THE IMPACT OF ENERGY ISSUES ON THE KYRGYZ UPHEAVAL
Though largely overlooked in Western coverage beyond the cozy fuel deals for the Manas Transit Center between the Bakiyev family and the U.S. Department of Defense, energy and water issues figured prominently in the recent unrest in Kyrgyzstan. The corrupt administration of President Kurmanbek Bakiyev stole from both the U.S via fuel sales to Manas, and Russia through the diversion of portions of its $2.15 billion loan, granted in February 2009. But what brought Kyrgyz demonstrators into the streets were massive utility rate increases. Hindsight made the unrest inevitable, though few saw the “perfect storm’ gathering at the time.
BACKGROUND: President Bakiyev’s son Maxim, appointed head of the Kyrgyz Republic’s Agency for Investment and Economic Development last October, quickly moved to extend his control over vast sectors of the Kyrgyz economy, as he promoted the selloff of joint stock energy companies as part of the country’s 2008-2012 privatization program, notably VostokElektro, serving Issyk-kul and Naryn provinces and SeverElektro, servicing Chuy and Talas provinces and Bishkek.
Last April, the Kyrgyz government sold its 80.49 percent share in VostokElektro to Chakan GES Company for $1.2 million. Bakiyev’s government cut a similar deal with Chakan last November for its 80.49 percent shares in SeverElektro, which sold for $3 million even as the Slavyansky Vostok holding company estimated the company’s value at $137 million. Chakan’s chairman of the board, Aleksei Shirshov, was a member of Maxim’s inner circle. The Kyrgyz Attorney General's Office concluded that the government suffered losses of over $120 million as a result.
After the insider trading of state energy assets at bargain prices, the government decided to raise utility rates for electricity, gas, heat and water for consumers, arguing that the money was needed for infrastructure upgrades. On January 1, electricity rates were increased. Before tariffs were raised a kilowatt of electricity cost 0.7 som (1.5¢). The rate subsequently rose to 1.5 soms (3.3¢), an increase of 214 percent. Hot water rates, calculated according to the size of a domicile, also more than doubled – in a country where monthly pensions are roughly $15. Adding insult to injury, on February 4 a meeting of the Jogorku Kenesh (Parliament) Budget and Finance Committee approved legislation to add VAT and sales tax to electricity and heating bills. Water issues underlay the price increases, as Kyrgyzstan's 15 hydroelectric stations generate 92.5 percent of domestically consumed electricity.
Quite aside from viewing the Kyrgyz population as sheep to be sheared, Maksim’s Agency for Investment and Economic Development purloined the second $300 million tranche of the $2.15 billion credit line that Russia gave Kyrgyzstan in February 2009.
On April 16, Kyrgyzstan's Prosecutor-General's Office announced the opening of two criminal cases against Maksim Bakiyev, accusing him of embezzlement and abuse of power, charging that in 2009 Bakiyev illegally transferred at least $35 million of a $300 million Russian loan tranche, intended to construct the Kambarata-1 hydroelectric cascade, to accounts at several banks he controlled while he and business associates allegedly used the remainder of the loan to buy and sell shares on foreign stock exchanges.
The stock market speculation was handled by Evgenii Gurevich, a naturalized U.S. citizen born in Kyrgyzstan. Gurevich was former head of the MGN Group, which entered Kyrgyzstan in 2008, acquiring numerous holdings, including banks, on its way to becoming one of Kyrgyzstan’s most powerful conglomerates. In 2006-2009 Gurevich served as director of the Asia Universal Bank, under the control of Bakiyev. AUB is Kyrgyzstan’s largest commercial bank, handling more than half of the republic's budget, including salaries of public sector employees, compulsory insurance programs, retirement savings and loans.
Furious about the misuse of the funds, Moscow suspended further payments, at which point Maksim looked for other sponsors to complete the Kambarata-1, in January venturing to China. Bakiyev publicly stated that China could replace Russia’s role in the project, but Beijing declined the offer.
On March 9, Italian media reported that Judge Aldo Mordzhini in Rome had issued an arrest warrant for Gurevich on charges of embezzling $2.7 billion from Telecom Italia and the Fastweb telecom company between 2003 and 2006, money laundering and ties to the Mafia in one of the biggest frauds in Italy’s history. It was only after the story broke that the Bakiyev administration cut its ties with Gurevich and the MGN group.
IMPLICATIONS: The price increases and the Bakiyev family’s corruption were the last straw for the long suffering Kyrgyz population, and a major factor in turning them against the government. Three days after Bakiyev’s ouster the provisional government repealed both the utility tariff increases and the privatization of SeverElektro and VostokElektro. Interim government first deputy head Almazbek Atambayev said in Osh on 18 April that the government would not increase electricity prices during the next two years.
But history may be about to repeat itself in neighboring Tajikistan, where a massive stalled hydroelectric project in the poorest of the Central Asian post-Soviet states is stirring a similar volatile mix of lingering Soviet mindset and corruption. Tajikistan is seeking to complete its unfinished 3,600-megawatt Vakhsh River Rogun hydroelectric dam, begun in 1976. In December the Tajik government issued Rogun stock and made it compulsory for citizens to purchase nearly $700 worth of shares, a sum exceeding most Tajiks’ annual income, in order to collect $600 million for construction to continue. After IMF Tajikistan mission head Axel Schimmelpfennig stated that the mandatory forced donations would destabilize the Tajik economy and that returns would be “negligible,” Tajik President Emomali Rakhmon suspended the campaign on 12 April as his administration negotiated with the IMF.
Tajikistan’s fixation on completing Rogun comes at a time when the UN’s World Food Program reports that over one-third of the Tajik population now lacks sufficient food, citing as causes a wintertime reduction in employment, a decline in remittances from Tajiks working abroad, the steady increase in food prices and the cost of acquiring shares in Rogun. Despite the IMF and UN cautions, the Rogun juggernaut rolls on, as of April 24, Tajik deputy Minister of Energy and Industry Pulod Mukhiddinov announced that 10 foreign companies, including firms from the U.S., Britain, Japan, Germany, Turkey, Switzerland, France and Italy would participate in a tender to develop a feasibility study and environmental assessment for Rogun.
As in Kyrgyzstan, massive Tajik corruption continues, with hundreds of millions of dollars being transferred each year to offshore accounts. According to local media in 2007 alone, corrupt government officials spirited $372 million out of the country.
In water-rich but energy-poor Kyrgyzstan and Tajikistan, governments determined to complete massive Soviet-era hydroelectric facilities, are in the absence of significant Western funding squeezing their populations to provide the working capital. The massive corruption in Kyrgyzstan pushed the populace to revolt for the second time in five years, and Rakhmon’s attempts to extort a year’s salary from his citizens for constructing Rogun is unlikely to endear him to his long suffering people.
CONCLUSIONS: Western interest in Central Asian hydrocarbon resources and military bases left the increasingly decrepit Soviet-era hydroelectric facilities in Kyrgyzstan and Tajikistan starved of capital investment. What money was raised in Kyrgyzstan was diverted by a corrupt administration, while in Tajikistan the populace is being fleeced to provide working capital to complete a soviet-era industrial dinosaur. As recent events in Kyrgyzstan proved, the population’s patience has its limits, and if such scenarios are not to be replayed, foreign countries with an interest in Central Asian stability had better develop a new paradigm for underwriting projects directly affecting “quality of life” issues for Central Asians lest in another five years Kyrgyzstan undergoes a third “Tulip Revolution” or Tajikistan slide backwards yet again into civil unrest.
