Kyrgyz parliament sets three-month deadline for Kumtor talks

By bne IntelliNews February 25, 2013

Clare Nuttall in Astana -

The Kyrgyz government plans to scrap its investment agreement with Centerra Gold for Kumtor, the largest privately owned gold mine in the former Soviet Union, unless new terms can be agreed within the next three months.

With Toronto-listed Centerra's management saying they are prepared to fight through the international courts if need be, the spat is set to be a further blow to investor confidence in Kyrgyzstan and will hinder Bishkek's efforts to find an investor for another of the country's largest gold deposits.

On February 21, the Kyrgyzstani parliament adopted a decree, under which the government will carry out negotiations over the next three months with Centerra to revise a 2009 deal signed regarding Kumtor. The decree also states that Kumtor should continue to operate without interruptions within this period. Should the two sides fail to reach a new deal within three months, the parliament decree authorises the government to take steps to invalidate the 2009 legislation approving the Kumtor Project Agreements.

Centerra responded later on February 21 with a statement saying that: "While Centerra has not yet reviewed an official version of the Decree, it continues to believe that the Kumtor Project Agreements are legal, valid and enforceable obligations." Centerra says it plans to continue discussions with the Kyrgyz government and regulatory officials. "However, there can be no assurances that the Company will be able to successfully resolve any of these matters currently affecting the Kumtor Project." Centerra says.

Bad for business

The parliament's decision follows the release in January of a report from the State Commission on Kumtor that calls for the 2009 deal with Centerra to be amended. Prime Minister Zhantoro Satybaldiyev has told MPs that the existing agreement "is not in the interests of the country". The PM has, however, indicated the government is not looking to nationalise Kumtor, an option that was rejected by MPs in a vote in June 2012.

The Kumtor Operating Company, a subsidiary of Centerra, has also been hit by a $315m claim from Kyrgyzstan's State Agency for Environmental Protection and Forestry for alleged environmental damage. The claim follows five smaller claims issued in December 2012 totaling $152m.

Both opposition parties represented in the parliament are also in favour of revising the agreement, with the main disagreement on February 21 being over how far to go against Centerra. Omurbek Tekebayev, leader of coalition member Ata-Meken, is understood to have already drawn up draft legislation repealing the ratification of the Kumtor agreement.

The existing agreements were signed between the Kyrgyz government under former president Kurmanbek Bakiyev and Centerra, and gave the Kyrgyz state a 33% in the Toronto-listed company. However, Bakiyev has been in exile in Belarus since the April 2010 revolution ousted him, and he was sentenced in absentia by a Kyrgyzstani military court on February 12 to 24 years in a high-security prison for abuse of office. The interim regime that took over in April 2010 launched a thorough review of the mining licences issued under Bakiyev's rule and new legislation on the issuing of licences has since been adopted.

The officials responsible for drawing up and signing the 2009 Kumtor agreement may also be called to account. Members of the ruling coalition voted in favour of a recommendation that Kyrgyzstan's Prosecutor General's Office "consider the responsibility" of those involved, according to reports in the Kyrgyz press.

Despite the enthusiasm for ending the agreement, Economy Minister Temir Sariyev has acknowledged that Kyrgyzstan could be unsuccessful if Centerra decides to fight it in the international courts. "Our stand is very weak. We need very skilled lawyers who require to be paid good money," Sariyev told MPs, reported.

The brokerage Visor Capital says the worst-case scenario for Centerra is the ripping up of the Kumtor agreement, but reckons that is unlikely to due to the threat of international arbitration.

Political project

Kumtor is a highly political issue in Kyrgyzstan, where the mine's output accounts for around 12% of annual GDP. With resource nationalism on the increase in Kyrgyzstan and other parts of the for Soviet Union, popular opposition to foreign ownership of the country's largest gold mine is growing.

The opposition Ata-Zhurt party, which was founded by Bakiyev, is now one of the fiercest critics of the Kumtor agreement. Three of the party's leaders are awaiting trial after their attempt to invade the White House in October 2012 during a demonstration partly motivated by anger over the situation at Kumtor. Around 1,000 of their supporters demanded the government's resignation and the nationalisation of Kumtor, in what the authorities say was an attempt to overthrow the government.

While most MPs are against the nationalisation of Kumtor, there is both political will and strong public support for the 2009 agreement with Centerra to be revised in a way that grants more favourable terms to Kyrgyzstan. However, President Almazbek Atambaev is understood to be against plans to change the agreement, saying in 2012 that it would damage Kyrgyzstan's reputation among investors.

In particular, some worry that any revision could stymie Bishkek's plans to find an investor to develop Jerooy, the country's second largest gold deposit. Economy Minister Sariev announced in mid-January that the government was planning to put the rights to develop Jerooy, which has an estimated value of around $5bn, up for tender within weeks.

Kyrgyz parliament sets three-month deadline for Kumtor talks

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