Kazakhstan claims some uranium deals illegal

Shares of Uranium One (UUU-T) took a beating today following news  that Kazakhstan has accused a key executive in the uranium industry of illegally selling deposits to foreign companies.

At the close of trading, Uranium One’s shares had plunged $1.29 or 39.21% to $2.00 per share with 47.69 million shares changing hands.

Reuters news agency reported that Kazakhstan’s security service, KNB, had arrested Mukhtar Dzhakishev, who heads state uranium producer Kazatomprom, and seven other executives.

The KNB has referenced the sale of a 30% stake in the Kyzylkum uranium joint venture as an example of an illegal transaction, Reuters said. The joint venture runs Khorasan, Kazakhstan’s largest uranium mine.

Kazatomprom owns 30% of the Kyzylkum joint venture, Canada’s Uranium One owns 30%, and a group of Japanese firms own the remaining 40%.

In addition to its stake in Khorasan, Uranium One owns 70% of the Betpak Dala venture, which operates two deposits, Akdala and South Inkai.

Officials from Uranium One declined to respond to repeated requests for comment but in a press release issued shortly after midday, said the company and its Kazakh joint ventures are cooperating with the Kazakh authorities in their investigation.

The company acknowledged that Uranium One’s Kyzylkum joint venture may be one of the matters that the Kazakh authorities are investigating and said that its Kazakh assets were acquired in November 2005 from a group of Kazakh investors by UrAsia Energy, which became a subsidiary of Uranium One in April 2007.

“UrAsia paid full value for these assets,” Uranium One said in the statement, including $75 million for its 30% interest in Kyzylkum and $350 million for its 70% interest in the Betpak Dala joint venture.

“UrAsia’s acquisition of these assets, as well as Uranium One’s subsequent acquisition of UrAsia, were completed in accordance with the requirements of Kazakh law, and both transactions were approved by the Kazakh authorities,” it stated.

Uranium One says its senior officials have requested a meeting with the new administration of Kazatomprom next week.

Lauren Goodrich, senior Eurasia analyst for Stratfor, a global intelligence company, said the latest events in the uranium sector do not come as a surprise because they follow a pattern of actions President Nursultan Nazarbayev has taken against foreign investors in the country over the last weeks and months.

“He’s reshuffling pretty much his entire government and most strategic companies in Kazakhstan,” Goodrich explained in a telephone interview from her office in Texas. “He’s trying to do this under the radar…Most of the guys he’s sacked have not just been fired but have been brought up on charges of this or that.”

The list of recently ousted officials include the head of the state railway company, the head of KazAtomProm National Atomic Company, the chief of national oil and gas giant Kazmunaigaz, certain bank heads (several of whom she said have fled the country), some defence figures, a former presidential advisor and a former chief of communications, Goodrich explained. “It’s a pretty lengthy list – it’s just hard to get confirmation when the government is locking down this information.”

Goodrich noted that ever since Nazarbayev took the helm of the country following the collapse of the Soviet Union in 1991, he has made no secret of his desire for a dynastic succession with his family members taking control of major assets.

She pointed out that Nazarbayev’s three daughters are in charge of strategic sectors of the economy. The eldest daughter is in charge of media and banking, the second daughter energy, and a third daughter construction projects.

“Most of their husbands help them with the exception of the eldest daughter’s husband (Rinat Aliyev) who has fled the country and lives in Austria,” she said. “All of their close associates are in charge of something too.”

According to Goodrich, Nazarbayev recently put his 24-year-old grandson in charge of one of the country’s biggest banks, despite his lack of experience.

She expects that Nazarbayev is likely to appoint someone connected to his family as the new head of the state uranium company, Kazatomprom.

But the arrest of the head of Kazatomprom is more than just about dynastic succession. It comes as the Central Asian republic falls under growing pressure from Russia to scrutinize business deals with foreign investors – particularly from the West.

“Nazarbayev is getting pressure form Russia to be careful about how much control they allow Western companies,” she explained. “There are quite a few deals on the table on uranium between Russia and Kazakhstan so Russian influence in the uranium sector is quite high right now.”

And it’s not just uranium. Goodrich noted that the Kazakh government is also suing Italian energy firm Eni for back taxes. “It doesn’t make sense,” she said. “Eni is a real company — they keep up on things like that. It’s a very Russian move – it mirrors what you have seen Russia do in the past six years.”

Eni is the leader of a group of oil companies including ExxonMobil, Total, Royal Dutch Shell and ConocoPhillips that have stakes in Kashagan, one of the biggest oil production projects in Kazakhstan.

Goodrich adds that since 2006, Nazarbayev has been making subtle changes to Kazakh law that have begun to redefine the rights of foreign investors in the country. “They have not published these new laws — it is being kept a closely guarded secret.”

One example has been Nazarbayev’s amendment to the Kazakh constitution. According to Goodrich, the constitution now reads that Kazakhstan will follow international law on investment, business, economics and so on as it has in the past, but that now, should the government feel that those laws go against national security or strategic sectors, then the government has the right to supersede those laws.

“Before that, Kazakhstan had been very good at adhering to laws on foreign investment,” she said. “The Russian mentality has started to creep in.”