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

The way in which the former management of BTA, Kazakhstan’s one-time champion bank, squeezed over a dozen million dollar out of the country’s economy is bad enough in itself. The worst thing seems to be that they never did what they did on their own, and possibly not even on their own initiative. Among their tutors were enough foreign, and American in particular, parties eager to use murky manipulators on the spot with the aim to cash in on ill-gotten gains. Even though indications in this direction remain highly suggestive for the time being, taking a closer look at what happened within the brief period that Mukhtar Ablyazov tried to “reconcile” (his) private business interests and what was left of Kazakhstan’s public interest remains all the more worthwhile for it.

by Charles van der Leeuw, KZW senior contributor

Ablyazov’s late XXth/early XXIth Century schemes: the power of power/IIThe overall scheme looks as incredible as it has been true. On May 12, 1998, Aset Naurouzbayev, Mukhtar Ablyazov’s successor at the head of Kazakhstan’s national power grid KEGOC, received an instruction from his predecessor who had now become his superior as the minister of fuel and energy, to prepare a contract due to be signed on May 12 that year between KEGOC, its Uzbek state-controlled power supplier SavdoEnergo and a producer of asbestos (highly cancergenic and thereby outlawed in an overwhelming number of countries around the globe), based in Kostanay in the central north of Kazakhstan and named KostanayAsbest. The latter company was under full control of a consortium of private enterprises in turn controlled by Ablyazov’s private holding. Years later, it would appear that through a sophisticated administrative network of overpricing and underpricing, KostanayAsbest, which had also been favoured with free electricity supplies and write-offs of earlier built-up debts under the deal, got away with a kickback sum of almost threefold the amount mentioned in the contract.

Meanwhile, the Wild-West-style raid that took place almost a decade later on AES’s headquarters in Kazakhstan, described in the previous episode, did not remain without consequence even though the spectre of senior executives and staff immediately being abducted to the gulag was being averted. After having examined the files that had been confiscated, the list of allege d infringements of various character drafted earlier by suspicious authorities grew substantially longer. Deprived of its umbrella composed of Ablyazov’s state authority control and private business finance control, AES appeared to have tried to continue the scheme it appears to have accepted in its early years in Kazakhstan either on its own, or with more discrete backing of Ablyazov’s clique running BTA and its affiliated enterprises both inside and outside Kazakshtan.

If there is one tragedy in the lives of law enforcers getting after corporate infringers it is that in the end, the consumer will be bound to pay. At the time, apart from the Ekibastuz coal-fed plant, AES also owned (and still owns) the hydropower stations of Shulbinskaya and Ust-Kamenogorsk in the extreme northeast of Kazakhstan, as well as the wholesale company NurEnergoService which operates in the same area. In early 2007, consumers noticed to their shock that ther powr bills had all but doubled overnight. AES had raised its tariffs from 0.9 tenge per kilowatt hour to 1.67 tenge without giving notice to the authorities as it was obligatory under the so-called law on natural monopolies. This time, fines would not help – since it now appeared that they were simply calculated through in the tariffs by the operator for the consumers to pay. It was only under the threat of criminal procedures that in June consumer tariffs were lowered again to 1 tenge per kilowatt hour for a period of one year. The overpaid amount was taken back by the authorities in the form of a penalty amounting to the order of 22 million US dollar. In spite of its one-year tariff freeze commitment, though, AES applied for further tariff raises not less than six times in the course of 2008. Over the summer that year, a 15 per cent increase was allowed instead of 24 per cent demanded by the company.

For a population already suffering under inflation rates which in 2008 soured to a staggering full-year proportion of 17 per cent, this was clearly over the top – especially in a part of the country where a decade-and-a-half earlier a break-up movement in favour of returning the northern provinces to the Russian Federation, where salaries and purchasing power more than doubled those of Kazakhstan, had been in full swing, threatening the country’s territorial integrity. But squeezing the market appeared not to be the sole manner in which AES tried to fill up the holes in its budget caused by restrictions on tariff increases and by repeated fines. It was only last year that investigators unraveled a complex kickback circuit between various subsidiaries of AES in Kazakhstan which between 2006 and 2008 allowed the company to cash in 2.7 billion Kazakh tenge in “illegal profit” on top of another 17 billion tenge in returns from price orchestration schemes, including ones between AES subsidiaries, according to statements made by Aliakbar Matishev, chairman of the Kazakh national committee for supervision on fair competition. His committee calculated that between 2006 and 2008 AES paid its own generation units 1.42 tenge per kilowatt hour in wholesale deals, which were recalculated through in the bills received by retail clients. Thus, up to two-thirds of the price end-consumers ended up paying consisted of non-performance gains – read: rip-offs.

On the investment side of the story, things hardly looked better as the first decade of the new century was drawing to a close. Due to the lack of a signed and sealed contract defining investment commitments linked to the one confirming AES’s ownership rights, the American company’s capital expenditures on its Kazakh assets amounted to no more than a few million dollar per year from day one into the new millennium. It looks very much as though the US party was all too well aware of the fact that holding out was the best way to drive the host country’s government into urgent need of getting its property back at whatever price. And what a price, or rather prize, it was to become. According to AES’s financial reporting over the years 2008 to 2010, net gains per share on the sale of Ekibastuz represented a major chunk in the company’s corporate net income for shareholders. “The full year 2009 results included a $0.15 per share gain relating to the final settlement of the Northern Kazakhstan businesses sold in 2008, the Kazakhstan earn-out of $0.12 per share in 2009,” the report reviewing 2010 in comparison to the two previous calendar years reads.

Among the burning questions remains the one how the illegal transfers of kickback money as brought forward by the authorities through Kazakhstan’s banking system could take place without any tax inspectors or other financial watchdogs on behalf of the state noticing it. The assumption that BTA, then under control of an old friend of AES named Mukhtar Ablyazov, could have played a role in it, e.g. by forging payment titles and invoice specifications in transfers, looks all too plausible even though hard evidence for that has yet to be collected. The “Russian connection” in this context also deserves some further attention and investigation. Looking back, if Ablyazov and consorts did indeed play a role in the dealings of AES, anything could be involved – including industries inside and outside Kazakhstan Ablyazov was either busy to lay his hand on or in the process of planning to do so.

It all leads to the conclusion that those who claim that a nation’s road to prosperity is paved with investments should exclude investments for investments’ sake from the agenda. As noted before, it looks all too likely that the bulk of the 200 million dollar promised by AES for investment into the power-related infrastructure in the areas where it was working only existed on paper. In reality, the money was sought to be generated by excessive income on sales. This, in turn, should teach Kazakh legislators the lesson that ill-defined investments are bound to backlash in socioeconomic terms. There is an urgent need for so-called emerging economies to review and revise partnership with the global corporate establishment if they want to keep emerging rather than submerge.

Definitions of the word investment vary considerably. In their classical work “Security analysis” British economists Graham, Benjamin and David Dodd Security Analysis. (McGraw-Hill, London 1951) define investment as “putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security of principle, as well as security of return, within an expected period of time. In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling.” The authors add the observation that “…promoters of and news sources that report on speculative financial transactions such as stocks, mutual finds, real estate, oil and gas leases, commodities, and futures often inaccurately or misleadingly describe speculative schemes as investment.”

Global operators in utility and commodity resources have become more and more defiant of late. To take an example borrowed from the mining sector, Reuters in a report published on June 30 quoted Anglo American, one of the world’s largest global operators, as warning host countries’ governments against “blind alleys” in the form of “unacceptable burdens” for operators such as “nationalisation and excessive tax if they want to attract continued investment from global miners” – in the agency’s words. “Governments tempted to move in this direction convince themselves that necessary mining investments in their countries will continue unabated, despite the imposition of such arbitrary changes,” the report quoted AA CEO Cynthia Carroll as telling a plush lunch party in London. “They are wrong. International businesses have choices to make between investment opportunities in different jurisdictions.”

In reality, the statement is as propagandistic as those targeted by the likes of Carroll are being accused of. First of all, miners need mines at least as much, and probably more, than deposit owners need partner miners. Second,: if “international business” can choose “between different jurisdictions” (they seem to prefer the most unjust ones to the community which turns them into the best opportunities to rip communities off), so can the latter between the former. Wherever the electricity sparks, the oil flows, the gold gleams and the grain grows, those eager to exploit it will always come – sooner rather than later, that is. For Kazakhstan and other major commodity and basic utility suppliers, there is a challenge here: refine the law by narrowing the definitions of investor and operator to their basics, and include severe conditions of capital and fund raising into any contract agreed upon.

AES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008

  2010 2009 2008
  (in millions, except per share amounts)
Revenue:
Regulated $ 9,145 $ 7,816 $ 7,768
Non-Regulated   7,502   6,138   7,429
Total revenue   16,647   13,954   15,197
Cost of Sales:
Regulated   (6,718)   (5,705)   (5,564)
Non-Regulated   (5,965)   (4,816)   (6,065)
Total cost of sales   (12,683)   (10,521)   (11,629)
Gross margin   3,964   3,433   3,568
General and administrative expenses   (392)   (339)   (368)
Interest expense   (1,526)   (1,485)   (1,770)
Interest income   411   348   519
Other expense   (239)   (111)   (161)
Other income   108   465   375
Gain on sale of investments     131   909
Loss on sale of subsidiary stock       (31)
Goodwill impairment   (21)   (122)  
Asset impairment expense   (1,221)   (25)   (175)
Foreign currency transaction gains (losses) on net monetary position   (33)   33   (184)
Other non-operating expense   (7)   (12)   (15)
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES   1,044   2,316   2,667
Income tax expense   (307)   (599)   (771)
Net equity in earnings of affiliates   183   92   33
INCOME FROM CONTINUING OPERATIONS   920   1,809   1,929
Income from operations of discontinued businesses, net of income tax expense of $2, $3 and $7, respectively   75   96   97
Gain (loss) from disposal of discontinued businesses, net of income tax expense of $132, $- and $-, respectively   64   (150)   6
NET INCOME   1,059   1,755   2,032
Noncontrolling interests:
Less: Income from continuing operations attributable to noncontrolling interests   (1,006)   (1,099)   (759)
Less: (Income) loss from discontinued operations attributable to noncontrolling interests   (44)   2   (39)
Total net income attributable to noncontrolling interests   (1,050)   (1,097)   (798)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION $ 9 $ 658 $ 1,234
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax $ (0.11) $ 1.06 $ 1.75
Discontinued operations attributable to The AES Corporation common stockholders, net of tax   0.12   (0.07)   0.09
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS $ 0.01 $ 0.99 $ 1.84
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax $ (0.11) $ 1.06 $ 1.73
Discontinued operations attributable to The AES Corporation common stockholders, net of tax   0.12   (0.08)   0.09
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS $ 0.01 $ 0.98 $ 1.82
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
Income (loss) from continuing operations, net of tax $ (86) $ 710 $ 1,170
Discontinued operations, net of tax   95   (52)   64
Net income $ 9 $ 658 $ 1,234
Share