It isn’t every week that two Western powers join up to essentially warn a small frontier market nation that its actions risk soiling its reputation as a feasible destination for foreign direct investment, but that’s essentially what happened this week when the UK and Canada responded to Kyrgyzstan’s move to seize Kumtor gold mine.
Centerra Gold, the Toronto-listed miner that owns Kumtor—one of the largest gold mines in Central Asia operated by a foreign investor—through its subsidiary Kumtor Gold Company (KGC), has over the years gotten well used to Kyrgyz governments of various stripes attempting to milk it for more than contractually bargained for, but the tactics deployed by populist strongman President Sadyr Japarov to wrestle the mine from its hands were especially aggressive and shocked foreign investors. So much so that the British government, with a cold eye on the fact that UK-based BlackRock Investment Management holds a 10.6% stake in Centerra, lined up with the Canadians in warning Kyrgyzstan that measures that “negatively impact trade and foreign direct investment will further undermine already fragile economic livelihoods of the Kyrgyz people”.
Kyrgyzstan moved fast. In just two weeks, the government went from passing a bill on allowing a takeover of the flagship mine on environmental grounds to Japarov signing that bill into law to the parliament initiating the takeover on May 17. Almost simultaneously, a court slapped KGC with a $3.1bn fine for environmental damage.
No love lost
There would appear to be no love lost between Japarov and Centerra. In early October last year, avowed and fervent nationalist Japarov was still resident in a prison cell, serving a sentence for having in 2013 taken part in events that saw the kidnapping of a regional governor used as a hostage in a standoff with authorities over demands for the nationalisation of the mine. During the turmoil into which Kyrgyzstan was plunged eight months ago, Japarov was busted out of jail by supporters, after which he quickly took command of events that rapidly delivered him the presidency.
Japarov is known as a fervent nationalist (Image: duma.gov.ru CC-BY-SA 4.0).
Curiously enough, Japarov quickly assured observers that his Kumtor campaigning days were over and that he would not in the current context be pushing to place the mine—scene of the second highest gold mining operation in the world, located in the Tian Shan mountains more than 4,000m (14,000ft) above sea level and 60 kilometres from the Chinese border—in state hands.
Was he bluffing or did something happen to change his mind? Some Kyrgyzstan watchers suggest one need look no further than the truly dire state of the country’s economy caused by the coronavirus crisis. Indeed, it appears to have only dawned on Japarov in the past couple of months just what a mess the government’s books are in.
Acute budget deficit
Nikita Mendkovich, of the Russia-based Eurasian Analytical Club, was one analyst who took in the Kumtor uproar from this angle, telling 24.kg: “There is one factor—an acute budget deficit—behind the current attempts to [once again] revise the agreement on the project, as well as behind other similar stunts that [have been pulled by] all previous presidents of Kyrgyzstan.”
Mendkovich cautioned: “I have always considered attempts to renegotiate the terms of concluded agreements as alarming symptoms. Such actions cause serious and long-term damage to the economy. They are much more harmful than compliance with agreements that have been previously concluded, even those that may be financially disadvantageous.”
Kyrgyzstan saw its GDP shrink by over 8% in 2020 and by another 9.4% in the first quarter of this year amid the pandemic’s impact. It is the second poorest country in Central Asia, being only slightly better off than Tajikistan. Food aid has lately been arriving from the country’s oil-rich neighbour, Kazakhstan, while the United Nations Development Programme (UNDP), Asian Development Bank (ADB) and Kyrgyz Economic Policy Research Institute have predicted a 25% decline in much needed remittance inflows and an unemployment level that is expected to reach 21%. Income from tourism and travel services is thought to have dropped by around 90% in 2020.
Japarov officials are wont to make loud complaints about environmental damage that they allege has been caused by operations at the Kumtor mine—claims that KGC has been illicitly dumping waste on glaciers, for instance, may be one aspect of the case that will be looked at in response to Centerra’s international arbitration suit—but such objections are unlikely to amount to more than a minor part of the reality at play in the state taking control of the mining asset.
Japarov officials have focused on claimed environmental infringements (Image: Centerra Gold).
“Of course, ecology is an important element, but has there been any recorded damage to public health associated with environmental disturbances in this area? I believe that the state is simply faced with the task of finding additional sources of income to solve the problem of the state budget,” Kyrgyz economist Asylbek Ayupov told Vesti.kg.
“In 2024, gold at [Kumtor] is expected to dry up and the project will close. And next year, Kyrgyzstan needs to pay off the bulk of its external debt. And someone [in the government] thinks that Kumtor will help solve the country's economic problems,” Ayupov added.
Even during previous battles with Centerra, Kyrgyzstan has looked at Kumtor in the light of its ticking clock. This, for example, was seen in the dilution of Kyrgyzstan’s shares in the Canadian miner in 2016 as the government settled on the promise of greater dividends from the firm in anticipation of the flagship gold mine’s fast-approaching demise. It would make sense that with 2024 very much nearer, Kyrgyz officials are going for a short-term hard squeeze.
Even as a short-term strategy, however, the latest scope of Bishkek's potential investor-shakedown might prove to be something of an overreach.
“When you read the news about the sky-high fine of $3bn, you can’t help but begin to think that the matter is far from violations of the rules that the foreign company is accused of. It seems to me that this is how investors are [normally] forced to leave the field,” Kazakhstan-based political scientist Eduard Poletayev told Russian news agency REGNUM this week. “Either these are not very skilful attempts to initiate negotiations with the aim of increasing payments or [there is a move] to revise the state’s share in the company.”
“Canadian Centerra Gold, operating at Kumtor mine, is one of the few large investors in Kyrgyzstan, and direct pressure from Bishkek looks—at the very least—illogical,” the analyst suggested.
“This situation, if it goes too far, will make other foreign investors working in the mining industry of Kyrgyzstan think about things,” Poletayev added.
That latter point, however, may not be much of a concern to Bishkek given that in terms of other Kyrgyz gold mines, the second-biggest, Jerooy, is being developed by Russia—a geopolitical ally in the neighbourhood that no Kyrgyz political faction would dare to seriously oppose—and several smaller gold mines are owned by China, another giant that won’t brook much nonsense from its smaller neighbour, especially given the pile of debt the Kyrgyz owe Beijing.
The ownership of the mine has always been a sore point with many Kyrgyz, given Kumtor’s importance. Kumtor is the country’s single largest contributor to gross domestic product, accounting for 5-7% of GDP, while the mine is also the nation’s largest taxpayer and employer. It is wholly owned by Centerra Gold through KGC, while Kyrgyzstan, via state mining firm Kyrgyzaltyn, gets some reward via its 26% stake in the Canadian parent company.
The mine is Kyrgyzstan's biggest tax contributor and employer (Image: Centerra Gold).
Several political factions have long called for the nationalisation of Kumtor, and their demands were especially loud after the ex-Soviet country’s second revolution in 2010. The agreements signed by the former regimes of Askar Akayev and Kurmanbek Bakiyev, respectively, were widely assailed as “unfavourable to Kyrgyzstan”, with alleged personal enrichment for various individuals involved.
Nevertheless, provided it is legally watertight, a deal is a deal, thus Japarov and his posse need more than just environmental objections with which to attack the strategic investor. Allegations of political meddling are another factor that has been put in play.
One vague insinuation voiced by the head of the state commission on Kumtor, Akylbek Japarov (no relation to the president), is that Centerra Gold has actively meddled in the state affairs of Kyrgyzstan.
“Some activists and politicians got into jail due to criticisms from [Centerra Gold], while others built their careers with the help of Centerra Gold. The company helped some of them take the posts of prime minister and even president,” Akylbek Japarov asserted on May 17. He provided no evidence to back up his accusations.
In many ways, there is nothing new about the government’s unproven claims about the environment, national interests and political meddling. Similar justifications have been employed during all previous disputes with Centerra over profit-sharing and investigations into the company’s purported connections with government officials.
One of the earliest examples of harassment directed at Centerra occurred in 2013. It featured as many as 10 cases of alleged criminality that emerged as part of a corruption probe at Kumtor, leading to the detention of some top-level Kyrgyz officials. Then there was the case of CEO of Centerra between 2004 to 2008, Leonard Homeniuk. He was detained in Bulgaria in July 2015 on corruption allegations made by Bishkek, but he was three months later allowed to fly home after a court refused to extradite him on the charges presented.
In 2014, Kyrgyzstan struck a non-binding agreement with Centerra Gold for the restructuring of Kumtor. Under this deal, the government would swap its stake—which back then stood at 32.7%—in Centerra Gold for a 50% shareholding in KGC, thereby shedding its stake in Centerra’s other interests, such as the Boroo mine in Mongolia. The talks over the restructuring continued stalling and facing setbacks until they eventually collapsed in December 2015.
Later on, in 2016, under then president Almazbek Atambayev, Kyrgyzstan launched a series of probes to assess the legality of 2003, 2004 and 2009 deals with Centerra amid another dispute over profit-sharing entwined with announcements of fines over supposed environmental damages. The dispute even led to arbitration proceedings.
Also in 2016, Kyrgyzaltyn voted against a planned $1.1bn purchase of Thompson Creek Metals (TCM) by Centerra to no avail. Centerra agreed to buy US-based TCM as part of plans to reduce its dependence on Kumtor. It was that move that diluted Kyrgyzstan’s stake in Centerra to 26.28% from 32.7%.
The dispute eventually led to a deal to affirm 2009 mine agreements, including tax and fiscal rules, in 2017. The company agreed to provide a one-time $50mn payment to a new Kyrgyz state-run nature development fund as well as annual payments of $2.7mn. The payments were framed as contingent on the government’s compliance with the agreement.
Under the deal, Centerra was also to pay $10mn to a cancer care support fund and boost its payments to Kumtor’s reclamation fund to $6mn annually, until the payments covered an estimated reclamation cost of a minimum $69mn.
The years of 2018-2020 brought a brief period of relative stability in Kyrgyzstan’s relations with Centerra. That, of course, has by now been rudely interrupted.
Making the case
Yet everyone must be given a chance to make their case. The mine is a national treasure and the Japarov administration is apparently hoping to elaborate on its actions in meetings with international financial institutions called for the coming week.
This ultimately implies a measure of self-awareness on the part of top Kyrgyz officials, but that does not mean that the regime will not prove to have shot itself in the foot. And, if the consequences of lost FDI eventually mount up to be particularly damaging, that analogy may need to be extended to the kneecap.