Open Letter to the National Leadership

published: 24 January 2014

President of the Kyrgyz Republic
Toraga of Jogorku Kenesh of the Kyrgyz Republic
Prime Minister of the Kyrgyz Republic

Dear Almaz Sharshenovitch, Asylbek Sharipovitch and Jantoro Joldoshevitch:

On behalf of the business community of the Kyrgyz Republic, may I thank you for your contribution to the economic development of our country and improvement of the living standards of Kyrgyz citizens. The International Business Council comes out in support of the efforts you are making to accomplish your basic mission, building a peaceful, just and prospering state.

We realize that you have a multitude of problems to address daily and we support your efforts in fighting corruption, improving the investment climate, eliminating administrative barriers and restrictions and bettering of the investment legal framework. The recent reports on the GDP growth in 2013 (over 10%) represent a serious result, powerful impulse to the further development of Kyrgyzstan towards international recognition of it as an actively developing country.
It is in this context of continued national development that we are addressing you in order to call your attention to an early solution of the Kumtor issue as this is the crucial circumstance that may affect further investment in Kyrgyzstan by a lot of large investors active in our country.

We see that quite a number of large investors formerly active in Kyrgyzstan have recently withdrawn their investment from Kyrgyzstan in favor of other countries and quit mining projects. These include Santos LTD, Australia (oil and gas projects in southern Kyrgyzstan including Yuzhnaya Neftianaya Kompaniya (Southern Oil Company), Textonic, KNG Hydrocarbons); a group of Petrofac companies, Britain (oil production, processing and sales, Kyrgyz Petroleum Company); Kentor Gold LTD, Australia (copper and gold deposit at Talas, Andash Mining Company, affiliate of Kentor Gold LTD in Kyrgyzstan); international company “Gold Fields LTD” (copper and gold deposit at Talas, Talas Copper Gold).
We are sure that a denunciation of the Kumtor agreement or nationalization of the company would have extremely negative effects on the national economy and fiscal security of Kyrgyzstan, aggravate dramatically social tensions, seriously hamper investment and trigger investment outflow from Kyrgyzstan.

Unless a consensus is reached by the parties during the negotiations, Kyrgyzstan is likely to face protracted and harassing international arbitration. Examples are on record where Kyrgyzstan lost arbitration actions, including those involving the former owners of Pinara Hotel, Aurora Plus Hotel and FEZ Central Asian Corporation. According to Prime Minister J. Satibaldiyev, party and party costs are extremely burdensome for the national budget. Furthermore, Kyrgyzstan has become a party to other arbitrations initiated by foreign investors against the Kyrgyz Republic with the amount in dispute totaling US $1 billion. The Centerra case, if lost by Kyrgyzstan, may lead to significant damages that this country would have to pay to the investor with the sum amounting to billions of US dollars.

The likely consequences may include disruption of mine operations and still greater risks – economic, social, environmental, political ones as well as risks of having Kyrgyzstan’s international business reputation seriously undermined. These likely consequences may be as follows:
• The budget revenues in taxes from the entire mining sector were 6,719 million soms in 2012, including the Kumtor Project’s contribution (the revenue-based tax alone) estimated at 4,578 million soms or 68%. These budget revenues may be lost.
• Reductions in tax and other mandatory payments would be approximately US $130,0 million annually. Annual losses suffered from the shutdown of the mine may total as much as US $300 million.
• Serious losses would be sustained also by the Social Fund of the Kyrgyz Republic which receives up to US $20 million per year from the Company itself and its employees.
• Also lost will be the program of social and economic projects in the Issyk-Kul region to which the Company has contributed more than US $25 million since 2009.
• Over 3,000 Kyrgyz citizens employed by the mine would lose jobs, the losses resulting in more than US $90 million in wages alone – a fact that would impair the welfare of over 10,000 families.
• The loss of control over the state of the mine infrastructures, including the risk of a pit wall failure as the result of the waste rock dump movement. This may result in the loss of access to the zone where mining operations take place now. Even a week of down time in the open pit may have effects that would take huge financial resources and great time to mitigate.
• A stoppage of mining operations would lead to a stoppage of milling and the entire technological process while restarting would take great financial resources and long time. A 3-day suspension of the gold mill in May 2013 caused damage estimated at US $4.5 million.
• A shutdown of the mine would make it impossible to provide services to the tailings and other facilities.
• Should the mine be shut down for a long time, restarting operations and recovery efforts would take US $100mln to $400mln.

The consequences of the above risks are direct and do not include other negative factors resulting from the possible shutdown of the mine and may have a multiplier effect.
Delays in the settlement of the Kumtor issue have already inflicted serious losses on the national budget of the Kyrgyz Republic. They amount to at least US $70 million, according to 2013 reports. Implementation of the accords already achieved, on the contrary, would increase budget revenues to US $2.7 billion at large.

A fair solution of the Kumtor issue would become a positive signal to all investors who are potentially ready to launch a number of projects in the Kyrgyz Republic because the Government, business community and general public realize it only too well that predictability of the operational environment is a matter of great importance for any investor.

It is precisely in the interests of the Kyrgyzstan people that a well-balanced decision should be taken with regard to the Project – a decision that would be recognized as satisfactory by both parties involved. It is obvious that approval of the agreement version as proposed by the Government of the Kyrgyz Republic would be such a decision. This step, if taken, would make it possible to attract investment – a thing is so vital for the economic recovery and further development of the industrial potential.
We, representatives of the business community, are patriots of our homeland and live with the faith in the future prosperity of Kyrgyzstan. This faith is what urges the business community to do our best in contributing to the development of Kyrgyzstan.

The International Business Council is calling for a thorough consideration of this issue, all the risks and repercussions included, and expresses hope for its early solution.

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