Central Asia Report: September 14, 2004

The Week At A Glance. A Russian prosecutor's mention of a "Kazakh" among the hostage takers at a school in Beslan, North Ossetia, triggered an official Kazakh request for clarification. Though clarification was not immediately in the offing, the head of Kazakhstan's National Security Committee later suggested that the individual may have been an ethnic Chechen who went by the nickname "The Kazakh." The Beslan attack also led to an 8 September cabinet meeting that focused on the implementation of measures to combat terrorism and extremism. President Nursultan Nazarbaev met with Vaclav Klaus, his Czech counterpart, for trade-centered talks. The Kazakh president continued to talk trade on a visit to Austria, where he met with Austrian Chancellor Wolfgang Schuessel and President Heinz Fischer, as well as International Atomic Energy Agency Director-General Muhammad el-Baradei and Organization for Security and Cooperation (OSCE) in Europe Secretary-General Jan Kubis. While in Vienna, Nazarbaev commented on recent Russian statements about preemptive strikes against terrorists, saying, "Preemptive strikes should be conducted only by the states on whose territory terrorist bases are located."

With 19 September Kazakh parliamentary elections drawing ever closer, President Nazarbaev urged voters to support female candidates. Opposition parties charged that state-run television is stumping for pro-presidential candidates, although the Central Election Commission averred that it has seen no evidence of violations. In an unusual moment of apparent familial discord, presidential daughter and pro-presidential Asar party head Darigha Nazarbaeva alleged that supporters of Otan, her father's equally pro-presidential party, are applying "pressure [to], bullying, and blackmail[ing]" provincial voters. Whatever the case may be, polls put Otan and Asar in the winners' spots with a virtually guaranteed one-two finish.

Czech President Vaclav Klaus visited Kyrgyzstan on his Central Asian jaunt. At a meeting with Kyrgyz President Askar Akaev in Bishkek on 10 September, Klaus noted, "We have somewhat forgotten about this part of the world.... I think it is now high time for us to be here and to be active, because...there are important markets here." On the home front, Kyrgyz lawmakers expressed a desire to gain the return of the Shakhimardan resort region from Uzbekistan, although past border negotiations suggest that it will be a tough go. And President Akaev urged active participation in 10 October elections to local assemblies, although interest has been rather lackluster thus far.

Tajikistan celebrated its Independence Day on 9 September. Addressing the nation on the eve of the holiday, President Imomali Rakhmonov stressed that it is the "prime and most significant task of every state" to protect itself and society from terrorism and extremism. Before the holiday, Rakhmonov met with OSCE Secretary-General Kubis, who inquired about the difficulty independent Tajik newspapers have had recently finding printing houses. For his part, the deputy chairman of the ruling People's Democratic Party of Tajikistan said that the problems of the independent press have nothing to do with politics and everything to do with tax evasion. The week ended on a high note with a visit from Iranian President Mohammad Khatami, who pledged $250 million in Iranian money toward the construction of Tajikistan's Sangtuda hydropower plant.

Turkmen President Saparmurat Niyazov favored his subjects with the second volume of his "Rukhnama," or "book of the soul." Cabinet members, foreign diplomats, and cultural figures attended the 12 September presentation of a tome an official government site described as "the second book of the Turkmen spiritual and moral constitution." The first volume of the constitution appeared three years ago on 12 September 2001.

OSCE Secretary-General Kubis was in Uzbekistan as well, where he met with Foreign Minister Sadyk Safaev. Their discussion of Uzbekistan's progress toward a more democratic society took place against a backdrop of official Uzbek television coverage that chided the OSCE to for paying too much attention to human rights and too little to the threat of terrorism. Human Rights Watch picked up the theme, publicizing on 10 September two letters it had sent to Uzbek President Islam Karimov on 18 August about state-sponsored repression of Muslim dissidents in the wake of March-April violence and recent violations of fair trial standards. And, as the Uzbek government considered its response to the letters, it went about the business of trying three other groups of defendants for their alleged role in the March-April events.

TWO DEALS AND A SCANDAL: KAZAKH-RUSSIAN TRADE TIES. Kazakhstan is Central Asia's economic powerhouse, and Russia remains the preeminent regional presence. With both petroleum-exporting countries reaping the benefits of high oil prices, times have been good for commercial cooperation. Two recent deals and a scandal illustrate the best and the worst of Kazakh-Russian trade ties.

In a deal that brings together Russia's dynamic telecom sector and Kazakhstan's promise as an emerging market, top-three Russian cellular operator VimpelCom announced in a 26 August press release that it had won a tender to acquire 100 percent of Kazakhstan's KaR-Tel. VimpelCom will pay $350 million for KaR-Tel and assume the Kazakh company's $75 million debt. The press release quoted VimpelCom CEO Aleksandr Izosimov lauding the deal: "We are very pleased to announce this acquisition in Kazakhstan as VimpelCom's first expansion outside of Russia. This move opens a new chapter in our development, reflecting our vision of VimpelCom as an international company with a strong presence in developing markets, particularly within the CIS. Kazakhstan, with the highest GDP per capita in the CIS after Russia and a cellular penetration rate of only 13 percent, offers tremendous opportunities."

KaR-Tel, which provides mobile communications services under the brand names Excess and K-Mobile, is Kazakhstan's second-largest cellular operator, with 620,000 subscribers and a 31 percent market share. According to "Vedomosti," KaR-Tel's revenues in 2003 totaled $65 million. According to the company's website, VimpelCom had 18.3 million subscribers as of 26 August and notched $491 million in operating revenues in the second quarter of 2004.

While analysts seconded VimpelCom's assessment of the Kazakh market, they noted that the Russian company agreed to pay a rather steep fee for access to its tremendous opportunities. Olga Zhilinskaya of Renaissance Capital told "Vedomosti" on 27 August that VimpelCom paid $692 for each KaR-Tel subscriber, more than three times the $223 per subscriber VimpelCom recently shelled out to acquire Russian regional operator Dal Telecom International. Other analysts differed in their cost calculations, but reached similar conclusions. Troika Dialog analyst Evgenii Golosnoi told "Kommersant-Daily" on 27 August that VimpelCom paid $773 per KaR-Tel subscriber, or almost double the $425 that the average VimpelCom subscriber is worth if one divides the company's capitalization by the number of its subscribers. Still, Golosnoi told the newspaper, "It's a fair price for the Kazakh deal. The logic is that the Kazakh market is minimally saturated and is growing much faster than the Russian market."

Another reason VimpelCom may have been willing to pony up such a significant sum is that it is getting harder to make money in Russia. Average revenue per unit (ARPU) in Russia is dropping and stands at around $10.8, "Gazeta" reported on 27 August. According to the newspaper, Russia's Communications Ministry has estimated that the profit margin for Russia's telecoms will become razor-thin if ARPU sinks below $10, creating a powerful incentive to seek new subscribers elsewhere. Moreover, buying a local operator may be the only path to international expansion in some places -- "Kompaniya" reported on 30 August (No. 33) that VimpelCom tried and failed to win a February 2004 tender for Kazakhstan's third GSM license.

This time, VimpelCom acquired KaR-Tel through a tender conducted by Russia's Alfa Bank. Alfa Bank is controlled by Russia's Alfa Group, which owns 25 percent plus 2 shares of VimpelCom. Maksim Kravchenko, vice president of Alfa Bank's Corporate Finance Department, told "Vedomosti" that eight companies took part in the tender, including Russia's Mobile TeleSystems (MTS) and a number of Asian and Near Eastern operators. Virtually all sources listed KaR-Tel's seller as a Kazakh company called Telecominvest, although "Kommersant-Daily" cited "unofficial information" as saying that the sellers were "two Kazakh entrepreneurs."

KaR-Tel's initial reaction to news of its acquisition by VimpelCom hinted at a certain amount of behind-the-scenes intrigue. When RIA-Novosti queried a KaR-Tel representative about the deal on 27 August, the spokesperson said, "Daniyar Omurzakov, the director of marketing, will be out until 31 August, and aside from him, no one in our company will confirm or deny the sale of our shares to VimpelCom." The report went on to quote Omurzakov as telling "Kazakhstan Today," "The information that our company has become the property of VimpelCom is absolutely inaccurate. Unfortunately, similar rumors have been circulating for over a year."

One possible reason for the denials is that the deal doesn't end with the acquisition. In its initial press release, VimpelCom announced that it plans to sell 50 percent minus one share of its recent purchase by the end of the year. VimpelCom CEO Izosimov explained at a 26 August news conference, "We realize that, despite our extensive experience, this is a new country, and we have decided to bring in a partner to speed up the assimilation process," RIA-Novosti reported. ACM-Consulting's Mikhail Alekseev told "Vedomosti" that the involvement of a Kazakh partner was probably a condition of the deal, and suggested that it may have scared off VimpelCom competitor MTS. And Nadezhda Golubeva, an analyst at Moscow-based Aton Capital, told Kazinform on 2 September, "A specific feature of Asian markets is that when you work there, you have to have an influential local partner." The miscommunication between VimpelCom and KaR-Tel, with one company announcing the acquisition while the other denied it, could point to heated last-minute negotiations, possibly with KaR-Tel's current owners, over the issue of a future Kazakh partner (since VimpelCom announced the price paid in its 26 August press release, but left time until the end of the year to close the deal and find a local partner).

By 2 September, Kazakhstan's government bestowed its public and official blessing on the deal, as Prime Minister Daniyal Akhmetov received VimpelCom's top management, including CEO Izosimov, in Astana, Kazinform reported. VimpelCom is also planning to increase its $1.5 billion 2004 investment portfolio in order to develop Kazakhstan's telecommunications infrastructure, the report indicated. As the Kazakh opposition newspaper "Navigator" wrote on 31 August, all in all, VimpelCom's acquisition of KaR-Tel is shaping up to be one of the largest Kazakh-Russian business deals, and probably the largest ever, outside of the natural-resources sector.

Another deal that took place recently outside of the natural-resources sector illustrates the interplay of business and foreign policy in Kazakh-Russian economic ties. Not long after toasting VimpelCom's acquisition of KaR-Tel, Kazakh Premier Akhmetov hammered out a deal with representatives of Russia's Kazan helicopter factory for the Kazakh military to buy 20 MI-17 helicopters over the next two years, Gazeta.ru reported on 8 September. A source at the factory confirmed to Rosbalt on 12 September that the contract is worth $40 million, meaning that Kazakhstan will be paying the "domestic" Russian price of $2 million for each MI-17 (the export designation of the MI-8 workhorse military-transport chopper). The export price is $5 million. As Gazeta.ru noted, the Russian decision to give Kazakhstan a "domestic discount" fits in with a recent statement by President Vladimir Putin that Russia is willing to cooperate militarily with member states of the CIS Collective Security Treaty Organization (Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan) as though they were domestic Russian entities, i.e. sell them arms at a significant discount.

The helicopter deal had another aspect avidly noted by Russian media. The United States and Kazakhstan signed a five-year military cooperation plan in September 2003, with provisions for the United States to supply Kazakhstan with C-130 aircraft, ships of up to 1,000 tons displacement, and Huey II helicopter gunships, Gazeta.ru reported. Although the Huey II is a gunship and the MI-17 is a military-transport helicopter, both Gazeta.ru and "Profil" suggested that the decision to purchase MI-17s could indicate that the Kazakh military is rethinking some aspects of its existing cooperation agreement with the United States.

But not all of the deals that link Kazakhstan and Russia end in glowing press releases and proud announcements of burgeoning trade volume. Sergei Stepashin, head of Russia's Audit Chamber, announced on 1 September that he and his colleagues from Kazakhstan's Audit Chamber will examine the fate of $65 million that Russia paid Kazakhstan for the use of the latter's Baikonur cosmodrome, "Nezavisimaya gazeta" reported on 3 September.

Two recent open letters detailed the nuts and bolts of the scandal -- one by Russian State Duma Deputies Petr Rubezhanskii and Aleksei Guzanov, both of the pro-presidential Unified Russia party, and another by Kazakh opposition parliamentarians Serikbolsyn Abdildin, Zauresh Battalova, and Tolen Tokhtasynov. The Kazakh opposition newspaper "Assandi-Times" published both letters. They describe how Russia provided the Kazakh state railway concern, Kazakhstan Temir Zholy, with a $65 million credit to purchase equipment in 2001. A number of Russian producers received $19 million for goods. The remaining $45 million ended up in the hands of three little-known companies based in Omsk, Russia. Those companies, designated the winners of a tender by Kazakhstan Temir Zholy, acted as middlemen, vastly inflating the prices of the equipment purchased with the credit, paying the actual price to the producers, and pocketing the difference. As a result, the Kazakh budget lost $45 million in equipment that should have been purchased and the Russian budget lost $13 million in taxes it would have collected had the deal been clean.

The alleged embezzlement is especially salient in the Kazakh context because it involves Imangali Tasmagambetov, the current head of the presidential administration. At the time the deal went down, he was the prime minister. In an open appeal published in the "Assandi-Times" on 9 September, representatives of opposition parties Ak Zhol, the Communist Party of Kazakhstan, and Democratic Choice of Kazakhstan called on President Nazarbaev to remove Tasmagambetov pending the conclusion of an investigation into the Baikonur affair. As they put it, "His signature is on the cabinet resolution that allowed the management of the national [railway] company to purchase goods and services at prices and rates two to three times higher than market levels." Moreover, the appeal stated that Tasmagambetov "is not only the head of the presidential administration; he also directs the election headquarters for the pro-presidential Otan party." It then asked, "Where does the money come from for Otan's extensive advertising? ...Could it be the $46 million [sic] that were received through this backhanded scheme?"

For now, President Nazarbaev shows no inclination of dismissing the head of his administration. And for his part, Russian Audit Chamber head Sergei Stepashin, whose investigation is going ahead with President Nazarbaev's blessing, has said that he will present results to the presidents and parliaments of both countries by the end of the year.

The twofold trade ties that bind Kazakhstan and Russia tell one story and hint at another. Kazakhstan is an important market for Russian goods and services, and one that Russia can use to advance its stated policy of maintaining and extending its influence in Central Asia. But as the allegations of improprieties around Baikonur and Kazakhstan Temir Zholy suggest, another story may lurk beneath the surface. Its outlines are murky, and though it may not equal in scope the uplifting tale of telecoms and helicopters, we are left to guess at its true extent.