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This is the English original for the article Gullette, David. 2014. ‘Kumtor: Ein Lackmustest für den Bergbau in Kirgistan’, Zentralasien-Analysen 76: 2-5, http://www.laender-analysen.de/zentralasien/pdf/ZentralasienAnalysen76.pdf. Kumtor: The Litmus Test for Kyrgyzstan’s Mining Sector David Gullette Summary Conflict surrounding the Kumtor gold mine in Kyrgyzstan is primarily about the equitable distribution of resources, but advocates for the nationalisation of the mine present it as a battle for the sovereignty of the country. The Government has sought to increase its shares in the mine to gain greater control and bigger revenues. While debates continue in Parliament on how this should be done, protests and violence have become people’s outlet for frustration at the drawn-out process. The proposed framework agreement is an achievement, but remains to be finalised. The deal, however, should not overshadow the need to address underlying challenges that communities affected by mining operations experience and the lack of communication between stakeholders. Without this, Kyrgyzstan’s attempts to reform the mining sector will fall far short of the goal and result in further conflict. A new beginning? On 6 February 2014 Kyrgyzstan’s Parliament approved a new agreement framework with the Canadian company Centerra Gold Inc. regarding control of the Kumtor mine in the east of the republic. After months of protests and violence concerning the fate of the mine, this is welcome news. It is, however, only another phase in the process to improve mining regulations, operations and equitable relations among stakeholders. Tensions are still running high. Continued calls for nationalisation of the mine by some politicians, however, have played on people’s frustration of living in poverty and a sense that they have lost control over a strategic asset. The country’s largest gold mine has always been a source of contention, but since the 2010 ousting of President Kurmanbek Bakiev there have been renewed attempts to change the operating agreement. The new agreement framework gives Kyrgyzstan an equal stake in the restructured mine operating company at Kumtor. The Government has said that the agreement should be finalised in four months, but industry insiders believe that it will take closer to a year. The agreement framework represents a series of political and economic compromises. The underlying causes of tension, however, remain to be addressed and must be considered for the future development of the mining sector. Importantly, all sides must examine how to make the increased mining-generated revenues benefit communities affected by the mining operation and improve the country’s strategic development. Pioneer in gold mining The Kumtor gold deposit is the largest in Central Asia. Discovered in 1978, mining experts found it was too costly to develop and extraction methods would have resulted in extensive environmental damage. The Canadian Cameco Corporation was the first company to invest in development of the deposit. On 3 December 1992 it signed a General Agreement with the Government of the Kyrgyz Republic. Cameco acquired a one-third interest in the Kumtor Gold Company, the owner of the mine. Kyrgyzaltyn, the state mining company, received the remaining two-thirds interest. Kumtor Operating Company, a subsidiary of Cameco Gold International owned by Cameco Corporation, operated the mine. Construction and development of the site started in 1994 and was completed in 1997, and production began only in the second quarter of that year. In 2004 Cameco Corporation transferred its gold-related shares and loans to Centerra Gold Inc., a new Canadian-based company, but retained some shares in the new company. As a result of the restructuring and selling of shares, the Government held around 16 per cent of shares in Centerra. In June 2009, under President Bakiev, Centerra negotiated a New Terms Agreement between Centerra, the Government and the Cameco Corporation. In December 2009, according to the New Terms Agreement, Cameco transferred shares to Kyrgyzaltyn. At the same time, it sold its remaining Centerra shares, concluding its interest in the gold mining company. Through this process the Government’s overall share of the mining operations at Kumtor was 33 per cent of all shares, leaving Centerra with the majority of shares. After the violent overthrow of the Bakiev in 2010, some in the new government felt that the agreement with Centerra and the reduction in shares was unfair and have requested a renegotiation of the terms, while others have called for the mine to be nationalised. The Kumtor mine now represents the largest foreign investment project in the country, and the largest private sector employer. At the Kumtor Operating Company around 95 per cent of the 2,500 full-time employees are citizens of Kyrgyzstan. According to Centerra, the main reserve pit has 3.6 million ounces gold, and total open pit reserves of 9.7 million ounces of gold proven and more probable reserves according to the latest analysis by the mining company. The mine contributes to roughly 5.5 per cent of the gross domestic product each year. Kumtor Operating Company, which conducts the mining, pays a hefty range of taxes and pays into a development fund for Issyk-Kul Oblast. In addition, the company funds social projects in nearby communities. According to Kumtor’s website, from 1994 to 2012, payments within Kyrgyzstan have exceeded USD 2.15 billion. Kyrgyz resource nationalism Since the ousting of Bakiev in April and the violence in southern Kyrgyzstan in June 2010 there has been a rise in resource nationalism, that is, a move by people and governments to exert almost exclusive control over resources on their territory. Ernst & Young, a multinational professional services firm, describes this as a primary risk for the mining industry around the world. While it may be a trend, what are some of the factors that have driven this in Kyrgyzstan? And, what are the prospects for the future? What lies ahead is an important test for the future of Kyrgyzstan’s mining sector. In Kyrgyzstan there are two main reasons for the rise of resource nationalism. First, nationalist leaders have led the charge to strengthen the country’s sovereignty, particularly after the violence that erupted in June 2010. In the power vacuum that followed Bakiev’s departure some people felt that ethnic Uzbeks were attempting to gain greater political prominence, challenging perceptions of authority. The modern Kyrgyz state was founded on the Soviet policy of establishing republics based on recognised ethnic groups that have a claim over a territory. As a result the June events, many Kyrgyz saw their sovereignty under threat. As a control over resources is part of this sovereignty, it heightened a push for resource nationalism. Second, nationalist leaders have presented the situation as though the state is under attack from foreign companies. They argue that companies like Centerra are taking away Kyrgyzstan’s wealth. There are significant gaps in social and economic development throughout the country, which become amplified among those living next to the most lucrative enterprise in the country. This creates the perception that the Kyrgyz are losing control over their resources as well as limiting the Government’s ability to use the money from those resources to promote development. High unemployment, migration and diminished provision of basic services have created serious tensions. According to the National Statistical Committee, roughly 38 per cent the population live in poverty. People are desperate for measures that will bring financial benefits and job opportunities. The demonstrations against the existing Kumtor agreement have therefore not been confined to Issyk-Kul, but have sparked support protests around the country. These protests have demanded greater control of Kumtor or nationalisation while highlighting local inequalities that demand greater government intervention. In one of the most significant demonstrations, members of the Ata-Jurt (Fatherland) Party parliamentary deputies – Sadyr Japarov, Kamchybek Tashiev and Talant Mamytov – organised a rally to call for the nationalization of the mine. On 3 October 2012, about 1,000 people gathered at Bishkek’s Ala-Too Square which rapidly denigrated into an attempt to break into Parliament after an inflammatory speech by Tashiev calling for the resignation of the Prime Minister and other top officials. All three organisers were arrested and their jail terms became a source of continued public demonstrations against the Government. The action taken by the Ata-Jurt party members encouraged other protests. In May 2013 protestors blocked the road to the Kumtor mine, demanding that Centerra put more money into education and health sector in the oblast and that the Government cancel the operating agreement with the company. Two days later, the demonstrators cut power to the mine. The riot police then moved in to break up the protest. The demonstration turned violent, resulting in 92 people arrested and 55 people wounded. This movement spread as protestors in the southern city of Jalalabad, Tashiev’s stronghold. Claiming to act in support of the Issyk-Kul demonstration, protestors captured the oblast administration building. Their actions put pressure on the Government and the Ata-Jurt party members were freed two weeks later, although the Supreme Court upheld the original decision to strip them of their parliamentary mandates. In August 2013 two informal leaders of the May violence were caught on videotape blackmailing a Kumtor official. Bakhtiyar Kurmanov and Ermek Dzhunushbaev were both arrested, causing fellow residents from Saruu village to set up roadblocks. The two men were later sentenced to seven years in prison for their actions, which they denied saying that they were trying to bring important issues to light and promote development in the region. In October 2013 more demonstrations took place in the oblast capital, Karakol. During the protests, people stormed the Issyk-Kul Oblast Administration Office and took the Governor, Emil Kaptagaev, hostage. The captors demanded that Kaptagaev, although not directly responsible, work to increase the country’s share in Kumtor or nationalise the mine. During the negotiations, Kaptagaev was reportedly doused with petrol and threatened he would be set alight if he did not obey. Eventually, the Governor was released. Some Saruu villagers who participated in the protest in Karakol have staged several more protest actions, including setting up roadblocks. This is not entirely about sovereignty, however, as the economic advantage of the mining assets is a significant factor in the protests. When the mine opened in 1997, the average price of gold was USD 323.50. In 2012 the price peaked at USD 1,657. However, increased mining costs mean that the profit margin is not as profitable as many might expect. Nonetheless, politicians and communities affected by mining operations view the revenues from mining as an important reason to control more of the mine and bolster the state and community coffers. Environmental pollution A central argument for many protestors is that Kumtor has caused extensive environmental pollution. This is a legitimate concern. In May 1998 a truck rolled over and lost some packages containing around 1.7 tonnes of sodium cyanide which dissolved into the Barskoon River that flows into Lake Issyk-Kul. Sodium cyanide is an inorganic compound used in the leeching process, and experts claim that it does not cause long-term environmental damage. Local villagers complained that they had been made sick by the sodium cyanide, but an international report did not find conclusive evidence to support those claims. Claims of environmental pollution have been important to the case of nationalists, some of whom, it is alleged, have distributed DVDs outlining Kumtor’s violations in southern Kyrgyzstan. A government commission report has also claimed that there is environmental pollution at the mine site. However, other reports have not supported the claims, instead suggesting that Kumtor operates within European standards. Nonetheless, in 2012 and 2013, various government bodies filed claims against Centerra for a total of USD 467 million in alleged environmental damages. Some of these have been dismissed by Bishkek courts, but others are still being considered. Irrespective of the report findings, many people claim that the Kumtor mine and other mines in the country are causing environmental pollution. As in the 1998 Barskoon incident, many people claim that worsening crops and health are the effects of environmental damage. There are, however, a number of contributing factors. Outdated agricultural methods, a lack of fertilisers and dilapidated irrigation networks in some places result in poor agricultural production. Poor health is often caused by a lack of hygiene and sanitation, unhealthy diets and limited health services which contribute to high morbidity rates. The pollution argument also acts as a banner for a range of other concerns. Some object to Kumtor because it had an accident in the past, but also because it is run by a foreign company which, in their view, may leave behind a potential disaster. However, few people have the same concerns regarding the actions of Kyrgyzaltyn. People perceive the company as more aware of the local context and more accountable to the people. When there is foreign company involved, irrespective of its local partners, people worry about how much the company can be trusted and how it will compensate the people for development of the land through a social development package for the community. There is no experience of a successful mine closure in the country, and thus no standard to measure Kumtor against. The country’s lack of experience in mining has made people concerned about the companies and what will be the end result. In this context, nationalists arguing against foreign companies and highlighting pollution easily win supporters. Corruption allegations Corruption has been another factor driving protests. Corruption has been a continual problem in the Kyrgyz Republic and allegations abound in the mining sector. According to Transparency International, a leading corruption rating organisation, the Kyrgyz Republic was ranked 150 out of 177 countries for its level of perceived corruption in its 2013 report. The Government and companies have been implicated in corruption scandals and have lost people’s trust. Many people see this as another reason that the mining sector needs to be reformed. Amendments to the Law ‘On Subsoil’, the main legislative act overseeing regulation of the mining sector, have helped to establish more transparent procedures, but this has apparently not helped to curb informal payments or other illegal acts in the sector. Some accuse former politicians of devising corrupt schemes to get pay offs from Centerra or extort money from the company. Others maintain that the company promotes corrupt business practices for their own benefit. As a result, the General Prosecutor’s Office is examining allegations of corruption during the conclusion of the 2009 agreement. Future prospects and proposals for solution The Government and Centerra must now finalise the agreement regarding Kumtor. Even if this phase of the process is relatively smooth, it will not automatically resolve the social tensions in Issyk-Kul Oblast. The Government, Centerra, the Kumtor Operating Company and local residents must discuss an equitable way for mining operations to continue without the threat of violence. This should mark a change in way Government views its role in the mining sector. The Government has focused on legislation and monitoring, rather than community engagement and strengthening village-level administrations to promote dialogue and conflict resolution. Legal provisions are just part of the solution. Proposed amendments to the Law ‘On Subsoil’ seek to improve the legislative base and to clarify the responsibilities of companies. Nonetheless, the conflict around Kumtor and other mining sites will require long-term government commitment, especially through increased support to the village-level administrations by the State Agency for Local Self-Government and Inter-Ethnic Relations and other state technical bodies. All sides must work to identify and mitigate the potential environmental impact of mining. This is essential to identify and limit potential impacts on the health and livelihoods. The Government and companies must also work together to identify more effective use of funds to support local development. This also means that transparent mechanisms for tax payments into local budgets and frameworks for the formulation of social packages from mining revenues must be developed. The mining sector will not be the cure to overcome development challenges, but funds can be used to improve basic social services in communities affected by mining operations and contribute to the country’s development strategy. In sum, instead of focusing on ultimatums, issuing threats and protesting, all sides should concentrate on setting achievable and transparent milestones to increase mutual cooperation to have a greater impact on the future of sustainable mining activities in the country. Thus the importance of Kumtor is more than just revenues, but about identifying ways to overcome tensions and conflict for sustainable development. What is happening in Kumtor, then, is very much a litmus test for the rest of the country. About the author David Gullette, PhD, is Senior Research Fellow at the University of Central Asia, Bishkek, Kyrgyz Republic. Dr Gullette is an anthropologist and development specialist. He conducts research and analysis into energy and mining, peacebuilding and disaster risk reduction and community resilience. Further reading Gullette, David (2014). ‘Conflict Sensitivity in the Mining Sector of the Kyrgyz Republic.’ Bishkek: OSCE Academy, Bishkek, http://www.osce-academy.net/upload/file/Mining_report_final.pdf. Trilling, David (2013). ‘Centerra Gold and Kyrgyzstan: time for a marriage counsellor’. The Globe and Mail, 25 April 2013, http://www.theglobeandmail.com/report-on-business/robmagazine/centerra-gold-and-kyrgyzstan-time-for-a-marriagecounsellor/article11541901/?page=all Chronology of recent events 1978 3 December 1992 Kumtor gold deposit discovered. Government of the Kyrgyz Republic and Cameco Corporation sign a Master Agreement on the Kumtor Deposit. Cameco acquires a onethird interest in the Kumtor Gold Company from the Government with Kyrgyzaltyn, the state mining company, holding the remaining twothirds interest. 1993 Kumtor Operating Company formed. 1994 Construction at Kumtor deposit site began. 1997 Commercial gold production began. May 1998 Truck rolls over losing packages which dissolve 1.7 tonnes of sodium cyanide into the Barskoon River. 2004 Cameco Corporation transfers gold assets to new Canadian-based company Centerra Gold Inc. 24 March 2005 Ousting of President Askar Akaev, ushering in a new government. 19-22 December Illegal walkout of some staff over disputes about the renewal of labour 2006 contracts. Work on site resumes after Centerra reaches an agreement with the Trade Union over all material issues in the two-year labour agreement. 26 August 2008 Bishkek Inter-District Court dismisses lawsuit filed by a Vice-Speaker of Parliament, K. S. Isabekov, against the Government of the Kyrgyz Republic relating to the Kumtor project. The lawsuit sought to annul previous government decrees and agreements which would limit Kumtor’s right to explore and develop the deposit. 24 April 2009 5 May 2009 30 December 2009 7 April 2010 11-15 June 2010 1 October 2010 10 October 2010 5 December 2011 6 December 2011 14-16 February 2012 3 October 2012 14 December 2012 21 February 2013 21 February 2013 5 March 2013 28 May 2013 30 May 2013 31 May 2013 31 May 2013 2 June 2013 3 June 2013 5 June 2013 17 June 2013 28 August 2013 Parliament ratifies Agreement on New Terms for the Kumtor project. President Kurmanbek Bakiev signs legislation implementing the Agreement on New Terms between Centerra Gold Inc., the Government of the Kyrgyz Republic and Cameco Corporation. Cameco Corporation sells all common shares of Centerra and transfers additional shares to Kyrgyzaltyn, as per the New Terms Agreement. Ousting of President Kurmanbek Bakiev in a violent uprising killing 86 people. Deadly violence in southern Kyrgyzstan. Unionised employees began a strike stopping work. Unionised employees return to work. Illegal roadblock interrupts transfer of diesel fuel and other supplies to marshalling yard of the mine. Transfer of supplies resumes. Strike by Kumtor workers over payment structure, work delayed as glacier ice covered pit. Ata-Jurt holds rally calling for nationalisation of Kumtor. Centerra receives five claims from the State Inspectorate Office for Environmental and Technical Safety (SIETS) under the Government of the Kyrgyz Republic related to alleged environmental damages totally USD 152 million. Government passes a decree requiring that Centerra work to revise the Kumtor agreement within three months. State Agency for Environmental Protection and Forestry (SAEPF) under the Government of the Kyrgyz Republic files USD 315 million claim against Kumtor for alleged environmental damages at the Kumtor site. Protests in support of jailed Ata-Jurt members in Issyk-Kol, Jalalabad and Osh Oblasts. Protestors block access road to Kumtor site in Issyk-Kul Oblast. Protestors cut electrical power to Kumtor site, forcing mining activities to be suspended. Riot police move in to break up protest. Violence ensues with 92 people arrested and 55 people wounded. Government declares state of emergency (lifted on 3 June 2013). Demonstrators in Jalalabad city protest in support of the events in Issyk-Kul. Demonstrators capture the Jalalabad Oblast Administration building. Meder Usenov, one of the protest leaders, names himself the ‘People’s Governor’. He is later arrested. Protestors in Jalalabad Oblast block the main road between Bishkek and the southern city of Osh. Work the Kumtor mine resumes. Kamchybek Tashiev, one of the jailed Ata-Jurt members, goes on hunger strike in support of the demonstration in Jalalabad Oblast. Usenov released on bail and joins protestors in Barpy village, Suzak District, Jalalabad Oblast. Protestors remove roadblock. Ata-Jurt members released from jail after protests at court hearing, but a later Supreme Court ruling upholds the verdict that they are stripped of their parliamentary mandates. Video emerges of two informal leaders of the May demonstration in 9 September 2013 7 October 2013 23 October 2013 12 November 2013 13 December 2013 24 December 2013 2 February 2014 6 February 2014 18 March 2014 31 March 2014 10 April 2014 23 April 2014 Issyk-Kul Oblast appearing to blackmail a Kumtor official. Centerra Gold Inc. states that it had signed a non-binding memorandum of understanding with the Government regarding the restructuring of Kumtor operations. Kyrgyzaltyn, would receive 50 per cent interest in the joint venture company that would own the Kumtor Project in exchange for giving up its equity ownership in Centerra and USD 100 million to be paid to Centerra by adjusting its joint venture distributions. Protestors captured the Issyk-Kul Oblast Administration building in Karakol, and took the Governor, Emil Kaptagaev, hostage. Kaptagaev was later released. Protestors demanded that the Government get up to 70 per cent of shares in new Kumtor operating company. Parliament rejects the Memorandum of Understanding with Centerra Gold Inc. Parliament asks Prime Minister Jantoro Satybaldiev, to seek 67 per cent of shares in new Kumtor operating company. Leader of the Ata-Meken Party (Fatherland), Omurbek Tekebaev, initiated a motion to nationalise the Kumtor mine. Centerra Gold Inc. announces that SIETS claim against the company for environmental damages was dismissed by Bishkek City Court. SAEPF, however, commenced court proceeding in the Bishkek InterDistrict Court for USD 315 million for environmental damages. Prime Minister Jantoro Satybaldiev announces that the Government entered into a Non-Binding Heads of Agreement with Centerra for a 50 per cent stake in the new operating company, similar to the deal rejected in October, but with fewer concessions to be paid to Centerra. Agreement would also give the Government the option to increase its shares up to 67 per cent before the expected closure of the mine in 2023. Saruu village residents block the road in protest against Kumtor. Government approves new agreement with Centerra and asks that all details be negotiated within four months. Ata-Meken (Fatherland) Party withdraws from the ruling coalition, and President orders resignation of the government the following day. This raises concerns about the Kumtor negotiations. New ruling coalition formed between Ar-Namys (Dignity) Ata-Meken, Social Democratic Party of Kyrgyzstan. No new statements on Kumtor have been announced. National Opposition Movement, a coalition of opposition parties, hold nationwide demonstrations. Protestors urge the Government to nationalise the Kumtor mine, among other demands. Parliament adopted amendments to the Law 'On Subsoil'. Among the amendments, there are provisions expanding the Government’s powers over issuing licences, broadens the use of social packages beyond those sites that had a competitive bidding process, and introduces a fund for the reclamation of land from the time exploratory work begins. This must still be approved by President Atambaev.