KAZAKHSTAN: CHANGES AND CHARGES AT KAZATOMPROM

UNCLAS SECTION 01 OF 03 ASTANA 000943

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, T, ISN, INR

E.O. 12958: N/A
TAGS: PGOV PREL PINR EMIN ENRG EINV ELAB KNNP KZ
SUBJECT: KAZAKHSTAN: CHANGES AND CHARGES AT KAZATOMPROM

REF: (A) ASTANA 0209
(B) ASTANA 0677

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1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: On May 21, former Minister for Industry and
Trade Vladimir Shkolnik replaced Mukhtar Dzhakishev as head of the
state-owned nuclear company Kazatomprom (KAP). On May 22, the
45-year old Dzhakishev was arrested on embezzlement and corruption
charges, which members of the opposition denounced as politically
motivated and likely to damage Kazakhstan's investment climate.
Dzhakishev had a close relationship with ousted BTA bank head
Mukhtar Ablyazov, and was childhood friends with President
Nazarbayev's estranged former son-in-law, Rakhat Aliyev. The
60-year old Shkolnik is a nuclear physicist and president of the
Nuclear Society of Kazakhstan, who served previously as Deputy Prime
Minister and Minister of Energy and Mineral Resources. END
SUMMARY.

KNB ARRESTS DZHAKISHEV AND OTHER TOP LEADERS


3. (U) On May 21, Dzhakishev was replaced by former Minister of
Industry and Trade Shkolnik as president of Kazatomprom. The day
after his dismissal, Dzhakishev was arrested, along with KAP vice
presidents Dmitriy Parfenov (finance),Askar Kassabekov (uranium
extraction),Malkhaz Tsotsoriya (strategic development),and
Baurzhan Ibrayev. The Committee for National Security (KNB) also
arrested the presidents of two KAP subsidiaries: Nurlan Mussin,
head of the Ulba Metallurgical Plant, and Eshmurat Pirmatov, head of
the Stepnogorsk Mining and Chemical Plant. Of KAP's top seven
managers, only two have not been detained, vice presidents Sergei
Yashin and Nartay Dutbayev, the latter a former KNB chief. On June
2, Dzhakishev's lawyer, Daniyar Kanafin, said he did not know where
his client was being held, nor on what charges. "The transactions
being reviewed by the KNB were transparent," he said. "We would
like to have access to the case file, and we question the legality
of conducting the investigation in secret."

ALLEGATIONS OF CORRUPTION AT KAZATOMPROM DATE FROM 2005


4. (U) On June 1, the KNB accused Dzhakishev of illegally
transferring more than 60 percent of the state's uranium assets to
offshore companies. According to KNB spokesman Kenzhebulat
Beknazarov, "Mukhtar Dzhakishev and other top managers abused their
authority and caused damage to the state through the sale of state
shares in several major uranium fields. From 2004-07, they
allegedly sold state shares in these uranium companies for the
benefit of a number of private, offshore companies." The KNB
charged that Dzhakishev registered a company called Ken Dala KZ in
2005, which later received a uranium production license for the
Tsentralnyi (Central) section of the Mynkuduk field in Kyzylorda
oblast, at no cost. Also in 2005, according to the KNB, Kazatomprom
sold a 30 percent share in Kyzylkum LLP (Kyzylorda oblast),to
another offshore company for "the mere sum of 15.6 million tenge"
(approximately $130,000 at the time).

DZHAKISHEV HAD TIES TO ABLYAZOV...


5. (U) The Procurator General's Office launched its investigation
on April 17, following accusations by ex-Mazhilis deputy Tatyana
Kvyatkovskaya. Kvyatkovskaya, now a member of the ruling Nur Otan
party, said at a press conference on April 1 that Dzhakishev
collaborated with former BTA bank chairman Mukhtar Ablyazov to sell
state shares in key uranium mines such as Akdala, South Inkai, and
Khorasan "for nothing." Ablyazov fled the country in February and
embezzlement charges were brought against him in March.
Kvyatkovskaya alleged that the uranium mines were sold to Ablyazov's
company Betpak Dala LLP, which was run by Rifat Rizoyev, a business
associate of Ablyazov's who is also under investigation by the
authorities in connection with the BTA bank case. "As a result of
these schemes," she said, "Kazakhstan now owns only 23 percent of
the country's uranium fields." Kvyatkovskaya made similar
accusations two years ago, but an investigation at that time did not

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lead to an indictment.

... AND RAKHAT ALIYEV


6. (U) In a radio interview on May 19, Dzhakishev refused to
address comments made by President Nazarbayev's former son-in-law,
Rakhat Aliyev, who claimed that Nazarbayev's family holds a stake in
Kazatomprom. "It is immoral to make comments about someone (Aliyev)
whom I have known ever since kindergarten," he said. Independent
political analyst Dossym Satpayev nevertheless links Dzhakishev's
arrest to his close affiliation with Aliyev and Ablyazov. He noted
that Dzhakishev and Ablyazov were close friends who studied together
and were roommates. Rakhat Aliyev on his personal website calls
Dzhakishev, "a political detainee of Nazarbayev's regime." Aliyev
claims that, "Nazarbayev did not forget that when Ablyazov was
charged back in 2002, Dzhakishev tried to defend him. He has not
forgotten that Dzhakishev was my friend too. And most importantly,
Mukhtar (Dzhakishev) was a personal witness to Nazarbayev's
machinations."

DZHAKISHEV DISMISSES "ABSURD" ALLEGATIONS


7. (U) On April 2, Dzhakishev told the opposition "Svoboda Slova"
newspaper that, "Kvyatkovskaya's accusations that I am giving away
state resources are total nonsense and show her incompetence in
legal matters." He suggested that she was acting on someone else's
behalf in making such "absurd allegations." Samarokov and Galym
Nazarov, Director of KAP Treasury, told Vremya on May 26-27 that in
exchange for a share in its uranium mines, KAP received advanced
technology from Japanese, Canadian, and French partners, which they
said was "much more valuable than money."

KNB DENIES POLITICAL MOTIVE


8. (U) On June 1, KNB spokesman Beknazarov said, "The KNB denies
that there is any political motivation behind this case." He
dismissed claims that Dzhakishev's arrest was "triggered by some
sort of political instruction to persecute Dzhakishev for his former
ties with Rakhat Aliyev and Mukhtar Ablyazov" and insisted that the
investigation is being conducted "in strict compliance with the
Constitution and the law, under the close supervision of the
Procurator General's Office." Beknazarov also announced that the
trial would be open to the public.

PROMINENT POLITICIANS AND BUSINESSMEN SUPPORT DZHAKISHEV


9. (U) On May 25, opposition leaders Vladimir Kozlov of the
unregistered Alga party and Serikbolsyn Abdildin of the Communist
party said that Dzhakishev's arrest is part of a plan to transfer
the country's assets to "the Family" -- referring to the family of
President Nazarbayev. (COMMENT: Alga is, in fact, financed by
ousted BTA bank head Ablyazov. END COMMENT.) They compared the
nighttime searches and arrests of KAP's top managers to the old
Soviet methods used by the NKVD (i.e. the secret police) in the
1930s. On May 26, Azat opposition party leader Bulat Abilov told
reporters that Dzhakishev's arrest would have an adverse affect on
Kazakhstan's international image. On May 28, dozens of prominent
Kazakhstani businessmen, including Forum of Entrepreneurs President
Raimbek Battalov, Kazkommertsbank Chairman Nurzhan Sukhbanberdin,
and Astana Motors President Nurlan Smagulov, published an open
letter to President Nazarbayev in defense of Dzhakishev in "Svoboda
Slova." "His arrest is inexplicable and negatively affects the
country's business climate, as Kazakhstani entrepreneurs will no
longer feel they are protected by the rule of law," they wrote.

DZHAKISHEV PRAISED AS AN EFFECTIVE LEADER AND MANAGER


10. (U) KAP's Nazarov defended Dzhakishev in an interview with the
newspaper "Vremya" on May 26. "When he arrived," said Nazarov, "the
company was near bankruptcy." At the time, KAP was producing only
890 tons of uranium per year, and KAP's debts to banks, suppliers,
and employees were equal to its revenues. Nazarov said that KAP
subsidiaries were paying employees' salaries in food stamps.

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"Dzhakishev created a world leader out of a bankrupt company," he
asserted. In response to allegations that Dzhakishev was merely
lucky because he arrived at the company just before an increase in
uranium prices, Nazarov said that when Dzhakishev joined KAP, one
kilogram of uranium cost slightly more than $6, whereas now the
price is $165. According to Nazarov, uranium production is capital
intensive, and no bank in 1998 wanted to lend KAP money, so
Dzhakishev personally visited dozens of foreign banks, looking for
loans. Thanks to Dzhakishev, Nazarov said, Kazatomprom borrowed
money at a low interest rate, cleared its bank debts in six months,
paid employees' salaries on time, dramatically increased uranium
production, and began to move the company up the value chain toward
fuel cycle products.

SHKOLNIK PROMISES TO CONDUCT BUSINESS AS USUAL


11. (SBU) On May 25, KAP's new president, Vladimir Shkolnik, told
senior staff that President Nazarbayev considers the nuclear sector
"just as important" to Kazakhstan's strategic development as the oil
and gas sector. He stressed that all existing strategic plans,
commitments, and obligations would be honored and implemented. The
60-year old Shkolnik graduated from Moscow's Engineering and Physics
Institute and worked for 20 years at the Mangistau Atomic Energy
Complex, first as an engineer at the BN-350 plutonium breeder
reactor, and ultimately as deputy director. He also served as
General Director of Kazakhstan's Atomic Energy Agency, President of
the Academy of Sciences, Deputy Prime Minister, Deputy Head of the
Presidential Administration, Minister of Energy and Mineral
Resources, and Minister of Industry and Trade. He possesses a rare
combination of technical expertise, ministerial experience, and
presidential confidence, which likely made the decision to replace
Dzhakishev easier than it would have been otherwise. Shkolnik also
has close ties to Russia's nuclear company Rosatom -- his daughter
is married to one of Rosatom's top managers. On May 27, Rosatom
president Sergei Kiriyenko said, "Shkolnik is a competent
professional with vast political experience and expertise in nuclear
energy. He is held in high regard by nuclear energy specialists in
both Russia and Kazakhstan."


12. (SBU) COMMENT: There is much speculation and rumor surrounding
the arrest of Mukhtar Dzhakishev, once a shining example of
homegrown talent. It is likely that his previous ties to Ablyazov
finally caught up with him. Dzhakishev's arrest also comes as
President Nazarbayev has launched a high-profile, anti-corruption
campaign (ref B) -- which some see as targeting officials who have
gone too far with their corruption, and others believe is a means
for rival clans to settle scores. On June 2, the Ambassador asked
another Western Ambassador, whose country has significant interests
in mining Kazakhstan's uranium, if the rumors of Dzhakishev's
corruption might be true. The answer? "Well, of course." It is
unclear what Dzhakishev's dismissal will mean for Kazatomprom. He
was undoubtedly a vocal, strident, and forceful leader, unafraid to
make deals with foreign partners while pushing the company to add
value and achieve ambitious production targets. Shkolnik, while
clearly capable, may be less aggressive, and less public, in his
approach. Dzhakishev's arrest has also created anxiety among KAP's
many joint venture partners, including companies from Canada,
France, and Japan. There is a risk that the ongoing KNB
investigation into KAP's joint ventures will call into question the
legitimacy of existing uranium mining contracts and perhaps
adversely affect the overall investment climate. In fact, on June
2, the Samruk-Kazyna National Welfare Fund announced that it will
begin to review all previous transactions involving the sale of
state assets to joint-venture companies. The first companies to be
audited will be national railway operator Temir Zholy and national
oil company KazMunaiGas. END COMMENT.

HOAGLAND