08ASTANA2177, KAZAKHSTAN: AES LOSES SUPREME COURT APPEAL

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Reference ID Created Released Classification Origin
08ASTANA2177 2008-11-04 11:26 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO2598
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHPOD RUEHPW RUEHROV RUEHSR
RUEHVK RUEHYG
DE RUEHTA #2177/01 3091126
ZNR UUUUU ZZH
O 041126Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3732
INFO RUCNCIS/CIS COLLECTIVE 0770
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0169
RUEHKO/AMEMBASSY TOKYO 0879
RUEHIT/AMCONSUL ISTANBUL 0083
RUCNDT/USMISSION USUN NEW YORK 2003
RUEHNO/USMISSION USNATO 2337
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0332
RUEKJCS/SECDEF WASHDC 0249
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 02 ASTANA 002177 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ENRG EINV KZ
SUBJECT:  KAZAKHSTAN:  AES LOSES SUPREME COURT APPEAL 
 
REF: ASTANA 02086 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY.  AES Country Manager Mike Jonagan informed the 
Ambassador on November 4 that AES lost its final appeal to the 
Kazakhstan Supreme Court on charges of engaging in profiteering and 
monopoly behavior.  AES will send a "trigger letter" to the 
Government of Kazakhstan in the next few weeks announcing their 
decision to go to international arbitration, based on alleged 
violations of the bilateral investment treaty between the United 
States and Kazakhstan.  Jonagan asked the Ambassador to raise the 
issue with Prime Minister Masimov in order to avoid government 
pressure on the company or its employees while the arbitration case 
is pending.  He expects AES will lose a second case pending before 
the courts.  END SUMMARY. 
 
A SURPRISE RULING FROM THE SUPREME COURT 
 
3.  (SBU) AES Country Manager Mike Jonagan informed the Ambassador 
on November 4 that AES last week lost its final appeal before the 
Kazakhstan Supreme Court on charges that it abused its market power 
by charging customers exorbitant prices for energy and hiding the 
excess profits.  He said the ruling came as a surprise, since the 
Ministry of Justice gave the company "strong hints" over a period of 
several months that they could expect a positive decision from the 
Court (see reftel). 
 
INTERNATIONAL ARBITRATION "THE ONLY REMAINING OPTION" 
 
4.  (SBU) Jonagan said that AES has now exhausted all of its legal 
options in Kazakhstan to resolve the case and he is "99% certain" 
that AES will open an international arbitration case in the next few 
weeks.  AES plans to send a trigger letter to Prime Minister Masimov 
to inform him of AES's decision to go to arbitration.  The letter 
will include a request that the Government of Kazakhstan not put any 
pressure on the company or its employees while the case is pending. 
Jonagan indicated that AES would also send "a softer letter" to 
President Nazarbayev to explain the company's decision and stress 
their long-term plans to remain strategic investors in Kazakhstan. 
 
 
5.  (SBU) Once the letter is sent, both sides will identify a 
mediator to act on their behalf during a 60-day "cooling-off" 
period.  The parties could settle their dispute at any time before 
the international arbitration panel convenes.  AES is in no hurry to 
start the arbitration process, but they are eager to initiate 
proceedings before a criminal case is opened.  According to AES, the 
Government of Kazakhstan has respected previous international 
arbitration rulings, most recently when they paid a settlement to 
AES in January. 
 
SAMRUK INTERESTED IN HYDRO CONCESSIONS 
 
6.  (SBU) Two days before the Supreme Court found against AES, 
Jonagan said he met with representatives of Samruk (Kazakhstan's 
principal state assets holding company), who had been asked by the 
Ministry of Finance to help resolve the ongoing dispute.  According 
to Jonagan, Samruk expressed strong interest in the two hydropower 
concessions owned by AES and suggested that AES "think about how 
much the hydros are worth, including the court costs and damages." 
That was the first indication that AES had that the Supreme Court 
decision was not going to go their way.  Jonagan said that AES is 
willing to consider signing the concessions, which have nine years 
left to run, over to Samruk, but he indicated that the two sides are 
currently "about $200 million apart" on price.  Jonagan also noted 
that Samruk has become more assertive since Timur Kulibayev was 
named deputy chairman of the newly merged Samruk-Kazyna National 
Development Fund last month. 
 
 
ASTANA 00002177  002 OF 002 
 
 
AES EXPECTS TO LOSE SECOND CASE TOO 
 
7.  (SBU) AES has another case pending before the Kazakhstani courts 
stemming from the activities of its former trading company, which 
the government claims pocketed $140 million in excess profit.  AES 
maintains that $140 million was the total amount of revenue 
generated and that the profit was only $10 million.   Jonagan said 
AES expects to lose this case as well, which would require immediate 
payment of a $140 million fine.   The former AES trading company is 
currently dormant, with no employees and a frozen bank account 
containing $6 million.  Once the finan
cial police discover that the 
trading company does not have the remaining $134 million, Jonagan 
said they are likely to initiate criminal proceedings against 
individual officers of AES.  Jonagan said he is "very concerned" for 
the safety of their local accountant, who would be especially 
vulnerable to intimidation.  If that were to happen, Jonagan warned, 
"We would go nuclear.  We already have articles drafted that would 
run in the Financial Times to shame the government into a fair 
fight." 
 
FINANCIAL POLICE QUESTION JONAGAN 
 
8.  (SBU) Jonagan said that he had no fear for his own safety, nor 
did he have plans to leave the country, but he did tell the 
Ambassador that he was "interrogated for three hours late at night 
last week."  Jonagan thinks the financial police were investigating 
an unrelated matter having to do with AES's decision not to offer 
preferential tariffs on electricity provided to a retail company in 
the northern Kazakhstan city of Kostanai.  He believes the company 
has ties to Deputy Prime Minister Shukayev. 
 
9.  (SBU) COMMENT:  AES is reluctant to go to international 
arbitration, but they are clearly determined to fight the 
government's charges, which they perceive as a direct attack on 
their reputation and integrity.  They understand that going to 
arbitration may adversely affect their ability to do business in the 
region in the future, but the company feels it has no viable options 
left and is unwilling to part with valuable hydropower assets it has 
developed and managed successfully for several years.  END COMMENT. 
 
HOAGLAND

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