Mukhtar Ablyazov’s early diversion schemes: notes from the underground/I

It has been widely assumed that the bulk of the schemes to strip BTA Bank of its tangible collateral have taken place from the middle of the first decade of the new millennium. Looking back to Mukhtar Kabylovich Ablyazov’s first hour of glory, however, suggests that the master plan for the multi-billion theft is indeed much older, and a “rehearsal” of the string of frauds already occurred in the late 1990s and early 2000s. The first “round” described earlier consisted of attempts to lay his hands on electricity assets through debt write-offs. What set the string of cases that followed soon apart from other Ablyazov-related files is that his engagement to appropriate air transportation facilities pulled him straight into the dodgy world of global trafficking in arms, drugs and other contraband, and could easily lead to a global demand for his arrest within this context.

by Charles van der Leeuw, KZW senior contributor

Mukhtar Ablyazov’s early diversion schemes: notes from the underground/IIn 1999, Mukhtar Ablyazov became president and CEO of Kazakhstan’s ill-born and ill-fated flag carrier Air Kazakhstan. Before the end of the year, he was to abandon his post again. But during that brief period of time, he left his trade mark on the ailing, debt-ridden company in pretty much the same manner he was to deal with BTA bank in later times. Over summer, all of a sudden small-size air companies were mushrooming in Kazakhstan – the obvious result of systematic asset-stripping, assumedly against external debt. The most notorious case is that of Irtysh Air, but at least another dozen “new” airlines must have been snatched from Air Kazakhstan in this way. If this is the case, suspicions in the direction of Ablyazov’s implication in the activities of another newcomer in Kazakhstan’s flying circus, Irbis Air, look all too justified in spite of several “blank spots” in the intrigue’s structure.

By summer that year, what was to become Ablyazov’s model-scheme after the example of Russa’s racketeer-barons, already started to glimmer at the horizon of Kazakhstan’s air transportation industry – and would eventually lead to Air Kazakhstan’s bankruptcy. The best-known case has become the one of Irtysh Avia, from which Irbis Air was to lease most of its aircraft. In the autumn of 1999, two freight carrier subsidiaries of Air Kazakhstan, Ulba Air and Irtysh Air, were incorporated in a newly formed joint stock company by the name of Irtysh Avia Service. At the helm of the company stood Valery Vyachislavovich Zelinsky, who was later to become a whistle-blower in the affair, and to relate how he had been appointed by Ablyazov as the president of an enterprise he fully owned, called Payda – a typical shell firm with no activities of its own other than purchasing and selling other enterprises.

What happened next bore Ablyazov’s trademark if anything did. Payda, which had no funds of its own to speak of, obtained a loan from Temirbank, under Ablyazov’s control, for the purchase of a 51.9 per cent stake in Irtysh Avia Service. This was enough to get control over the company, without having to pay the full sum for the entire enterprise. Ablyazov must have known at that stage that Air Kazakhstan was heading for bankruptcy and that paying for a hundred per cent in Irtysh Avia Service would have been a waste of money since it would eventually fall into the majority owner’s hands for virtually free. Payda, which bought its asset for the hilarious sum of 438 million tenge or less than 3 million US dollar at the time, was never meant to remain the final owner. Failing to pay up for the loan, it was soon to default upon which the air company fell into the hands of Temirbank, which let it slide into another firm, this time less exposed, under Ablyazov’s umbrella. In this way, the future multi-billion Great Manipulator obtained a firm foothold in the murky world of contraband. Also in the process, he must have become acquainted with veterans in the sector such as Lev Levayev and Arkadi Gaydamak – both of whom, looking back hardly by coincidence, were enabled to lay their hands on oil and gas, uranium and phosphate assets in Kazakhstan – with control over the Ulba plant within reach.

Back in the late 1990s, Kazakhstan through “certain circles” within its state and business echelons to which the likes of Ablyazov could hardly be considered strange, by that time had already built up some reputation as a “safe” stop-over for smugglers of military equipment and other suspicious merchandise – even though it was far from being the only country in that position, with Moldova, Georgia and Kyrgyzstan – not to speak of smugglers’ den Tajikistan – joining the list. The huge arsenals of military vehicles, aircraft, tanks and armoured vehicles, guns and ammunition, communication and other equipment may have looked obsolete in the eyes of western military experts. Among maverick military forces, either on the side of maverick governments or their maverick opponents, in less developed parts of the world, especially in countries which during the Cold War had been lavishly armed and equipped by the USSR with the aim to keep up the balance between “socialist” and “capitalist” forces (to the enormous benefit for both sides for all it mattered), fresh equipment and spare parts of similar fabricate remained in high demand.

The same was true for Soviet cargo aircraft, which may have their shortcomings in terms of safety and high-tech equipment but are still the only aircraft in the world able to carry heavy loads over distances covering half the globe without needing to land in order to tank along the way. Besides, they were cheap to purchase and generally not considered merchandise of military-strategic character, subject to state and international control in cross-border trade. This is the domain where Viktor Bout had been a pioneer, with customers varying from the CIA and the Pentagon to Sicilian, Middle-East, African and Latin-American organised crime “families”. The volumes of (black) money in circulation on such levels was beyond imagination and virtually without limits. This alone, plus the ruthless “protection” methods organised crime’s agents put into practice, may have given Ablyazov the idea that he was in a win-win situation, which would in the end make him strong enough to defy the entire community, the authorities and the state itself alike.

Of course, the notion on Ablyazov’s mind in this respect was a formidable misconception. Nevertheless, he was soon to trod on fertile grounds. A report to the UN Security Council by an investigation panel published on October 26, 2001, concerning deliveries of arms and military equipment to governments and paramilitary groups in war-torn African countries, in violation of UN embargos, mentions Kazakhstan as the supplier of Russian Mi-8 and Mi-24 military helicopters and spare parts for their maintenance and repair to Sierra Leone. The affair had taken place in 1996/’97. According to an official letter to the UN Security Council’s presidium by the chairman of the SC’s supervising panel on embargoes against Liberia written the same date, through what it dubs “the involvement of controversial brokers and shadowy procedures” the Kazakh government acknowledged that laws had been broken in the transaction. “The export license was given [by the authorities of Kazakhstan] was given against an end-user certificate for the helicopters, for their end-use in Russia,” the letter read. “The helicopters were later detained by Russian custims, on their way to Freetown in Sierra Leone, without a valid export license. […] In Kazakhstan, the authorities told the panel that they believed that a crime had been committed under the Criminal Code of Kazakhstan.”

All this took place before the arrival of Mukhtar Ablyazov at the helm of Air Kazakhstan, but the existence of such illegal connections must have been enough for him and his associates to decide to lay their hands on supplies for Kazakhstan’s ailing metallurgy sector with the final goal to get the industry itself and its export lines under control. To get a fat finger into the transportation industry, in particular the elusive freight air transportation sector, was vital in the process. The fact that within that particular sector global organised crime in the form of the likes of Viktor Bout was already a factor to reckon with does not seem to have scared Ablyazov’s circles off – it might even have made the outlook all the more attractive for it.

Another even more noteworthy case within this context was publicised little later in January 2002 by a Belgium-based NGO called International Peace Information Service (IPIS) and concerned supplies from war-torn Rwanda of coltan, a mix of columbium and tantalum, to the metal processing plant of Ulba, in the north of Kazakhstan. There are only a few places in the world where the polymetallic ore is being mined, with one of the largest mining sites being located in Rwanda. Coltan is being used in electric and electronic hardware industries. Its ore and the rock structures in which it is found are highly radioactive, and without proper protection miners can easily be exposed to several hundred times the maximum radiation below contamination levels. The waste left after deriving the metal mix from the ore contains tens of times the allowed maximum radioactivity level as well. It almost speaks for itself that in Rwanda, especially in rebel-controlled areas, there has never been any protection to speak of while child labour in the mines and on primary processing sites is rule rather than exception.

Under the spotlight came a businessman from Switzerland called Chris Huber, who, in the IPIS report’s words “… appears to play a major role in the financing of the Rwandan war effort”. “Research shows that his offshore companies Finmining and Raremet buy coltan from Rwanda Metals, a company acting as a front for the Rwandan Patriotic Army [RPA – or the Tutsi rebel movement responsible for extensive massacres among the ethnic rival Hutus] and sell it to the Ulba processing plant in Kazakhstan,” the report reads. Through agreements with the Kazakh air freight company Ulba Aviakompania/Irtysh Avia, which handles Finmining’s shipments to Kazakhstan, Chris Huber may be linked to Viktor Bout, a notorious arms trafficker who supplies various groups and armies in Africa.”

Huber’s activities in Kazakhstan slightly preceded Mukhtar Ablyazov’s entry into the higher state echelons in the country. In 1997, the Swiss entrepreneur’s company Finconcord SA clinched a long-term deal with the Ulba combine for supplies of coltan. “Under the provisions of the agreement, Finconcord was responsible for all raw material purchases and sales of the Ulba plant’s tantalum-based end products,” the IPIS report reads. “According to the Kazakh newspaper Novoye Pokolenye [New Generation], Finconcord sold the tantalum bars to its Gibraltar-based mother company for 75 US dollar per kilogramme, at a moment when the market price was no less than 174 dollar. Ulba, which is located in the Ust-Kamenogorsk region, has a capacity of 250,000 tonne per year. Its largest shareholder at the time was the governor of the region, Vitaly Mette.” In April 1999, roughly coinciding with Ablyazov’s arrival at the helm of Air Kazakhstan, the contract with Finconcord was broken off after judicial investigations into tax fraud and invoice forgery. After having settled the affair at a price of 1.5 million US dollar, Finconcord left Kazakhstan – only for Huber to return under the name of another enterprise, Finmining, registered at the same address as its predecessor. It seems that only in 2002, after the disclosure of Ablyazov’s practices and his arrest, Huber lost his last foothold in Kazakhstan.

Vitaly Mette could easily be viewed as an alter-ego of Mukhtar Ablyazov. The supply chain was set up shortly after the Ulba plant, which also includes processing chains for uranium, potassium and other metallic half-fabricates, was privatised. Not all details have become known, but in the end Mette turned up as the biggest single shareholder and president of the new “private” enterprise. Whether that was the final stage of the asset-appropriation scheme remains to be questioned. For Ablyazov, who had set his eyes on a major chunk in Kazakhstan’s non-ferrous metal industry from the very beginning under his Astana Holding, Ulba was an obvious bait which could hardly be overlooked in his plans. Therefore, Ulba’s deal with Chris Huber was a vital element in getting control over supply lines for the industrial complex. Whether in this context Ablyazov and Mette were in fact rivals or allies remains to be guessed. What did happen was that Ablyazov managed to snatch Irtysh Aviation from Air Kazakhstan – no doubt for a mere trifle, and probably through the nowadays well-known but at the time far less known trick of asset-for-loan deals involving Temirbank – thereby obtaining the company through his bank as collateral for a mere fraction of even its historic value let alone market value.

Nowadays, it is hardly a secret that the story never ended there. However, the cherished assumption that the case of Ablyazov is a mere one of white-collar swindle by erroneous bankers and financiers who think that if money makes the world go round it can also change its course at their whim, seems to be challenged by the early stages in Ablyazov’s career, from the cash-strapped adventurist-industrial in a frustrated attempt to conquer Kazakhstan and beyond to a racketeer under state protection (at least, so he must have thought) until his exposure and subsequent setback in 2002. In circles where the likes of Bout and Gaydamak operate, people have long memories as opposed to authorities and most of the mass media. The Irtysh affair, details of which will be given after having looked into its regional dimensions, in any case would justify including the Ablyazov files in investigations after players in the multi-hundred-billion smuggling arena – including Bout, now on trial in the USA, and other druglords, warlords and money launderers. Arrest warrants from western governments and international tribunals to submit Ablyazov and his associates to some tough hearings might impress UK and other courts of law more than those coming from Astana. This may hurt some feelings, but if effective, it may well be worth it. (to be continued)