Kazakhstan: Business Climate Grows Gloomy Amid Arbitrary Arrest Controversy

Foreign investors and Kazakhstan's business elite have been shaken by the arrest of one of the country's most respected and successful entrepreneurs. As investors look on nervously and some of the country's top executives protest openly, a probe of all state companies has been ordered. So great has been the controversy stirred by the arrest of Mukhtar Dzhakishev, former head of the state nuclear agency, that President Nursultan Nazarbayev felt compelled to intervene.

Dzhakishev was fired as head of Kazatomprom on May 21 and officially arrested four days later on suspicion of stealing state property. (His wife insists he was actually arrested on May 21).

According to the National Security Committee (NSC), he is accused of appropriating as his personal property 60 percent of Kazakhstan's uranium deposits worth tens of billions of dollars. The NSC says Dzhakishev committed the alleged crimes in collusion with fugitive banker Mukhtar Ablyazov, his longtime associate. Separately, Ablyazov is accused of running an organized crime ring at BTA Bank, which he owned until the financial institution was forcibly nationalized in February. [For background see the Eurasia Insight archive].

On June 1, the NSC showed journalists a video of three former Kazatomprom vice presidents, Malkhaz Tsotsoria, Askar Kasabekov and Dmitriy Parfenov, relating how offshore companies and joint ventures were allegedly set up to misappropriate vast uranium deposits, including those at Akdala, Southern Inkay, Central Mynkuduk and the Khorasan mines. The three vice presidents are now state witnesses in the case rather than suspects, the Kazakhstan's National Security Committee says. A fourth vice president, former NSC chairman and Nazarbayev associate Nartay Dutbayev, is not under investigation.

More arrests are possible: the NSC officer leading the investigation, Vladimir Petrovsky, said "famous" names have been implicated. He also denied allegations by relatives of the accused that the investigation was tainted by irregularities, including suspects' lack of access to legal counsel.

One foreign investor affected by the case is the Canadian-based Uranium One Inc. Investigators are examining the sale of a 30 percent stake in the Khorasan mine, the country's largest, seeking to determine whether it was disposed of for a supposedly token price of 15.6 million tenge, now worth some $104,000. Officials have not named Uranium One as a target of the investigation, and the company is cooperating with the Kazakhstani probe. It asserts that its 30 percent stake in the mine was acquired via a fair-market-value purchase of $75 million. A Japanese consortium owns 40 percent, and Kazatomprom owns the remaining share. News of the investigation sent Uranium One shares plunging on the Toronto Stock Exchange.

Dzhakishev, a well-respected figure in Kazakhstan's business circles, has steadily built up the uranium sector in the country: Kazakhstan is pitching to become the world's largest uranium exporter, aiming to produce 12,826 tons this year. His arrest prompted rare public comments from some of the country's top executives, who assert that their colleague is the victim of an arbitrary manipulation of the law.

"Mukhtar Dzhakishev is known as an honest and talented top manager, who in 10 years has put the Kazatomprom company among the world's nuclear industry leaders. . . . Mukhtar Dzhakishev has never been involved in corruption scandals, and his reputation is untainted," said an open letter to Nazarbayev, signed by 22 high-profile executives, including Nurlan Smagulov, head of the Astana Motors; Kazkommertsbank's board chairman Nurzhan Sukhanberdin; former finance minister Zeynulla Kakimzhanov; and Armanzhan Baytasov, who heads the Nur Media group that operates outlets for Nazarbayev's Nur Otan party.

The open letter went on to state that Dzhakishev's arrest was having a detrimental impact on Kazakhstan's business climate. "Kazakhstani entrepreneurs no longer feel protected by the law," the letter stated. It also accused state agencies of launching "a large-scale offensive against business, killing the free spirit of entrepreneurship and persecuting the best representatives of business."

The fact that business leaders publicly protested is significant. Entrepreneurs have kept their heads down since a group of prominent businessmen and officials banded together in the Democratic Choice of Kazakhstan movement in 2001 to urge reform. This sparked a power struggle that ended with Ablyazov serving a prison sentence, from which he gained early release in 2003. [For background see the Eurasia Insight archive].

The Kazatomprom controversy sparked an unusual public intervention from Nazarbayev, who ordered Prosecutor General Kayrat Mami on June 3 to ensure the case is pursued in line with the law. The NSC, meanwhile, has denied allegations that the case is politically motivated. "The NSC resolutely denies any political reason behind this criminal case," press secretary Kenzhebulat Beknazarov told an Astana news conference in remarks carried on the Zonakz.net website. There have also been suggestions that Dzhakishev's arrest was sparked by someone's desire for a slice of the lucrative nuclear industry pie as the financial crisis sparks a re-division of spoils among Kazakhstan's elite. [For background see the Eurasia Insight archive].

The investigation into Kazatomprom's practices echoes the experience of BTA Bank, which officials now say was run for years by an organized crime ring, and also that of Rakhat Aliyev, the president's former son-in-law, who was found guilty in absentia of plotting a coup and running an organized criminal group. [For background see the Eurasia Insight archive].

The case is providing Kazakhstan with some unwanted international publicity as the country gears up to chair the Organization for Security and Cooperation in Europe in 2010. [For background see the Eurasia Insight archive]. It also is raising questions about how large-scale crimes could be carried out for so long in a top state company without anyone noticing.

In the wake of the Kazatomprom investigation, the Samruk-Kazyna state assets management fund ordered a probe of deals at all companies under its control, starting with the KazMunayGaz energy firm and the Kazakhstan Temir Zholy railroad company.

The June 1 announcement of the probe -- which will investigate possible irregularities in the setting up of joint ventures and asset transfers -- rattled investors. Meanwhile, Nazarbayev was enthusiastically talking up the economy at a meeting on anti-crisis measures on June 8. "Economic rates are not getting worse, but getting better. There is a possibility for the economy to level off according to the results of the first half of the year and [for us] not to permit a fall in our country's economic growth rates," he said in remarks quoted by the Kazakhstan Today news agency.

However, even as Nazarbayev seeks to reassure investors about Kazakhstan's economy, the storm over Dzhakishev's arrest risks tarnishing the country's image as having a reliable investment climate.