Alaco

14.08.2013 | Bishkek’s predicament

Located 4,000 metres above sea level in the Tien Shan mountain range in Kyrgyzstan’s Issyk-Kul region, Kumtor, Kyrgyzstan’s largest gold mine, poses a political problem for the Kyrgyz government. Caught between growing demands for the mine to be nationalised and Kumtor’s crucial importance to the Kyrgyz economy, Bishkek has been forced to navigate a precarious course.

The stakes

The Kumtor gold mine is one of Kyrgyzstan’s key economic assets, accounting for around 12% of the country’s GDP and about 50% of its exports.  To demonstrate Kumtor’s importance, when its production forecast for 2012 was downgraded from 642,000 ounces of gold to 390,000 ounces in May 2012, Kyrgyzstan’s government responded by drastically revising down its GDP growth forecast for that year from 7.5% to 1.8%. 

Kumtor is also a big source of revenues for its operator, Toronto-listed Centerra Gold Inc.  On 31st July 2013 the company posted a healthy second quarter profit, largely on the basis of its operations at Kumtor.  It is unsurprising therefore that Centerra Gold has already indicated its intention to seek international arbitration if it feels unfairly treated by Kyrgyzstan.  Were this to happen, the resultant financial damages would be considerable for all sides concerned and Kyrgyzstan’s investment climate rendered less attractive. 

Mounting accusations

As local grievances against Centerra Gold continue to mount, its future prospects seem more precarious than its recent financial results suggest.  Centerra Gold stands accused of damaging the local environment and enjoying excessively favourable terms.  Whatever the merit of these charges, they have prompted violent clashes between local residents and police officers, disrupted Kumtor’s operations, and fanned already tense political relations. 

The environmental impact of Centerra Gold’s operations at Kumtor has come under particular scrutiny.  Key concerns voiced by local residents include allegations that the mine’s operations are polluting the surrounding vicinity – a serious charge given Kumtor’s location at the top of glaciers that feed into the Naryn River which flows towards Uzbekistan.  The gold extraction process – which involves using sodium cyanide to dissolve gold from granulated ore – is certainly not without its environmental risks.  In 1998 a truck loaded with around 1.7 tons of this chemical en route to Kumtor tipped into Barskaun River, poisoning 2,500 people.  The incident has cast a long shadow over the company’s relations with the local population. 

That said, claims that Centerra Gold’s operations are unusually environmentally destructive were countered by two independent assessments recently made by European scientists.  One of the reports, which was leaked to Eurasianet.org, stated that “the analytical data do not provide evidence of the presence of undue high concentrations of cyanide and toxic elements in surface water at the sampling locations of this study”.  

The accusation with more merit is the claim that Centerra Gold’s operating terms do not benefit Kyrgyzstan enough.  Under the terms of the agreement signed in 2009 while Kurmanbek Bakiyev was still in power, the company pays 14% tax on its gross revenues from Kumtor; this is less than the 17% to 20% paid by other mining companies operating in Kyrgyzstan, and the current government is keen to downgrade Centerra Gold’s preferential status.  In January 2013 Temir Sariyev, Kyrgyzstan’s Economy Minister, said that “agreements the government signed with Centerra Gold between 1992 and 2009 were dubious.  They were all approved by a narrow circle of persons, without wide public discussion and not entirely in Kyrgyzstan’s interests”. 

Kumtor’s politicisation

Nationalist politicians have used the environmental concerns at Kumtor to attack the government and call for the gold mine’s nationalisation.  In October 2012 Kamchybek Tashiev, a nationalist politician and leader of the opposition Ata-Zhurt party, led an anti-government rally in Bishkek.  One of the demands was Kumtor’s nationalisation on the grounds that its current operator is not running the mine in an environmentally sensitive manner.  Tashiev has branded the government “unpatriotic” for failing to do so.  Tashiev proceeded to scale the fence at the White House, the government seat in Bishkek, in an apparently clumsy attempt to grab power, after which he was promptly imprisoned.

With opposition leaders using concerns over Kumtor for their political aims on the one hand, and Centerra Gold contributing to a critical part of Kyrgyzstan’s economy on the other, the government is left with a tricky course to navigate.  It must both mitigate nationalist claims – which clearly have some traction in the country – and ensure that a critical national economic asset remains productive without prompting foreign investors to flee. 

Thus far, the government appears to have charted a distinct strategy: dismissing nationalisation calls while simultaneously leveraging environmental concerns to renegotiate Centerra Gold’s operating terms.  The Kyrgyz parliament (or Jogorku Kengesh) has given both sides until 10th September 2013 to complete negotiations. 

However Bishkek’s careful balancing act may appear to be bordering on the contradictory.  In February 2013, two different state bodies issued Centerra Gold with a combined fine of $467 million for environmental damages.  Since then, in May this year, President Almazbek Atambayev decried the fact that “Kumtor is an object for those who want to destabilise the situation in the country”.  In other words, Bishkek is actively lending credibility to one of the main arguments for Kumtor’s nationalisation while at the same time opposing this aim.  The potential for this stance to unravel is not inconsiderable.

Bishkek’s anxieties

Recent clashes have demonstrated the government’s concerns over developments at Kumtor.  In May 2013 protestors blocked roads leading to Kumtor and seized an electricity substation close to the mine, cutting it off from power and temporarily suspending production activities.  The police responded by making dozens of arrests, which in turn sparked violent clashes with protestors.  Bishkek was swift to declare a state of emergency, and subsequently emphasised the economic damage caused by the incident.  The Kyrgyz State Committee of National Security estimated that, due to the power outages at the Kumtor gold mine, the latter sustained damages in excess of $3 million; President Almazbek Atambayev declared that the incident had lost the state KGS 6 million in revenues.

Bishkek’s concerns are entirely understandable.  Kyrgyzstan’s recent history is punctuated with political unrest.  In 2005 Kyrgyzstan’s first president, Askar Akayev, was overthrown; his successor, Kurmanbek Bakiyev, was deposed in 2010.  In both instances, protests motivated by a variety of factors – often ones with an economic dimension – steadily spread across Kyrgyzstan, culminating in the eventual overthrow of the government in question.  Atambayev’s government is therefore acutely aware of the threat posed by economic grievances, and will want to mitigate this threat.  Ensuring a satisfactory outcome at Kumtor will be critical.