US embassy cable - 05ALMATY3915

C O N F I D E N T I A L  ALMATY 003915 
 
SIPDIS 
 
 
DEPARTMENT FOR EUR/CACEN (J. MUDGE), EUR/PRA (D. LINNET) 
 
E.O. 12958: DECL: 10/31/2015 
TAGS: KZ, PARM, TBIO, WMD/Non-proliferation, POLITICAL 
SUBJECT: KAZAKHSTAN:  NEXT STEPS ON BIOKOMBINAT 
 
REF: A. 04 STATE 271994 
     B. ALMATY 1436 
 
Classified By: Ambassador John Ordway, reasons 1.4 (e) and (h). 
 
1. (C) Summary:  The owners of the privatized Biokombinat 
facility in Almaty are willing to transfer ownership of 69 
fermenters to the Nonproliferation and Disarmament Fund for 
destruction in return for $500,000 plus taxes.  Post 
recommends that the Department act quickly to formalize 
agreement on the fermenters in Almaty, as they pose a serious 
and immediate proliferation risk.  After the fermenters have 
been destroyed, post believes it would be appropriate to 
approach Betta Star, the private firm which purchased 
Biokombinat in 2001, with a request that they abandon their 
plans to manufacture anthrax vaccine in Stepnogorsk.  If 
Betta Star does not agree to this request, interagency 
discussion of whether to urge the GOK to step in and limit 
Betta Star's commercial activities would be necessary.  Post 
believes that the GOK's reaction to any such request is 
likely to be negative.  See paragraph 7 for action request. 
End summary. 
 
Background 
---------- 
 
2. (SBU) After learning this summer from contacts at the 
Ministry of Education and Science that the owners of the 
Biokombinat facility in Almaty intended to dispose of several 
large fermenters, which posed a potential proliferation 
threat, post gathered additional information and relayed it 
to the department in August.  Interagency discussion resulted 
in a decision that the Nonproliferation and Disarmament Fund 
(NDF) would address the problem.  POEC chief met with Gaisha 
Kashikova, director of Betta Star (which owns Biokombinat), 
on September 8 to inform her of the Department's interest in 
addressing this potential proliferation threat. At that 
meeting, Kashikova explained that when her firm purchased the 
complex from the State Committee on Property in 2001, they 
were required to commit to maintaining the "profile" of the 
firm for five years. Kashikova indicated that this commitment 
obligated Betta Star to maintain vaccine production. 
 
3. (C) As a result of the inspection conducted at U.S. 
request (reftels), Betta Star was ordered to move vaccine 
production out of the Almaty oblast.  Kashikova indicated 
that she is under pressure to re-establish production as 
quickly as possible so as not to be found in violation of the 
privatization agreement.  She noted that Betta Star was a 
real estate development firm that had gotten into vaccine 
production "accidentally" by purchasing the six-hectare 
Biokombinat complex in central Almaty.  The firm plans to 
build retail and residential space on the lot. 
 
4. (SBU) Kashikova explained that, after searching 
unsuccessfully for a suitable location in the Almaty region, 
she settled on Stepnogorsk as the only place with the 
appropriate facilities, workforce, and utility rates. 
Renovation of the building and installation of fermenters was 
already underway as of September, according to Kashikova. 
She indicated that Betta Star was doing the minimum required 
to fulfill the requirements of the privatization agreement. 
 
NDF Visit 
--------- 
 
5. (C) NDF and Embassy representatives held initial 
discussions with Kashikova on September 19 and visited the 
Biokombinat facility in Almaty briefly on September 21. 
During the visit, it was apparent that the complex is lightly 
guarded and almost abandoned; only three or four Biokombinat 
employees were on site as caretakers.  Most of the 69 
remaining fermenters are still in the main building; two are 
lying in the courtyard. 
 
6. (SBU) During a September 22 meeting with NDF 
representative Pat O'Brien, Kashikova presented an elaborate 
business plan for the Stepnogorsk facility, describing 
production of six vaccines and bottling of a seventh from 
imported concentrates.  Kashikova agreed to transfer 
ownership of the 69 fermenters remaining in Almaty to the USG 
for destruction for $500,000.  She indicated that she would 
be willing to sell the entire new facility in Stepnogorsk to 
the USG for an additional $3.5 million, once Betta Star's 
vaccine production requirement has been fulfilled (i.e. 
October 2006).  Kashikova indicated that the $500,000 figure 
was after taxes, including VAT and corporate income tax.  In 
a September 30 letter to POEC chief, Kashikova revised the 
proposal to $1.2 million if an agreement was signed covering 
only the Almaty fermenters, or $4.14 million for the entire 
package.  After POEC chief met with Kashikova on October 4 to 
discuss the discrepancy, Kashikova sent an email on October 5 
requesting a total of $687,306 for the Almaty fermenters, 
 
including $65,217 in VAT and $122,089 in corporate income 
tax. 
 
Next Steps/Action Request 
------------------------- 
 
7. (SBU) Action request:  Post understands that NDF will be 
ready to sign an agreement on the Almaty fermenters as early 
as November 4.  Post requests department guidance on 
responding to Kashikova's October 5 offer.  The question of 
taxes needs to be addressed, given the verbal agreement of 
September 22.  Kashikova has requested an advance copy of the 
NDF agreement for review by Betta Star's lawyers in order to 
be prepared to sign as quickly as possible.  Post recommends 
the NDF send a letter as soon as possible to Kashikova, via 
the embassy, outlining how much the Department is willing to 
pay Betta Star and explaining which taxes we believe are 
applicable and why.  Post also recommends that the letter 
include a draft of agreement for Kashikova's review.  It is 
essential to move quickly with the destruction to ensure that 
cooperation with the U.S. continues to make financial sense 
for Betta Star and to address the real threat posed by these 
69 poorly protected fermenters. 
 
8. (C) The question of whether and when to purchase the 80 
fermenters that Betta Star has moved to Stepnogorsk requires 
further discussion.  Post believes that it would not be wise 
for the USG to agree to Kashikova's price of an additional 
$3.5 million for the Stepnogorsk facility, as it remains to 
be seen whether Betta Star actually intends to invest 
sufficient funds to create a functioning business or is 
merely using its ambitious business plan to drive up the 
asking price.  In her first conversation with the USG on this 
subject, Kashikova minimized the size and value of the 
intended facility in Stepnogorsk.  Only after learning that 
the USG might be willing to compensate her firm for the 
fermenters did she begin to describe ambitious investment 
plans.  In so doing, she has increased the per unit price for 
the fermenters from $7250 (Almaty) to $43,750 (Stepnogorsk). 
Even allowing for the fact that Betta Star has chosen to move 
only newer, more commercially useful equipment to 
Stepnogorsk, this appears to be a bargaining tactic.  Post 
recommends allowing the market to decide.  If in October 
2006, Betta Star has a commercially-viable vaccine production 
facility in Stepnogorsk, the U.S. should not prevent them 
from selling it to a legitimate buyer.  Such a course of 
action would be consistent with our policy of supporting 
economic diversification and the peaceful employment of 
former weapons scientists.  If no such buyer appears, then 
the U.S. would be able to offer a far lower sum for the 
facility. 
 
Anthrax and Stepnogorsk 
----------------------- 
 
9. (SBU) In the business plan shared with NDF on September 
22, Betta Star described plans to manufacture six vaccines 
(anthrax, brucellosis, gangrene, braxy, swine erysipelas, and 
listeriosis) at its new Stepnogorsk facility, and to bottle 
FMD vaccine from imported concentrates.  The business plan 
indicated that vaccine production at Biokombinat had been 
relatively low in recent years, resulting in only $144,000 
revenue from government contracts in 2002.  According to 
Kashikova, most if not all of Biokombinat's revenue since 
privatization came from anthrax vaccine. 
 
10. (C)  Post understands that there is significant 
interagency concern regarding the establishment of anthrax 
vaccine production capability in Stepnogorsk, given the 
expense and difficulty of the CTR project to liquidate the 
remains of the Soviet Union's weaponized anthrax program at 
the same location.  In informal discussions of the issue, Dr. 
Yerlan Ramanculov, former CDC researcher and director of 
Kazakhstan's new National Center for Biotechnology, has 
stressed that there is no comparison between the production 
of anthrax vaccine using attenuated strains, and the 
Soviet-era production of weaponized anthrax.  According to 
Ramanculov, the supplies and procedures for vaccine 
production pose no proliferation threat and extremely minimal 
public health risk. 
 
11. (C) Given the potential for the situation to be distorted 
if picked up by the media, post believes it would be 
appropriate to discuss with Betta Star officials the 
possibility of dropping anthrax vaccine from their production 
plans in Stepnogorsk.  It is essential that NDF reach 
agreement with Betta Star on the destruction of the 
fermenters in Almaty, transfer the funds, and complete the 
destruction first, however.  Broaching the subject 
prematurely could endanger the agreement with Betta Star by 
creating the impression that the USG intended to use 
diplomatic pressure to force the firm to do something that 
would violate the terms of its privatization agreement.  As 
 
the company is completely private and there are no domestic 
laws or international agreements that prevent them from 
moving the fermenters within Kazakhstan, there in fact is no 
way to compel them to cooperate with the USG.  During 
meetings, Kashikova has more than once said that she is ready 
to go to court to fend off any USG or GOK action that could 
threaten Betta Star's ownership of the extremely valuable 
Biokombinat plot. 
 
12. (C) If Betta Star does not agree to drop its plans to 
manufacture anthrax vaccine in Stepnogorsk, interagency 
discussion of the option of demarching the GOK would be 
necessary.  Post notes that officials in the Ministry of 
Education and Science are extremely critical of what they 
describe as the U.S. "failure" to support commercial 
development in Stepnogorsk through the defense conversion, 
and often bring up the subject of the tableting line provided 
by the U.S. that has sat unused in Stepnogorsk for many 
years.  They allege that in Stepnogorsk, the U.S. "only 
destroys, it never builds."  It would therefore be an uphill 
battle to approach the GOK with a request to impose limits on 
the business activities of a start-up biotechnology firm in 
Stepnogorsk, particularly given the lack of a convincing 
argument that production of anthrax vaccine creates a 
proliferation risk.  If it comes to this stage, post 
recommends that the relevant agencies weigh carefully the 
political cost of beginning what is likely to be a dispute 
with the GOK against the actual risk, if any, posed by Betta 
Star's proposed activities.  It is also important to consider 
the fact that preserving good relations with Betta Star would 
ensure USG access to the Stepnogorsk facility and preserve 
the option of purchasing the remaining fermenters in 2006. 
Any action perceived as threatening the firm's ability to 
operate could end the cooperative relationship. 
ORDWAY 
 
 
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