US embassy cable - 05ALMATY2407

UNCLAS  ALMATY 002407 
 
SIPDIS 
 
 
SENSITIVE BUT UNCLASSIFIED 
 
DEPT FOR EUR/CACEN MUDGE; EB/EWH LUFTMAN 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EFIN, KZ, ECONOMIC, Energy 
SUBJECT: GOK ANNOUNCES PURCHASE OF ALMATY POWER CONSOLIDATED 
(APK) 
 
 
1. (SBU) Summary: On June 27, Prime Minister Akhmetov 
announced last-minute plans for the GOK to purchase Almaty 
Power Consolidated (APK) after a disputed bankruptcy 
auction, scheduled for the same day, was cancelled for 
unspecified reasons.  A leading opposition figure, later 
joined by deputies and the pro-presidential ASAR party, 
warned of asset stripping, and called on authorities to 
delay the sale.  New York-based Access Industries, which 
intended to participate in the APK auction, charged that a 
leading bank short-circuited its bid by refusing to initial 
an already agreed upon loan guarantee. End Summary. 
 
GOK SAVES THE DAY? 
 
2. (SBU) Prime Minster Daniyal Akhmetov announced on June 27 
that the GOK would purchase debt-ridden Almaty Power 
Consolidated (APK) and related assets after a foreclosure 
auction, scheduled on the same day, fell through for 
unspecified reasons.  Creditor Halyk Bank sought to recover 
outstanding loans made to Almaty City Authorities (Akimat), 
the owner of APK.  Halyk set a starting price of 8 billion 
tenge, around $60 million, for assets that include two 
hydroelectric stations, three combined power/heating plants, 
Almaty's electric distribution system, and two of Almaty's 
major, if unrenovated hotels, the "Almaty" and the 
"Kazakhstan."  The Akimat reportedly collateralized the 
hotels against loans to APK.  Timur Kulibayev, presidential 
son-in-law and vice-president of state oil producer 
KazMunaiGas (KMG), is reported to have a controlling 
interest in Halyk Bank. Aleksandr Pavlov, the present boss 
of OTAN, the President's political party, is Halyk's 
chairman. 
 
3. (U) Akhmetov justified the purchase by the need to 
prepare APK for the upcoming heating season.  [Note:  Access 
told us that the district heating system was not included in 
the auction, and that the city intended to continue to run 
it. End Note] Akhmetov's announcement contradicts a June 
23rd statement by Almaty mayor and former head of the 
Presidential Administration Imangali Tasmagambetov.  He said 
the city would not intervene to save APK, burdened under 
debts of $150 million and poorly run. Moreover, the Ministry 
of Finance had also announced that the GOK could not 
intervene since it could not put a financing package 
together in time. 
 
4. (U) State-owned KazTransGas, the KMG subsidiary that runs 
the natural gas pipeline infrastructure, will buy APK for 
the starting price of $60 million.  State authorities did 
not announce a concrete plan to turn around the ailing 
enterprise, though they intend to sell-off the two hotels. 
 
OPPOSITION SMELLS A RAT 
 
5. (SBU) Opposition figure Oraz Zhandosov, a former deputy 
prime minister and Central Bank chair, told us that APK and 
related assets are worth at least $600 million dollars. 
[Note: One Western company we spoke with said that the 
Kapchagay hydropower plant alone was worth at least $300 
million.  Access Industries, however, believed that the 
entire package as constituted was not worth much more than 
the $60 million starting price, given APK's operating losses 
and investment needs, and the fact that the GOK currently 
requires all Kapchagay power go to APK at controlled, highly 
subsidized prices.  End Note]  Zhanzdosov charges that 
former Almaty Akim Viktor Khrapunov, who was transferred to 
Eastern Kazakhstan oblast in December 2004, colluded to 
bankrupt APK, and then strip its assets. The pro- 
presidential Asar party, along with about half of the 
deputies in the lower house of parliament, called on the 
government to intervene in the APK auction as well. 
 
6. (SBU) Zhandosov opined that government officials would 
collude to limit access to the auction cancelled today by 
ensuring that no "unfavored party" had the legally required 
line of credit from one of two major banks here, TuranAlem 
and Kazkommertzbank.  This, he charged, would ensure that an 
insider could get the assets for $60 million. 
 
ACCESS INDUSTRIES OUT IN THE COLD 
 
7. (SBU) Access Industries, a U.S. company that is a coal 
operator and power producer here, told the Ambassador in a 
June 23rd meeting that it would participate in the auction, 
and sought advice, given the politically-charged environment 
around APK.  Company officials pledged not to "flip the 
assets," and hoped to use the synergy of their coal supply, 
 
 
combined with a tariff increase, to turn around APK.  They 
saw a far less rosy balance sheet than Zhandosov, with APK 
debt equaling revenue, run-down facilities, and ridiculously 
low tariffs. Ambassador Ordway pledged embassy support 
provided that Access acted transparently and in accord with 
Western business practices. 
 
8. (SBU) True to Zhandosov's scenario, the Access lead for 
the APK auction, Val Vaninov, told us on June 27 that on 
Friday, June 24th, officials of Kazkommerzbank refused to 
initial an already agreed upon loan guarantee, thus 
sabotaging Access' bid.  Vaninov, accompanied by Access 
officials, camped out for four hours at Kazkommerzbank in a 
vain attempt to have bank officials sign the necessary 
documents.  Access is exploring what legal action, if any, 
it can take against Kazkommerzbank. 
 
9.  COMMENT:  (SBU)  This story is far from over, and 
considerably more murky than even the now available facts 
would indicate.  Access Industries and its President, Len 
Blavatnik, have a long-term and growing interest in 
Kazakhstan.  They have just announced their intention to 
build a $1 billion petrochemical facility in Atyrau, one of 
western Kazakhstan's oil boomtowns.   Blavatnik told the 
Ambassador in early June that the GOK was leaning hard on 
him to take over the APK assets, and at that point he was 
not enthusiastic.  The Access team that was doing due 
diligence had extensive and detailed discussions with the 
Almaty Akimat and were under the firm impression that the 
Akimat, and Akim Tasmagambetov himself, wanted to see Access 
take over the loss-ridden utility and turn it around, just 
as Access had done with the utility in Petropavlovsk. 
 
10.  (SBU)  Although KMG vice president Kulibayev is the 
rumored owner of Halyk bank, Grigoriy Marchenko actually 
runs the bank.  Former Central Bank chairman and former 
Deputy Prime Minister, Marchenko is the most highly regarded 
figure in Kazakhstan's financial circles and someone with an 
impeccable reputation for integrity.  Halyk is about to 
announce a strategic partnership with a major western bank 
that will inject modern information systems and risk 
management into Halyk.  The deal is set to close very soon. 
We suspect that Halyk may have needed to get this $60 
million non-performing loan off its books before closing its 
upcoming deal.  Access was relying on Marchenko's reputation 
for financial probity in its decision to participate in the 
auction. 
 
11.  (SBU) It is not clear at this point whether the 
principal motivating factor for the cancellation of the 
auction was politics or greed.  There definitely was a 
political bandwagon that was started by Zhandosov and his 
colleagues in the opposition, who were then joined by Asar 
and others in the pro-presidential camp.  The authorities 
may have decided that the political price was simply too 
high.  The fact that Access was encouraged to participate in 
the auction would bolster that explanation, as would 
Access's conclusion that the assets are not worth 
substantially more than the asking price.  On the other 
hand, we cannot exclude the possibility that this was all an 
elaborate charade designed to divert large amounts of cash 
into private pockets.  If this is the case, we would expect 
to see the two hotels sold off either directly to a 
developer, or indirectly via an inside deal.  The other 
possibility for significant gains would be to change the 
licensing terms for the Kapchagay hydroelectric plant and 
allow it to sell power at market price -- which would raise 
its value dramatically.  (The downside would be that this 
would require a significant increase in Almaty power 
tariffs.) 
 
12.  (SBU)  We very much doubt that KazTransGaz will be able 
to turn around APK.  This latter would require (a) reducing 
expenditures; (b) major investment in deferred maintenance 
and capital upgrades; (c) vigorous collection efforts, 
including against politically well-connected industrial 
customers; and (d) strong action against any insider power 
theft, and (e) regular tariff increases.  The alternative is 
for KazTransGaz and its parent to continue to pour money 
into APK's operations.  Access told us that APK is currently 
losing $40-$50 million a year.  It's hard to see what KMG's 
motivations would be to sustain such large losses on a long- 
term basis, particularly given investment needs in their 
core oil and gas business. 
 
13. (SBU)  One possible scenario would be for KazTransGaz to 
run the utility until after the presidential election -- and 
 
 
then try to either sell it or put it under an international 
management contract.  Whether Access or another reputable 
Western company would be willing to take it on at that point 
is an open question.  In preparing its bid for APK, Access 
told us that they would have preferred having an additional 
six months or more to do due diligence and more negotiation 
on the terms of operation. 
 
14. (U) Minimize considered for Dushanbe. 
 
ORDWAY 
 
 
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