analysts, the
controversial videos might have contributed to the December 8 removal
of the Chairman of the Committee for National Security (KNB). KAP's
new head, Vladimir Shkolnik, announced ambitious plans to proceed
with the transformation of KAP into a producer of full fuel-cycle
products. However, German and Canadian interlocutors note the loss
of some KAP autonomy since Dzhakishev's removal. They do not dismiss
allegations that Russia played a role in this multi-faceted drama.
END SUMMARY.

DZHAKISHEV CASE HEADS TO COURT


2. (SBU) The Procurator General's Office (PGO) announced on December
10 that it is proceeding with the case against Mukhtar Dzhakishev,
former head of the state-owned nuclear company Kazatomprom (KAP),who
was arrested on May 22 (ref A). The PGO announced its intention to
hold open hearings, despite the confidential nature of the
allegations. The charge of embezzlement, which is still under
investigation, alleges that Dzhakishev illegally sold more than 60%
of the state's uranium assets to private offshore companies. The
corruption charge contends that Dzhakishev illegally established a
KAP office in Vienna and used it to pay salaries to Kazakhstani
diplomats posted in Vienna and their relatives. Purportedly, Rakhat
Aliyev, the President's former son-in-law and Kazakhstan's erstwhile
ambassador to Vienna, requested such action. The PGO formally filed
criminal charges on the second charge with the Astana City Court.


3. (C) Dzhakishev was widely perceived as a loyal, apolitical civil
servant and an effective manager of KAP, and his arrest became prime
fodder for rumors and conspiracy theories. Daniyar Kanafin, a lawyer
hired by Dzhakishev's family, has argued that Dzhakishev could not
have sold sensitive state assets without the knowledge and approval
of the highest echelons of Kazakhstan's political leadership,
including President Nazarbayev. Some have alleged that Dzhakishev's
childhood ties to Rakhat Aliyev and his friendship with the former
head of BTA bank, Mukhtar Ablyazov, finally caught up with him.
Others, like Kanafin, believe Dzhakishev's removal is linked to an
alleged Russian strategy to limit Kazakhstan's independence in the
nuclear-energy industry.

THE RUSSIA ANGLE


4. (C) The theory alleging Russian attempts to influence
Kazakhstan's nuclear ambitions and Kazatomprom's business strategy in
the nuclear industry received a significant boost with the appearance
of YouTube videos of what appears to be Dzhakishev's interrogation by
an unseen interlocutor, presumably a KNB officer. In the videos,
which first appeared on November 4, Dzhakishev details his strategy
to turn KAP into a major global uranium player. Dzhakishev sought to
transform KAP into a link between major uranium producers -- the
United States, Russia, France, China, and Japan -- and to use these
connections to increase Kazakhstan's technological expertise. In the
video, he describes in great detail KAP's agreement with Japan's
Toshiba for the production of uranium fuel pellets; the construction
of a storage facility for these pellets in Japan; the construction of
a uranium-enrichment plant in Angarsk, Russia; and the establishment
of a KAP-Toshiba-Westinghouse training center in Kazakhstan to train
new specialists. This project, according to Dzhakishev, would have
given Kazakhstan entry into the nuclear fuel market.


5. (C) Dzhakishev claims that he "received signals" in late 2008

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that Russia's RosAtom (Russia's state nuclear corporation) began
separate negotiations to bypass KAP, and it approached the Japanese
with a proposal to build a storage facility for Russian-made pellets
in Japan. Russia also proposed to buy shares of Uranium One, a
Canadian-based uranium-producing company currently participating in
two joint ventures with KAP. Dzhakishev asserts that he tried to
prevent Russia from gaining a controlling stake in the company by
convincing Toshiba and a Chinese company to buy a 20% stake in
Uranium One. However, his arrest stalled those plans. Dzhakishev
believes Russia encouraged his arrest, because it wished to remove
him from the business and leave Kazakhstan as a "banana republic."

THE KNB ANGLE


6. (C) Adding fuel to the conspiracy-theory fire is the connection
to Amangeldy Shabdarbayev, the Chairman of the KNB who was
unexpectedly relieved of his duties on December 8. In early
November, the KNB announced its investigation into the authenticity
of the recordings and how they made their way to the Internet.
Dzhakishev's wife Dzhamiliya Dzhakisheva caused a stir on December 2
with allegations that Shabdarbayev himself gave her the videos in
order to pass them to President Nazarbayev, because he ostensibly
could not. Dzhakisheva said she passed several copies to people
close to the President, but claimed that she did not know how the
videos ended up on the Internet. Shabdarbayev's quick removal after
Dzhakisheva's explosive announcement led some independent Kazakhstani
and Russian political scientists to call it the "final straw" in a
long string of botched KNB cases -- Dzhakishev, human-rights advocate
Yevgeniy Zhovtis (ref B),and "Alma-Ata Info" editor-in-chief Ramazan
Yesergepov, not to mention Rakhat Aliyev in Vienna -- that pushed
Nazarbayev to remove him. In one of his first public statements,
Shabdarbayev's replacement, Adil Shayakhmetov, notably vowed to bring
Dzhakishev to trial immediately.

SHKOLNIK'S BIG PLANS FOR KAP


7. (C) Despite Dzhakishev's allegations, KAP's new President,
Vladimir Shkolnik, seems to have ambitious plans to move beyond the
export of raw materials. According to the press, Shkolnik told
President Nazarbayev on December 7 that KAP's operating profits will
increase 200% from last year, reaching 49 billion tenge
(approximately $32 million). The company plans to develop solar and
wind-power energy and manufacture heat pumps. In the first quarter
of 2010, according to Shkolnik, KAP will also establish joint
ventures with Japan's Toshiba and Sumitomo.

THE GERMAN TAKE -- RUSSIA KEEN TO LIMIT KAP


8. (C) German DCM Wolfgang Brett (please protect) asserted to the
Energy Officer on December 10 that two powerful actors in Russia
actively shape and influence the development of Kazakhstan's nuclear
energy sector: RosAtom and Glavnoye Razvedyvatelnoe Upravleniye
(GRU, Russian military intelligence). A commercial organization,
RosAtom primarily is interested in the raw uranium ore Kazakhstan
produces. Brett asserted that lacking uranium fuel for its nuclear
power plants due to decreasing imports, it has been feeling
"squeezed" lately. (NOTE: Australia cancelled uranium shipments to
Russia following the war with Georgia in August 2008. END NOTE.)
Brett said Nazarbayev has tried since independence to diminish the
influence of the GRU -- the Foreign Military Intelligence directorate
of the Russian armed services -- and dismantle its structures in
Kazakhstan. However, he has not fully succeeded. "They still have
people and structures in place from the Soviet days," Brett said. In
an effort to reclaim Russia's status as a world power, Brett claims
that the GRU wants to "renuclearize" Russia. He alleged open, public
disagreements within the Russian government regarding the GRU's role
and involvement in Russian foreign policy, particularly with respect
to nuclear issues.


9. (C) According to Brett, regardless of which power center is
driving Russia, Russia has declared its policy to erode KAP's
contacts and contracts with Western and Japanese companies. Brett
conceded that KAP announced ambitious plans to become a

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vertically-integrated company with expertise and products in the
entire nuclear fuel cycle, but he dismissed this as "just rhetoric."
"Nothing is moving forward," he said. "None of these ambitious plans
is being carried out," including projects to build nuclear power
plants in China. Brett believes Russian influence largely has
created this impasse. Russia does not want Kazakhstan to develop
independent partnerships with other countries or consumers, including
those in Japan and China, he claimed. Even at Angarsk, where KAP has
a 50-50 joint venture with Russia, Russia fully controls the
technology.


10. (C) Brett alleged Kazatomprom's President Vladimir Shkolnik has
personal and professional ties to RosAtom (his son-in-law is a senior
executive),and Shkolnik has strong links to Russia in general.
Brett said the removal of KNB Head Shabdarbayev is "at least 50%" due
to the Dzhakishev case and the controversy surrounding his arrest and
detention. He suggested that this change, and other indications of
"conflicts and rifts inside the service," which he called the real
power center in Kazakhstan, might be the early signs of a struggle
for succession. "You know," he said, "2012 is not that far off..."
[COMMENT: We would note that many are always eager to predict almost
every single headline event portends "the beginning of the succession
struggle." END COMMENT.]

THE CANADIAN TAKE -- KAP MOVING SLOWER


11. (C) Canadian Commercial Officer David Mallette (please protect)
told Energy Officer on December 8 that he and senior executives from
Canadian uranium company Cameco (which operates the Inkai joint
venture with KAP) met with Shkolnik in October. According to
Mallette, Shkolnik was "very positive" about KAP's progress with the
development of full fuel-cycle products. Mallette did not receive
the impression that Shkolnik wanted KAP simply to mine and export
uranium ore. He noted, however, that Canadian mining companies have
complained since Dzhakishev's arrest about the increasing difficulty
of obtaining decisions from KAP. Managers appear more cautious, and
Samryk-Kazyna (the state holding company) has exercised greater
control over daily operations (ref C). All in all, Mallette said,
KAP now is operating with much less autonomy and freedom.


12. (C) COMMENT: The case against Dzhakishev and the future of KAP
can be analyzed from multiple angles. KAP's diminished dynamism
since Dzhakishev's removal probably is linked to internal factors as
much as to external ones. The bulk of the company's senior
management was arrested six months ago. Samruk-Kazyna's creation of
a new entity to oversee and approve KAP activities certainly impacted
the company's ability to take risks, make decisions, and show
initiative. Still, Russia's influence over Kazakhstan's behavior in
this area, as in many others, cannot be denied. KAP's near-term
development strategies will play an important role in analyzing the
degree of Russian influence over Kazakhstan, including in the nuclear
energy industry. END COMMENT.

HOAGLAND