Rethinking Kyrgyzstan's Gold Profits

With gold prices climbing, the government of Kyrgyzstan has affirmed that it will revise an agreement with a foreign partner to increase its take of the profits from the massive Kumtor gold mine, a critical source of state revenue.

"Kumtor is a unique deposit in terms of reserves and it must be this country's pride, not its shame," Kyrgyz Deputy Prime Minister Daniar Usenov, the government's lead negotiator on the project, told cabinet ministers on March 7. A memorandum of understanding with Cameco Corporation, the government's Canadian partner, and the state-run firm Kyrgyzaltyn, which develops the Kumtor desposit, has been drafted as a step toward "a new general agreement," the Russian news agency ITAR-TASS reported Usenov as saying.

Additional talks with Cameco were reportedly expected to be held on March 12.

Kumtor, Kyrgyzstan's largest gold mine, is critical to the Kyrgyz economy, providing annual tax revenues of approximately $30 million. Its astounding 10 percent share of Kyrgyzstan's Gross Domestic Product is so significant that it is often listed separately from the country's overall macroeconomic data.

Although the Kyrgyz state initially owned two-thirds of the Kumtor project, a controversial restructuring plan and sale of government shares in 2004 created a new company, Centerra Gold, dominated by its Canadian parent firm, Cameco. The government's stake dwindled to 16 percent. [For details, see the Eurasia Insight archive].

But the Kyrgyz authorities seem determined to recoup some of their losses. In December 2006, Centerra was forced to agree to an increased high-altitude wage bonus after a strike; the government seized on a proposal by Kumtor's foreign investors that the mine's operating company merge with another Canadian firm, El Dorado Gold, as a chance to regain more ground.

"We asked Cameco to meet us partway," Usenov told journalists at a news conference on February 20, according to Kyrgyz news agency AKIpress. "Gold prices have risen from $360 to $650 an ounce, but revenues are calculated according to the old agreement. We are asking for an increase in our share," Usenov said.

Both the Kumtor negotiations and recent unrest in the northwestern mining region of Talas highlight the delicate and fluid relationship between the various stakeholders in Kyrgyzstan's mining industry. As questions of fairness arise, company representatives, officials, and local activists are looking to Kumtor for lessons on how best to pursue their often divergent interests.

In February, Talas residents blocked off the road leading to the country's second-largest gold deposit, Jerui, for 10 days. They were calling for the closure of the mine before the start of commercial production, expected within a year. A month earlier, local protestors also targeted the nearby Andash site, which is currently under exploration. In both cases, residents expressed environmental concerns and skepticism that locals would benefit from the mining projects.

Kerim Shatmanov, the Kumtor mine manager for regional relations, told a roundtable on March 3 that the tone of the current talks about the government's ownership stake showed that relations had improved. "This is a negotiations process, and it happened without any pickets or anything of the sort," he said. "The experience of conflict is instructive."

The conflict cited was the aftermath of a 1998 truck accident near the mine that spilled two tons of sodium cyanide into the Barskoon River. [For details, see the Eurasia Insight archive]. The initial response from both company and government representatives was to play down the ecological and public health dangers of the spill, but dead wildlife and illnesses among residents prompted the local population to demand compensation.

"Relations [with the mine] improved only after the accident; prior to that they only dealt with the government," said Anarkan Ibrayeva of the local group Women of Jeti-Oguz. After the spill, Ibrayeva noted, the company began a process of outreach to nearby communities and support for social projects in the region, which eventually turned open hostility into an uneasy truce.

But critics of the compensation process have faulted the Kyrgyz government's handling of the funds, saying only a trickle reached local residents. After local groups closed the road to the mine in November 2005, reviving memories of the post-spill protests, Centerra agreed to additional compensation worth several million dollars.

Ibrayeva said local civic groups are similarly skeptical that they will see benefits from the current negotiations. "It will change little," she said, claiming that neither the government nor Centerra were focusing on the people's needs. "We shouldn't have to wait until some [other] accident happens," she added.

According to a government press release, Usenov mediated an end to the Jerui protests on February 27 by securing annual payments of $3 million to a local social fund, plus a 40 percent profit-sharing agreement for the government.

Jerui's investor, the Austrian company Global Gold, may have suffered from a weak negotiating position. The British firm Oxus initially held the rights to develop Jerui, and has argued that its license was revoked unfairly and awarded to Global Gold by the company's political allies. Some of the people participating in the road closure were Oxus workers who had lost their jobs.

Meanwhile, some Talas activists hope that the agreement on Jelui will point the way towards a peaceful form of conflict resolution that takes into account local concerns, commented Salia Akulova, director of the Talas non-governmental organization center Aikol. "We have a chance to avoid repeating the mistakes of Kumtor," she said.