An Ontario court has frozen much of Kyrgyzstan’s share in its largest industrial asset, the Kumtor Gold Mine, adding an awkward new twist to the epic saga over the mine’s future.
Kumtor is fully owned by Toronto-listed Centerra Gold, which is one-third owned by Kyrgyzstan’s state-run Kyrgyzaltyn gold company. Since early 2012, Kyrgyzstan has been trying to increase its share in the high-altitude mine, which accounts for over 50 percent of the impoverished country’s industrial output and 10 percent of GDP in a good year. Early this year, the government and Centerra were moving toward an agreement that would increase Kyrgyzstan’s share in Kumtor to 50 percent, but negotiations have stalled as some lawmakers continue to demand the mine be nationalized.
The Ontario Superior Court of Justice ruling favors another investor with no role in the Kumtor dispute: Stans Energy, which says Kyrgyzstan has failed to pay the $118 million in damages awarded in Moscow this summer related to a different mine site, Kutessay II. In July, the Arbitration Court at the Moscow Chamber of Commerce and Industry ordered the Kyrgyz government to pay Stans in compensation for seizing the company’s license to Kutessay II, a heavy rare earths deposit.
Stans Energy announced on October 14 that the court order “prohibits the Kyrgyz Republic and Kyrgyzaltyn JSC ("KJSC") from selling, disposing, exchanging, assigning, transferring, pledging or encumbering 47,000,000 shares in the capital of Centerra Gold Inc. registered in the name of KJSC.”
This is not the first time a jilted investor has gone after Kyrgyzstan’s Centerra shares, which are the country’s only significant asset abroad—the “low-hanging fruit” as a Stans VP has called them. In 2009, a Geneva tribunal found in favor of a Turkish company, Sistem, which owned a hotel that Kyrgyz authorities seized in 2005. After its win in Geneva, Sistem took its case to Toronto, where in 2012 an Ontario Superior Court judge instructed Centerra to freeze over $8.5 million worth of Kyrgyzstan’s shares.
The Kyrgyz government confirmed the Stans ruling on October 15, which industry analysts say will complicate efforts to reach a settlement between Centerra and Kyrgyzstan.
“This development confirms our concerns with regards to Centerra Gold's efforts to restructure ownership of the Kumtor mine,” said investment researcher Seeking Alpha. “The described injunction prohibits this proposed transaction, and foreshadows further escalation in the strained relationship between Centerra Gold and the Kyrgyz government.”
Unsurprisingly, the nationalist legislator who has presented the biggest obstacle to the government’s effort to reach a deal with Centerra, Omurbek Tekebayev, responded by telling 24.kg that the ruling “reinforces my belief that it is necessary to nationalize Kumtor.”
But there are questions about the original ruling in Moscow that allowed Stans to freeze the Centerra shares, one of many arbitration suits weighing on Kyrgyzstan’s government. Last month, the CIS Economic Court upheld Kyrgyzstan’s position on the Kutessay II dispute, rejecting the Moscow Chamber ruling in favor of Stans.
Luke Peterson of Investment Arbitration Reporter, a trade journal, called Stans’ choice to bring its claim before the Arbitration Court at the Moscow Chamber of Commerce and Industry an “unorthodox arbitral pathway” in the first place. Stans “invoked the protections of a treaty and of a forum that are not familiar to most investment arbitration practitioners,” Peterson wrote in January. “The Moscow Chamber is a relatively new and seemingly inexperienced player on the investment arbitration landscape.”
Peterson told EurasiaNet.org this month that the CIS Economic Court’s determination in favor of Kyrgyzstan “will have some significant weight when Stans tries to enforce its recently obtained arbitral award under that particular treaty.”
It is unclear what the Ontario court makes of the CIS Economic Court.