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Corruption Watch: May 15, 2003

15 May 2003, Volume 3, Number 17
By Roman Kupchinsky

Kazakhstan's ruling elite, both communist and post-Soviet, has never been viewed as particularly enlightened by organizations that track human rights or corruption. According to Transparency International (TI) Kazakhstan garnered an 84 out of a possible low score of 99 in 2000, making the Republic of Kyrgyzstan and Azerbaijan the only former Soviet republics more corrupt according to the TI indicator. The same dismally high level of corruption continued into 2001 and 2002. Kazakh President Nursultan Nazarbaev, the last communist boss of the country, is also the first and only president the country has had. His authoritarian rule since 1991 has spawned an opposition that operates mainly outside the country to avoid harassment -- or worse.

U.S.-based Freedom House in its "Freedom of the Press 2003" assessment (see placed Kazakhstan in its "Not Free" category. "President Nursultan Nazarbaev's crackdown on opposition media has prompted a further deterioration of press freedom. Existing legislation criminalizes insults against the 'honor and dignity' of the president. Under the 1999 Law on Confidential State Affairs, the economic interests of Nazarbaev and his family officially became state secrets."

The commodity that keeps Nazarbaev in power is oil, vast quantities of it, located in the world's fifth-largest oil field, Kashagan, and in the sixth-largest, Tengiz. When Kazakhstan became an independent state, these oil reserves soon became the object of considerable interest to major oil companies, as did Kazakhstan's easy access to the vast reserves found in the Caspian Sea region. Nazarbaev was quick to tally up the dollars these oil fields could provide and set about creating the necessary structures to exploit the oil fields for all they were worth.

Major Western oil companies (ExxxonMobil, ChevronTexaco, Total, Royal Dutch/Shell, Elf, British Petroleum [BP], and CococoPhillips) could not ignore Kazakh resources and were willing to invest some $30 billion over the next two decades to develop oil production in Kazakhstan -- increasing the output from 1 million barrels per day (bpd) to 3 million bpd and making Kazakhstan one of the world's top five oil-producing nations. The trick these oil giants had to solve was how to balance their commercial interests with the reputed appetite of the president.

Nazarbaev was faced with a similar dilemma. In order to solve it, Nazarbaev hired as his counselor on 1 August 1995 a U.S. citizen, James H. Giffen. Giffen ran a small merchant bank in New York called Mercator Corporation, of which he was chairman of the board and chief executive officer. Giffen's duties to Nazarbaev included advising on strategic planning, the development of foreign investment, and the negotiation of priority investment projects relating to the country's oil and gas industries. In this capacity, he acted as a representative of the Kazakh government in six major transactions involving U.S.-based oil companies. According to an indictment of Giffen handed down by the U.S. Attorney for the Southern District of New York on 2 April, Giffen was responsible for the following deals:

1. Mobil Oil's 1996 purchase of a 25 percent share in the Tengiz oil field;

2. Mobil Oil's 1995 agreement to finance the processing and sale of gas condensate from the Karachaganak oil and gas field;

3. Amoco's 1997 purchase of a share in the Caspian Pipeline Consortium;

4. Texaco and other oil companies' purchase of a share in the Karachaganak oil and gas field in 1998;

5. Mobil and other oil companies' 1998 purchase of exploration rights in the Kazakh portion of the Caspian Sea, and;

6. Philips Petroleum 1998 purchase of Caspian Sea exploration rights.

According to the indictment, Mobil Oil agreed to pay the success fee owed by the government of Kazakhstan to Giffen. Out of these payments, Giffen allegedly made unlawful payments of $22 million to secret Swiss accounts beneficially owned by two high-level Kazakh officials named in the indictment as "Ko-1" and "Ko-2." According to "The Wall Street Journal" of 23 April, "Ko-1" is former Prime Minister Nurlan Balgimbaev, presently the director of the Kazakh state oil company, while "Ko-2 is President Nazarbaev. According to a 1 April report in "The New York Times," Swiss official documents indicate that one of the accounts to which Giffen transferred money has President Nazarbaev as a beneficiary. Altogether, the indictment mentions that Giffen paid some $78 million into the Balgimbaev and Nazarbaev accounts. Along with the money, he reportedly also bought the president a power boat in Long Island.

Giffen appears to have been a shrewd dealer. According to "Eurasia View" of 3 April: "Among the many consultants who broker deals between private companies and government ministries, Giffen apparently earned special prominence. Prospective investors reportedly called him 'Mr. Seven-and-a-Half Cents.' He reportedly negotiated a production deal with a global oil giant, in which he secured a commission of 7.5 cents on every barrel of oil the company pumped out of Kazakhstan."

"The Wall Street Journal" of 23 April reported that Mobil was not the only company involved in the alleged bribery of senior Kazakh officials: "Though two of the six oil deals cited in the indictments involve consortia in which some of Europe's largest oil companies are members, there is almost no possibility that any of them will face similar investigations at home, experts say. That is because European antibribery statutes similar to the Foreign Corrupt Practices Act have been in force only since 1999, a year after the last transactions detailed in the U.S. indictments."

In a continuing trial in Paris, French oil company Elf, one of the members of the Caspian Sea Consortium, is accused of massive bribery and influence peddling. Among those implicated are former Prime Minister Roland Dumas, who in May 2001 was sentenced to six months in prison for having accepted some of the $250 million that Elf apparently spent in the early 1990s to further its interests and those of the late French president, Francois Mitterrand. Investigators, according to "The Guardian" of 2 March, are looking into allegations of a bribe of 900,000 pounds given to author Francoise Sagan from an Elf go-between, known as "Dede the Sardine," in exchange for "persuading the president to intervene on a contract in Uzbekistan."

In one of the deals involving Giffen, prosecutors say six U.S. and European oil companies paid $23 million into a Swiss escrow account as part of their 1997 purchase of rights to the offshore Kashagan field, which geologists describe as the world's largest oil find in three decades. Giffen allegedly transferred $5 million of that sum to a Swiss bank account belonging to Nazarbaev and $2.5 million to an account of then-Prime Minister Balgimbaev. The European companies that were part of the consortium are Total (now TotalFinaElf), Royal Dutch/Shell Group, Eni, BG Group, and BP. The sole U.S.-based company was Mobil.

Prior to Giffen's arrest, in early April 2002, international media reported that Kazakh Prime Minister Imanghali Tasmaghambetov told the Kazakh parliament that the government had secreted abroad some $ 1 billion in profits from the sale of 20 percent of the Tengiz oil field in 1996. On 16 April, President Nazarbaev told the "Financial Times" that he sees nothing wrong in the creation of the fund and that no money has disappeared.

The money had gone into a Swiss bank account and allegedly was in the name of the president himself, although Kazakh authorities were quick to claim that neither the president nor his family benefited from it. Kazakhstan Central Bank Chairman Grigorii Marchenko defended Nazarbaev's decision: "As an economist and banker, I can only say this was the right decision from the economic point of view" (see "RFE/RL Business Watch," 30 April 2002.)

The central banker went on to say that $880 million from this fund was spent in 1997-98 to pay off huge pension arrears and to support the budget amid a sharp fall in revenues due to lower oil prices. He also said that by 15 April, $212.6 million had transferred to the country's national fund for oil income since the start of the year. No documentation was provided to confirm those claims.

As these revelations were being made, the Kazakh president was consolidating power in the country and clamping down on the press and the opposition. As "The Wall Street Journal" wrote on 24 July 2002, "Reports of corruption involving Nazarbaev's family have circulated for years. The president's daughter Dariga and both his sons-in-law have been active in business here. According to diplomats, local journalists and politicians, Dariga Nazarbaev openly or secretly owns most of the country's news media, including the state television channel."

According to a Human Rights Watch Report titled "The Energy Industry" (see, during the March 1997 to September 1998 period that these transactions took place, the Nazarbaev government took action to undermine freedom of speech, assembly, and association in Kazakhstan in order to prevent independent media from reporting such activities and to deny Kazakh citizens the right to express their opinions and change their government.

"In addition to pursuing political opponents abroad, Nazarbaev signed a law on 21 July 2000 to grant himself lifetime powers, including rights to remain on the powerful Kazakh Security Council, to head the parliamentary assembly of Kazakh peoples, to make national addresses on television and before parliament, to attend government meetings, to advise any future president on policy matters, and to immunity from prosecution. Opposition parliamentarians strongly criticized the law and suggested that Nazarbaev was moving towards making himself president-for-life, like his counterpart Sapurmurat Niyazov in gas-rich Turkmenistan."

As the investigations around Nazarbaev reached closer to home, he apparently reversed his course and began pushing foreign capital out of Kazakhstan. In 2001, Nazarbaev re-created the KazMunaigaz (KMG) national oil company by merging KazakhOil, the national oil-production company, with Oil and Gas Transport (TOG). The helm of this "new" company was handed to Lyazzat Kiinov, the former head of the Kazakh branch of the Caspian Pipeline Consortium. But the real power in the new company, according to the Russian energy website RusEnergy ( belongs to the first deputy, Timur Kulibaev, Nazarbaev's son-in-law and the former president of KazTransOil. Considered by some to be the likely successor to Nazarbaev, Kulibaev in the past was said to be responsible for expelling the Belgian company Traktebel, whose assets he had transferred to KazTransOil. With enormous power over the oil industry and its financial levers through KazMunaigaz, RusEnergy predicts that Kulibaev will turn it into a base for his own presidential bid.

Doing business in Kazakhstan is fraught with political booby traps for U.S. companies. Pointing to the political complexity of the case, "Eurasianet" on 8 April quoted from a letter written by Reid Weingarten, a Washington-based attorney for Kazakhstan, to U.S. Deputy Attorney General Larry D. Thompson. Weingarten wrote, according to "Eurasianet": "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."

In his testimony to a U.S. Senate committee on 30 April as published in "Johnson's Russia List" of 2 May, the U.S. Energy Department's Leonard L. Coburn had this to say about U.S.-Kazakh cooperation in the energy field: "With independence, both Azerbaijan and Kazakhstan welcomed international investors, and big Production Sharing Agreements (PSA) contracts have been signed in both countries. These projects developed by western investors, including companies from the United States, have created thousands of jobs, provided access to improved technology including training for the labor force, invested in social infrastructure, increased commitment to environmental protection and encouraged the establishment of many small and medium sized enterprises in these countries."

Was James Giffen helping Kazakhstan create jobs and move into the 21st century, or was he (knowingly or unknowingly) helping a corrupt leadership to steal from its own people? The Giffen indictment makes the following argument: "The scheme thus defrauded the Government of Kazakhstan of funds to which it was entitled from oil transactions, and defrauded the people of Kazakhstan of the right to the honest services of their elected and appointed officials."

(For more on "Corruption In The Energy Sector Of The Former USSR," see "RFE/RL Organized Crime and Terrorism Watch," 2 May 2003.)

Four car-bomb explosions rocked three guarded housing compounds in Riyadh, Saudi Arabia, on 12 May, killing an estimated 10 Americans and wounding 50 more. The next morning, another explosion took place outside the headquarters of a joint U.S.-Saudi company in Riyadh.

No one claimed responsibility for the blasts, but U.S. Secretary of State Colin Powell told a press conference in Amman, Jordan, that the blasts "had the earmarks of Al-Qaeda," according to AP on 13 May. Powell was on his way to Saudi Arabia and arrived in the city a few hours after the blasts took place. CNN reported the same day that Saudi officials told its people that "some of the attacks were the work of militants, others were due to in-fighting among gangs involved in lucrative alcohol smuggling."

The AP report stated: "An intelligence official in Washington said information from the past two weeks indicated Al-Qaeda was planning a strike in Saudi Arabia." Saudi officials also told the agency that Al-Qaeda was planning attacks in Saudi Arabia. RK

On 12 May, as many residents were returning to work after the Victory Day holidays, a suicide car bomb exploded in Znamenskoye, a town north of the Chechen capital, Grozny, killing at least 41 people and wounding 110. According to AP, the explosion had the force of at least 1.3 tons of dynamite. The truck was driven by three suicide bombers, including one woman.

The blast destroyed a regional-government-administration building and severely damaged the two-story office of the Federal Security Service (FSB), the intelligence agency that is active in Russia's campaign in Chechnya.

FSB chief Nikolai Patrushev, speaking on state-run television, said the truck carrying explosives blew up after it was halted at a security barrier about 30 meters from a concrete wall that protects the government buildings.

No one claimed responsibility, but officials immediately blamed Chechen rebels. According to "The Washington Post" of 13 May, "Russian officials quickly blamed the attack on Chechen militants and singled out Arabs who they said have gained significant influence in the movement. But they acknowledged they had no real evidence yet as to who was responsible.

"In recent months, Russia's president, Vladimir Putin, has portrayed Chechnya as a region of growing stability, eager to reconcile with Russia after two wars in less than a decade. With parliamentary elections scheduled for December and presidential elections less than a year away, political analysts say it is important to Putin to show that the loss of 4,500 Russian soldiers in Chechnya over the past 3 1/2 years has had some purpose." RK

Justice and interior ministers from the Group of Eight leading industrialized countries reached a consensus on the continuing threat of terrorism during a meeting in Paris on 5 May. The ministers declared that "terrorism continues to present both a pervasive and global threat to our societies that we have to respond effectively and immediately." "The New York Times" reported on 6 May.

At the same time, the ministers pointed out that while the war in Afghanistan was able to eliminate much of the Al-Qaeda terrorist network's infrastructure, the terrorist organization is regrouping and establishing new bases in the region, which make Al-Qaeda a continuing, serious threat. The ministers did not elaborate on what led them to this conclusion.

French Interior Minister Nicolas Sarkozy announced that the ministers had agreed to reinforce their efforts jointly to combat the terrorist threat. "French and American cooperation never stopped because it concerns the security of our citizens," he added. Sarkozy also told the press that Osama bin Laden's organization has moved its bases from Afghanistan to Georgia and Chechnya, according to a report in the "Independent" of 6 May. The French minister did not present any evidence to back this charge. RK

The U.S. State Department released its annual report on "Patterns of Global Terrorism" for 2002 (see, which includes a section on the situation in the Russian Federation. The report states that Russia continued to be subjected to terrorist attacks in 2002 "mainly connected to the ongoing insurgency and instability in Chechnya." The report concentrates on the events of 23 October 2002, when a group of about 40 armed militants seized a Moscow theater and held some 800 people hostage. The theater was eventually stormed by special Russian police units, who used a narcotic gas to disable the attackers but also are believed to have killed more than 120 hostages, including a U.S. citizen. In general, the report lists Russian initiatives and legislation in the struggle against terrorism and favorably mentions Russian government cooperation in the freezing and tracking of terrorist assets. RK

A member of the Russian State Duma's Committee on Security, Valerii Ostanin, told the "Trud" newspaper of 26 April that there are an average of four murders committed in Russia every hour. Ostanin, who formerly headed the organized-crime unit of the criminal police in Altai Krai, was asked about reports that law-enforcement officials were eager to arrest "criminals" in the search for the killers of Duma Deputy Sergei Yushenkov. Ostanin replied that the reports remind him of the flurry of police activity following the murder of liberal lawmaker Galina Starovoitova, when a composite drawing of the killer was circulated the next day but the crime still has not been solved. "I think it all looks like an ostentatious display, with which they hope to conceal a lack of professionalism," he said, according to "Trud."

Ostanin went on to state that there are some 5,000 contract killings per year in Russia, and the victims include mayors, vice governors, other local officials, and regional legislators. "We know from experience that it is not difficult to find a hit man who will kill any official at all for $100. He only has to be provided with a gun and shown whom he is to kill."

In Ostanin's view, organized crime has infiltrated the Russian government -- and this, he claimed, is borne out by the high rate of corruption among officials and the fact that so many crimes are committed with impunity. The Duma member cited the case of a deputy interior minister who is presently wanted on charges of accepting bribes. "The criminal activities of the State Fisheries Committee, in which the country's top officials were involved, also created a scandal. Do you think it will sink them? I am certain that all of them will stay afloat." RK

Serbian police filed charges against 45 individuals in connection with the assassination on 12 March of Serbian Prime Minister Zoran Djindjic. Making the announcement on 29 April, Serbian Interior Minister Dusan Mihajlovic said the criminal group had devised an operation, code-named "Stop The Hague" in reference to Djindjic's cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), and had planned the assassinations of a number of leading political figures in Serbia and Montenegro, including Foreign Minister Goran Svilanovic.

Ten of the 45 individuals have not been apprehended. According to RFE/RL's South Slavic and Albanian Languages Service, those charged include Milorad Lukovic "Legija," a former special-operations commander and the reported leader of the "Zemun clan"; Zvezdan Jovanovic, a member of that former unit who is suspected of pulling the trigger in the Djindjic assassination; and Vojislav Seselj, the leader of the right-wing Serbian Radical Party who is awaiting trial for alleged war crimes in The Hague. According to "Transitions Online" of 6 May, those charged also include Ljubisa Buha "Cume," the leader of a criminal grouping who is reportedly willing to testify against Lukovic in exchange for leniency; and General Aco Tomic and Rade Bulatovic, onetime aides to former Yugoslav President Vojislav Kostunica. The former president's party, the Democratic Party of Serbia (DSS), denied the charges and said they are politically motivated and intended to discredit the former president. RK