Ablyazov’s late XXth/early XXIth Century schemes: the power of power/I

Once upon a time in Kazakhstan: a core strategic asset to keep the light on in northern Kazakhstan bought for hardly more than a million US dollar and sold for over a billion greenbacks less than a decade later. And even that does not include the numerous violations of environmental commitments, tax obligations and other infringements of which AES, the US wildlife energy development company flying high in jungle markets around the globe, has been accused of. It all happened when Mukhtar Ablyazov, the fugitive bank fraudster entrenched in a plush London suburb, had the responsibilities to clinch the deal – which obviously he did according to his own aspirations: a super-corporate society as depicted in Paul Verhoeven’s movies. How dangerous his schemes have been for Kazakhstan and beyond has not yet been fully assessed. Doing so is bound to add just one more chapter of the spectre what the country’s would-be “democratic forces” really had, and still have, in mind.

by Charles van der Leeuw, KZW senior contributor

Ablyazov’s late XXth/early XXIth Century schemes: the power of power/IWhat looks like one of the most longstanding standoffs between western investors and their Kazakh hosts, could well be part of attempts by Kazakh malicious entrepreneurs, better known as oligarchs after their Russian peers, to lay their hands on the country’s resources and domestic markets altogether – thereby turning the notion of fair competition into a sheer mockery. The very champion of that quest is known to be Mukhtar Ablyazov who in the process usurped a lump sum in tangible cash and assets by turning them into non-tangibles for their legitimate owners and into very much tangible for himself and his associates. His master scheme culminated in a 12 billion dollar scam set up into the new millennium – but a much more dangerous stage in the process started much earlier. Whether or not US power company AES was dragged into the scheme involuntarily or deliberately on its part remains uncertain. The timing of it all, tough, at least requires some urgent further investigation into the US enterprise’s past and present activity in Kazakhstan and its possible connections with fraudsters on the run.

“Without warning, 24 foot soldiers of the Pavlodar Oblast Financial Police showed up, carrying AK-47 Kalashnikov automatic rifles. Their target: the Maikuben coal mine in northern Kazakhstan, owned by the American firm AES Corp. Demanding documents connected to a tax case in Kazakh courts, the troops brandished their weapons to remove AES employees and seize the mine’s administration building, according to internal AES e-mails. With no cellular service in the area, AES managers in the country struggled to communicate with their staff as the occupation dragged into a second day. They negotiated an end to the standoff with regional officials, who persuaded the goons to pull back. AES never told investors or the press about the armed takeover.” The Hollywood western-like incident related by Forbes Magazine on June 2 2008, had occurred two years earlier.

What had happened during the decade that preceded it looks more like a horror movie – at least to the feelings of the area’s population. The American party had made a commitment to invest hundreds of millions in US dollars to upgrade the crumbling infrastructure with the aim to reduce loss of power along the way drastically, but looking at its sites today can only make one conclude that pretty little has been done in the process. From day one, prices shot up indiscriminately with merciless cut-offs in cases of arrear payment – including schools, old people’s homes and even hospitals, according to an impressive pile of reports made up by inspectors from various departments through the period. Looking back, it looks very much indeed as though AES never intended to invest much capital to speak of and instead reap the funds needed for the necessary works by squeezing the market. Fund movements between various subsidiaries of AES’s Kazakh venture raised suspicions among tax inspectors that a complex tax evasions system was being put in place.

As for the coal mines AES had bought, safety remained a major concern. According to the authorities, violations of environmental regulations occurred frequently. Fines imposed on almost a quarterly basis on average met with initial protests from the management but after some arm-twisting both in and out of court promptly paid. Concluding that administrative measures were insufficient to improve AES’s strategy, the authorities in the end turned to the state prosecutor with the request to initiate criminal investigations against the management, which, after some hesitation, took off – resulting in the Wild West scene described by Forbes, and in the end a deal that struck friend and foe in the affair as though by lightning. Today, the outcome of the longstanding struggle suggests that the scheme put in practice by AES has a “connection” at its origin that looks all too Kazakh and points at no one less than Mukhtar Ablyazov as having had a hand in it. At least the timing of it all makes the thought look plausible if not likely.

AES had made its entry into Kazakhstan since 1996, by signing a 20-year contract for the concessions on two hydroelectric stations (Ust-Kamenogorsk and Shulbinsk) and four combined heating and power stations (Sogrinsk, Leninogorsk, Ust-Kamenogorsk, and Semipalatinsk) in eastern Kazakhstan. The biggest bait, however, was the purchase of Ekibastuz GRES-I, the nation’s biggest power plant which together with its twin station, Ekibastuz GRES-2, feeds most of the industrialised north and northeast of Kazakhstan. According to the Forbes report, the Americans paid the hilarious-looking sum of 3 million US dollar for the asset. “While that may sound like a steal, the investment required a leap of faith,” the article reads. “A relic of Soviet engineering, the coal-fired plant in northern Kazakhstan was designed to generate 4 GigaWatt. At the time, it was producing less than a tenth of that. Still, AES embraced the risk, immediately buying enough coal to ensure that Ekibastuz could produce power through its first winter. The company ended up investing $200 million to increase capacity at the plant. It also purchased a nearby coal mine to stoke the plant and concessions on two hydro power producers in eastern Kazakhstan. At its peak AES produced 25% of Kazakhstan’s power.”

According to the Forbes report, in February 2008 AES “…announced that it was selling the Ekibastuz power plant and its coal mine for $1.1 billion and a $381 million contract to manage the assets for three years. The buyer is Kazakhmys, a mining powerhouse controlled by Vladimir Kim, a Kazakh businessman worth $4.7 billion. […] The company expects to record a $900 million gain on the deal. […] Merrill Lynch figured it was priced at 16 times operating income (earnings before interest, taxes, depreciation and amortization).” It comes down to the tragic conclusion that the Americans have been able to sell an asset bought for hardly more than a million dollar have been able to sell it for almost a thousand times more without being able to prove that they actually helped to improve asset and market value of the companies they controlled for a decade or so to begin with. In all: if the $200 million AES claims to have “invested” ever existed, where it came from remains unclear and whether it was ever spent and if so on what remains even less clear.

The big question remains who gave the American company the chance to carry out its scheme – if it was its scheme to begin with. The answer might well be found in the name of the man who was responsible (or rather irresponsible as it appears today) for the Kazakh nation’s power business, and under whose regime the deals were signed. As AES in its corporate publicity machinery admits, the purchase of the Ekibastuz facilities was signed and stamped in a contract with the government, but the investment commitment was never formally put into a legal agreement – let alone a hard contract under international standards. The question also remains whether this very deliberate-looking omission carries a kickback which in the case of the likes of Ablyazov should come as no surprise.

On July 18 1997, Mukhtar Ablyazov obtained the post of president of the country’s national electricity grid KEGOC. In April the following year he moved on to the post of minister of energy, industry and trade, a job considered more powerful than that of anyone else in Kazakhstan with the possible exception of the head of state. He left KEGOC under the sceptre of one of his alleged protegees named Aset Nauryzbayev, who to his embarrassment found a “loss” totalling the equivalent of around 20 million US dollar on the balance sheet over the full year 1997 and the first quarter of 1998, which could neither be explained by asset versus liability valuation let alone by income versus expenditure ratios over the said period. But since his predecessor was now his superior and protected by immunity, there was little he could do and the affair was swift to be covered up. Only in September 2001 he was briefly detained on rather vague charges of forgery and misrepresentation of administrative data.

After a swift release, Ablyazov stuck to banking and put himself at the helm of Temirbank, which he controlled through his Astana Holding, the business empire he and his associates had built up in the 1990s. The holding was chronically short of liquidity – hence the purchase of the bank which, however, proved too small to cover the huge deficit the holding and the numerous industries under its umbrella was suffering from. This would eventually lead to Ablyazov’s “putsch” through which he obtained control over Bank TuranAlem in the process of its privatisation, over the back of rival CenterCredit – as described in earlier episodes of this never-ending time wandering venture to uncover Ablyazov’s extremely complex master scheme. In early 2002, however, it seems that after the downfall of most of the political figureheads from the 1990s, his wheelings and dealings in the energy sector were looked into once more. This time, he had no more friends in high places. In March, he was once more put under arrest for related, but this tiem more serious charges including theft and fraud.

By the end of 1998, soon after Ablyazov had entered the Kazakh cabinet of ministers, Kazakhstan’s debt for power supplies from Russia by UES to its northern provinces amounted to the impressive sum of 239 million US dollar. In a clear attempt to settle the debt and obtain a handsome personal profit in the process, Mukhtar Ablyazov and his “social” ally Galymzhan Zhakizhanov, the governor of Pavlodar, tried to persuade their Russian interlocutors on behalf of UES, led by Chubais’ executive for foreign sales and property Valentina Zavadnikova to accept assets instead of cash. At stake were regional power stations in the centre and the north of Kazakhstan, which looked a bit strange since shortly before the Russian State Duma had just accepted a plan to privatise UES-owned production and wholesale assets with the aim to bring some dynamics into power production and trade.

The entire break-up plan for UES came from no one else than Chubais, Boris Yeltsin’s one-time mastermind of Russia’s large-scale industrial privatisation scheme which included the notorious loan-for-stock swaps, which eventually led to a massive series of asset squandering and the rise of the ill-reputed oligarchs in the Russian Federation. Therefore, the letter written and signed by Mrs. Zavadnikova, dated August 12 1999, to the Kazakh President Nursultan Nazarbayev was a genuine bomb under Ablyazov’s and Zhakizhanov’s respective chairs. According to its signatory, the couple had proposed during negotiations to put the value of Ekibastuz-2 and VL-500 to the equivalent of 70 million US dollar in all – down from a previous assessment which had put the assets’ value in the order between 350 and 500 million dollar. Later it would appear that the proposal included a 25 per cent stake for Ablyazov and Zhakizhanov – each, that is – in a new holding meant to manage the assets obtained by UES. This conditions was obviously not mentioned in the letter.

The corporate and commercial structure of the business in the province of Pavlodar where Ekibastuz is located looks rather complicated. In the district of Pavlodar, the power retail monopoly is in the hands of a company called Pavlodar Power Distribution Company. The firm is wholly owned by (also listed) Pavlodarenergo which runs the wholesale business. Pavlodarenergo, in turn, appears to be fully owned by an Almaty-based enterprise called Central Asian Power Corporation, equity of which is in the hands, on an equal basis, of three tycoons by the names of Alexander Klebanov, Sergey Kan and Yerkyn Amirkhanov. CAPC also owns the power supplier of the district of Petropavlovsk in the extreme central-north of Kazakhstan.All the enterprises involved are listed on the Almaty stock exchange (KASE). It all looks like a solid and indeed profit-making business which automatically turns it into a juicy bait for post-Soviet robber barons. How they tried to do it remains a burning question for both prosecutors and legislators in Kazakhstan and beyond. At the time of writing, not all pieces of the puzzle are on the table. In all: stories concerning white collar crime and related issues the end of the story moves back like a horizon – even changing colour but never ending its character of tragic intrigue in which victims tend to stay behind helpless. (to be continued)

EKIBASTUZ-1 KEY FIGURES IN 2010 AND 2011 (in million Kazakh tenge)

period full year 2010 1st quarter 2011
authorised capital 31110.120 31110.120
equity 83164.977 95661.672
asset value 106919.186 120216.593
sales revenue 49974.481 19031.751
operating income 29552.325 12978.672
net income 18226.643 12204.461

source: KASE


period full year 2010 1st quarter 2011
authorised capital 16999.047 16999.047
equity 64881.346 68261.757
asset value 182030.667 173289.493
sales revenue 64552.965 23553.135
operating income 19429.190 7242.499
net income 1825.070 3362.652

source: KASE

PAVLODARENERGO’S KEY FIGURES IN 2010 AND 2011 (in million Kazakh tenge)

period full year 2010 1st quarter 2011
authorised capital 14859.996 14859.996
equity 29938.495 32974.272
asset value 51821.671 51908.597
sales revenue 22487.787 8271.232
operating income 6530.024 3635.822
net income 2672.901 3035.776

source: KASE

PAVLODAR POWER DISTRIBUTION CO. KEY FIGURES IN 2010 AND 2011 (in million Kazakh tenge)

period full year 2010 1st quarter 2011
authorised capital 2057.200 2057.200
equity 5441.900 5607.522
asset value 8392.716 7196.471
sales revenue 4066.567 1311.435
operating income 295.671 256.994
net income (loss) (256.994) 165.623

source: KASE

SEVKAZENERGO KEY FIGURES IN 2010 AND 2011 (in million Kazakh tenge)

period full year 2010 1st quarter 2011
authorised capital 14810.513 14810.513
equity 18195.036 19701.691
asset value 32657.076 34365.444
sales revenue 13416.513 4805.974
operating income 4619.339 2263.391
net income 919.858 1506.655

source: KASE