kumtor-gold-kyrgyzstanFor almost 20 years, heated discussions and criminal proceedings have surrounded the massive highland gold deposit in Kyrgyzstan.

The Kumtor mine is located in the country’s northern region of Issyk-Kul.

The economic development project began in 1992 together with a Canadian firm, and almost immediately led to political conflict. Since 1994, every three to five years, politicians have questioned the necessity of the project for the country and who – the investor or the country – should benefit from gold extraction.

Kumtor is located at an altitude of approximately 4,500 meters, and its reserves total over 700 tons of ore.

The agreement to develop the mine was initially signed by the Kyrgyz government and the Canadian Cameco Corporation, whose subsidiary Cameco Mounting Company received the exclusive rights to develop the field. Meanwhile, the Kyrgyz government owned the majority of the joint venture’s asset.

Kumtor: First bar of gold

The first bar of gold at Kumtor was produced on Dec. 31, 1996. Commercial exploitation began in 1997. To date, nearly 300 tons of gold have been extracted. This year, production is expected to reach 18.7 tons.

Together with the exclusive rights to develop the field, the Canadian company also received significant tax exemptions for the first five years of its operation until 2002. At the time, Kumtor virtually became the only major enterprise in the country generating revenue for the state budget. The project contributes a hefty sum to the Kyrgyz GDP, and, consequently, the slightest malfunction leads to serious budget concerns.

Meanwhile, the tax exemptions for the Canadian company have seriously bothered the Kyrgyz opposition, which appealed to the government asking how much tax the company is forced to pay to the budget. But the grace period coincided with a decline in gold prices. According to specialists from Kyrgyzaltyn (Kyrgyz Gold), which signed the agreement with the Canadians on behalf of the government, the project “did not meet the expectations of the Kyrgyz side in terms of either tax revenues or dividends.” Five years later, the first round began of a so-called “search for solutions,” and the talks reopened with the Canadian investors.

In early 2004, the government and Cameco Corporation signed an agreement on restructuring Kumtor. As a result, Kumtor’s assets were exchanged for shares in Centerra Gold Inc., which is listed on the Toronto Stock Exchange as CG, as well as other assets belonging to Cameco Corporation.

Ten years later, in November 2013, the government declared this agreement on restructuring the project to be illegal. Kyrgyzstan issued a wanted notice for then-Prime Minister Nikolay Tanaev, and criminal cases were opened against two former members of the government – former Finance Minister Bolot Abildaev and former Emergency Situations Minister Temirbek Akmataliev. However, the officials ultimately did not face trial because the statute of limitations on these crimes ended in 2013.

Kumtor: Rising gold prices

The second round of turmoil surrounding Kumtor coincided with the increase in gold prices in 2004, and the accompanying tumultuous political processes in Kyrgyzstan. After the Tulip Revolution in March 2005, a new government came to power, which quickly reopened the negotiations with the Canadian investors.

The negotiation process began in 2007. By that time, one of Kumtor’s primary shareholders, Cameco Corporation, decided to sell its assets in the gold-mining business to focus on raw uranium production.

The negotiations lasted for two years and resulted in the signing of the agreement, “On the New Conditions of the Kumtor Project.” According to the document, Centerra Gold Inc. would operate the field and the Kyrgyz government would become the mine’s primary shareholder, owning 33 percent of the shares.

The new agreement defined a special tax regime for the project, under which the company was set to pay a flat tax of 13 percent on gross income. In addition, the company would pay an additional one percent of its gross income to the Issyk-Kul Regional Regional Development Fund. The question of subsidizing the region was raised by locals after a horrific accident in May 1998 when a truck filled with cyanide overturned in the Barskaun village. The poison seeped into the Barskaun River, causing the local population to suffer.

Despite the improving investor relations, the 2009 agreement signed had its pitfalls. First, the document was approved by parliament, which means that it can now only be abolished by parliament. Second, all legal claims on the investor can only be resolved in Canadian courts, as the company is in its jurisdiction.

All this became clear over almost three years when the new Kyrgyz parliament initiated a company audit. It was discovered that the agreement concluded with then-President Kurmanbek Bakiyev, who fled in April 2010, “was anti-national, as it is not in country’s interest because most of the money stayed in Canada. The mine activity violates the ecological balance, so the terms must be revised and the mine nationalized.”

The government’s plans to renegotiate the agreement with Centerra caused a wave of opposition, political meetings, and protests in the Issyk-Kul region. Three members of parliament from the opposition party Ata-Jurt – Sadyr Zhaparov, Kamchibek Tashiev, and Talant Mamytov – were accused of attempting to overthrow the government after a meeting was held on the nationalization of Kumtor on Oct. 3, 2012 in Bishkek. They were deprived of their seats in parliament in August 2013, and as of May 2013, their supporters across the country still asked the government to annul the agreement with the investors and nationalize Kumtor.

The aggressive campaigns waged by the company’s opponents have been accompanied by the closing of roads, clashes with the police, the disconnecting of the mine’s master-switch, and a governor’s kidnapping.

So, finally, the parliament requested to nationalize the mine. A year ago, it ordered the government to create a state commission to renegotiate the agreement signed in 2009. Members of parliament suggested that the government should increase its share in the project from 33 percent to 67 percent. Otherwise, they say that they will unilaterally denounce the agreement and nationalize the company. They said their request was not populist, as the president and prime minister claimed, but was an attempt to restore historical justice, claiming that the country suffered after signing the deal with the Canadians in 1992.

However, President Almazbek Atambayev strictly opposes the nationalization of the company and the termination of relations with the investor. Experts in the Cabinet of Ministers believe that Kyrgyzstan will sue dozens of shareholders if the agreement is denounced with Centerra. The amount of money required for lawsuits and damages varies from $3.8 billion to $5.5 billion, according to various estimates. Obviously, this amount is impracticable for the country, whose external debt is approximately this size.

In 2013, cabinet members have been conducting difficult negotiations with Centerra’s shareholders in an attempt to achieve preferences for the country and increase the government’s share in the mine. They did their best to convince parliament of the need to renegotiate the agreement and restructure the project, addressing all the arguments from significant financial losses to political and economic risks. Economy Minister Temir Sariev noted that Kyrgyzstan would lose up to $100 million in direct and $50 million in indirect taxes should Kumtor close.

Ultimately, on Jan. 18, 2014, the government and Centerra signed a memorandum on restructuring the project. According to the document, the development of the mine will take place under a new joint venture with equal equity participation. It will be registered in Kyrgyzstan, and the country will be able to increase tax revenues and dividends by 70 percent. It will also be able to participate in decision-making processes. From 2014 to 2026, the total amount of inflow from the mine’s development will measure $2.2 billion.

Meanwhile, the agreement reached with Centerra is only preliminary and has yet to be signed. Three months have been given to develop the document, in addition to provisions addressing environmental issues and the reclamation of the tailing dump. According to the preliminary assessment of experts, the damages resulting from the mine’s activities totaled several million dollars from 1997 to 2013.

Despite the added benefits of the new agreement for the government, no explanation has been offered as to why the document has been revised continually over the past 20 years. The battles over Kumtor reveal that the personal interests of political leaders are at stake and remain dependent on how things unfold.