Cash-strapped Kyrgyzstan has a potential fix for its fiscal woes. Experts say the country is capable of doubling its gold production within a decade and reaping a financial whirlwind. Yet it’s no sure thing that officials will get their regulatory act together to make that happen.
Foreign investors are increasingly skittish when it comes to working in Kyrgyzstan. Political instability, physical insecurity and misgivings about the Ministry of Natural Resources’ management style have undermined confidence.
“At best investors here [in Kyrgyzstan] are guarded. They are sitting on their hands. Various events are very discouraging to investors […] people describe the Ministry of Natural Resources as ‘chaotic’,” said Ken Arne, a senior associate with Behre Dolbear International, a global firm offering business, technical and financial advisory services to the mineral industry.
The mining sector tends to rely on small companies to discover and develop mineral deposits. It’s a risky business, requiring millions of dollars in early stage investments. It also requires a high degree of confidence in a government’s regulatory framework.
But right now, uncertainty abounds for investors in Kyrgyzstan. The government is conducting a regulatory overhaul that has brought mining operations in the country to a standstill. Exploration licenses have been frozen since February while a ministerial committee conducts a “clean sweep” in an apparent effort to weed out ineffective companies who are not actively developing their holdings. For companies already holding licenses, the governmental review is causing “considerable problems,” industry experts say.
Kasiet Karacholokova, a ministry spokeswoman, acknowledged that the reform process has been protracted, but added that authorities did not want to rush, citing a desire to give the issue “proper consideration” and to ensure transparency. “Unlike previous [government] committees, the new one differs in that the entire structure is changed, the whole atmosphere of work has changed,” Karacholokova told EurasiaNet.org.
“It used to be that only the minister made decisions, but now representatives of the Attorney General, security services and a deputy from each faction in parliament participate in the meetings. Each meeting is carefully documented for clarity and transparency,” she continued. “We are aware that the new leadership is criticized, but [we are working to ensure the overall] good and prosperity of the industry.”
Though the government’s desire for thoroughness may be understandable, mining executives are nevertheless upset over lost opportunities. The delay is hurting the bottom line of many Kyrgyz mining entities. As gold prices shot to record highs earlier this year, many exploration-focused companies working in Kyrgyzstan could have expected their share price to rise. This did not happen. For the likes of Chaarat Gold, Kentor Gold and Manas Resources, share prices stagnated, or lost gains made during the latter half of 2010.
According to Arne, the mining-sector expert, there is only one reason for the woes of these companies: “It’s because they are in Kyrgyzstan.”
“Kyrgyzstan is not the only country in the world with gold deposits, investors are going to take a long hard look at the place, and they can decide to put their money into somewhere much more stable, such Canada or Chile,” Arne said.
Beyond procedural uncertainty, the forced retirement in April of senior ministry geologists also undermined investors’ confidence. One industry executive, who spokes on condition of anonymity, expressed concern about the future. “These are the people we have dealt with for years. They are solid professionals,” the executive said, referring to the personnel turnover. “The question is who is going to replace them? There is also a worrying lack of communication from the ministry on this and other matters. We desperately need to know what is going on, but we have no idea.”
Valentin Bogdetsky, a member of the Kyrgyz Mining Association’s board, said the ministry is on a path that will be “devastating” to the mining industry in Kyrgyzstan. He described the mass dismissal of geologists as “rash.”
“This will seriously affect the flow of investment,” he said.
“It’s very annoying. I was at a conference in Kazakhstan recently and everyone is asking what’s going on in Kyrgyzstan. Investors are not going to come here. What Kyrgyzstan needs most are qualified, competent people to advise the mining industry. At the moment we don’t have that,” Bogdetsky added.
Arne said that Kyrgyzstan’s reputation as an unsettled place to do business is costing the government in terms of lost revenue. “There are 2,900 known deposits of gold in Kyrgyzstan. If this were anywhere else in the world that would attract hundreds of companies but people have seen and heard enough to consider Kyrgyzstan risky,” he said.
“We need to get the licensing issue resolved fast. We need macro, not micro management from the ministry. There’s good geology in Kyrgyzstan, but no one is inclined to throw money down a rat hole,” Arne said.
Deirdre Tynan is Bishkek-based reporter specializing in Central Asia affairs.
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