The arrest of a U.S. adviser to Kazakh President Nursultan Nazarbaev in a bribery probe has raised concerns about possible fallout for foreign investment. Some analysts see a link between the investigation and the worsening human rights and business climate in the country during the past two years.
Boston, 3 April 2004 (RFE/RL) -- Investors in Kazakhstan will be nervously watching the progress of a corruption probe following the arrest of a U.S. executive in New York this week, industry sources say.
On 30 March, James H. Giffen was arrested at New York's Kennedy Airport on charges of violating the Foreign Corrupt Practices Act, according to a U.S. criminal complaint.
Prosecutors charge that the 62-year-old Giffen shifted $20.5 million in 1997 to a Swiss bank account linked to a "senior Kazakh official" and "his heirs" through a series of transfers. "The New York Times" reported that Swiss legal documents name President Nursultan Nazarbaev and his family as the "apparent beneficiaries" of the account.
An attorney for Giffen, who heads the Mercator Corporation merchant bank, said the charges were based on "circumstantial evidence" and predicted he would be exonerated. Giffen was freed after posting a $10 million bond and surrendering his passport, news agencies said.
The Kazakh government has repeatedly denied that Nazarbaev profited from the alleged payments. Giffen, who has been involved in Kazakhstan for more than a decade, was appointed as Nazarbaev's official counselor in 1995. In the past, Nazarbaev has claimed that funds held in foreign accounts were only for national emergencies.
The case has been smoldering since July 2000, when the U.S. magazine "Newsweek" reported an FBI investigation into suspected transfers of more than $65 million by three U.S. oil companies or affiliates into offshore accounts. Only Mobil Oil Corporation, now part of ExxonMobil, was specified in this week's complaint. The Amoco oil company has since merged with Britain's BP, while Phillips Petroleum is now part of ConocoPhillips.
The allegations stem from Giffen's involvement as a consultant or middleman for oil companies seeking shares in the giant Tengiz oil field. According to the federal complaint, Mobil agreed to pay $1.005 billion for one-fourth of the field in 1996, giving Mercator a $51 million fee. Funds from the fee allegedly flowed to the Swiss account, controlled by a shell company and a foundation linked to Kazakh officials.
In the latest development, a former senior executive for Mobil was charged yesterday with evading taxes on a $2 million kickback. The Associated Press says the indictment for J. Bryan Williams alleges that the president of Mercator paid him $2 million for his work with Kazakhstan over Mobil's purchase of a stake in Tengiz. Williams' lawyer said his client believes he acted "properly."
While the outlines of the case have been long known, the consequences have been unclear. Some analysts and industry officials have privately traced the worsening of the investment and political environment in Kazakhstan over the past two years to the first publicity of the FBI probe.
The period has seen a surge in human rights abuses, including jailing of dissidents and a crackdown on independent press. In the business sphere, foreign oil companies have complained about pressure to renegotiate contracts with the government and the terms of a new investment law.
Last December, "The New York Times" drew a link between the bribery scandal and the troubles, saying, "Relations between the United States and Kazakhstan have hit a rough patch." The paper quoted Reid Weingarten, a Washington attorney for Kazakhstan, as voicing similar worries in a letter to the U.S. Justice Department.
Weingarten wrote, "I am deeply concerned that foreign relations between the United States and the Republic of Kazakhstan -- an important ally in the war on terrorism with significant oil and gas reserves in an unstable geographical region -- will deteriorate if prosecutors maintain their pursuit of the documents in Kazakhstan and continue to aggressively investigate Kazakh government officials."
This week brought renewed concerns. One oil-industry analyst, who spoke on condition of anonymity, told RFE/RL, "This is a very serious case for Nazarbaev and for whomever else Giffen's file implicates."
The analyst said: "Clearly, over the last year -- since the beginning of 2002 -- they've gotten increasingly oppressive with foreign companies. There's no question 2002 was a terrible year for the industry."
Perhaps the toughest test for investors came in November, when Tengiz investors suspended a $3 billion expansion plan after a funding and tax dispute with the government. In December, the government also confirmed a $70 million environmental fine against the Tengizchevroil venture.
Since then, the sides have settled their differences, and the fine has been reduced to $7 million. Foreign companies are likely to be on the lookout for any new fallout from the Giffen arrest.
But some analysts say that Kazakhstan's troubling trends have their own roots and reasons that have nothing to do with the investigation.
Laurent Ruseckas, a consultant based in Paris for Cambridge Energy Research Associates, said, "There may be some vague correspondence in the timing, but this doesn't imply a causal connection." Ruseckas added, "The investment climate is worsening because the Kazakhs have looked at the terms of their existing contracts and decided they can do better and that they have the leverage to improve the terms, even if it means revising contracts."