The coming crisis in Kyrgyzstan: a mixture of politics and gold

by Max Hess on 5/12/2015

Kyrgyzstan is due to hold legislative elections in October and, once again, all that everybody can think about is the gold. While Kyrgyzstan fails to crack the top 25 global gold producers, gold nevertheless accounts for roughly 40 per cent of export earnings and the gold industry is responsible for some 20 per cent of Kyrgyzstan’s GDP. The gold industry in Kyrgyzstan has also been a driving factor in much of Kyrgyzstan’s political unrest in recent years, in particular the ownership of the Kumtor Gold mine. As the October elections approach, the fight over Kyrgyzstan’s gold remains in full swing and threatens to not only cause potentially-crippling widespread demonstrations ahead of the vote but also casts serious doubts on the potential stability of Kyrgyzstan after the vote.

The Kumtor gold mine is undoubtedly a golden goose for Kyrgyzstan’s economy, providing between 12 per cent of its GDP in a good year, and 7.5 per cent in a bad one. Yet it also is Kyrgyzstan’s poisoned chalice. Perhaps no mine has tackled as many governments, with tensions over the mine’s status and future plans for its development at least in part responsible for collapse of three governments since 2012. Negotiations with the mine’s owners, Canadian-listed Centerra Gold, have frequently prompted widespread demonstrations, often led by the nationalist Ata Zhurt party, that have crippled not only the mines operations but also seen the demonstrators occupy Kyrgyzstan’s major roads thereby hindering other trade activity as well. On 24 April, Djoomart Otorbaev became the latest prime minister to resign over the issue, only 11 days after he stated he was ending negotiations aimed at giving Kyrgyzstan a controlling interest in the mine in exchange for its 33 per cent stock holding in Centerra. The negotiations had dragged on for nearly two years but were repeatedly derailed by calls in Kyrgyzstan’s legislature for the mine to be nationalised, echoed and amplified by repeated protests as well. As a result, it was politically preferable to dismiss Otorbaev than to admit that fact that Kyrgyzstan lacks the technical ability to nationalise the mine and that doing so would have a major impact on its relations with international lenders .

Otorbaev’s replacement and Kyrgyzstan’s latest prime minister, Temir Sariyev, who was only appointed on 1 May, may already have chosen to sign his political death warrant. On 5 May, Kyrgyzstan’s State Geology Agency awarded the rights to mine Kyrgyzstan’s second-largest gold deposit, Jeeroy, to Russian mining firm Vostok-Geolodobycha despite the fact that Kyrgyzstan’s state gold company Kyrgyzaltyn bid US$111m compared to Vostok-Geolodobycha’s US$100m. The State Geological Agency stated Vostok-Geolodobycha’s offered a better investment program and better technology, however, much of the political establishment has unsurprisingly denounced the decision and instead focused on claims that Vostok-Gelodobycha’s owner, Russian oligarch Musa Bazhaev, is a close friend of former Prime Minister Omurbek Babanov.

The decision to award Vostok-Geolodobycha the contract poses a number of political risks for Kyrgyzstan, regardless of whether or not it did in fact make a better offer. Firstly, it raises nationalist tensions over the gold mining industry as political campaigning for the October polls gets underway and risks allowing these concerns to dominate the electoral discourse. Secondly, it poses a serious risk that a nationalist backlash could now result in anti-Russian sentiment, given Vostok-Geolodobycha’s Russian ownership, just as Kyrgyzstan prepares to formally enter the Russian-backed Eurasian Economic Union (EEU). Finally, the deal risks further derailing Kyrgyzstan’s image among international investors and creditors, which has been come increasingly battered in recent years.

Recent Kyrgyzstani elections have a troubled, and increasingly violent, history. Fraudulent parliamentary elections in 2005 led to the overthrow of President Akar Akayev, in what would become known as the Tulip Revolution, with opposition leader Kurmanbek Bakiyev coming to power. While the modernising programmes and pro-Western nature of the post-revolutionary government were hailed in Western media and Kyrgyzstan hailed as a new springboard for democracy in the Islamic world, Bakiyev himself was accused of rigging elections two years later, setting the ground for violent protests in 2010 that led to the ouster of his government.  Notably, the first of these protests took place in Talas, which is also the nearest major settlement to the Jeeroy gold deposit.

Clashes between supporters of the nationalist Ata Zhurt party – dominated by Bakiyev loyalists – and other parties continued sporadically throughout the 2010 elections. Ata Zhurt has also publicly backed anti-mining protests in Talas province on numerous occasions and will have little trouble stirring opposition to mining the Jeeroy site regardless of who profits. While Ata Zhurt received the most seats in the new legislature following the 2010 election, it has since been frozen out of government. If Ata Zhurt’s actions in recent years including road blockades, violent protests, and intimidation of regional officials often in the context of calling for Kumtor’s nationalisation are any guide, Ata Zhurt is likely to seize upon any opportunity it can to facilitate a return to power. The controversy over the Jeeroy deposit presents the perfect such opportunity given that there remain significant concerns in Kyrgyzstan over its prospects under the Russian-backed Eurasian Economic Union. Needless to say, local political actors are astutely aware that the risk of attempting to leave Moscow’s sphere of influence has increased notably over the past year following the conflict in Ukraine and may temper their actions as a result. Nevertheless, Kyrgyzstan has flopped between seeking alliance with Moscow and the West more often than any other country in the post-Soviet space and its elections are typically dominated by domestic issues rather than foreign policy concerns.

Even in the event that Kyrgyzstan’s elections proceed without major unrest and political actors do not seek to further politicise gold mining in the country, the awarding of the Jeeroy deposit to Vostok-Geolodobycha is likely to further harm the perception of Kyrgyzstan in international finance markets, both among private investors and multilateral finance institutions. Kyrgyzstan’s stake in Centerra Gold has repeatedly been the only target jilted investors – of whom Kyrgyzstan has quite a few, largely in the mining sector – were able to pursue in court, with portions of its stockholdings frozen by Canadian courts on behalf of investors seeking repayment.  Amongst the most prominent claims was on by Kazakshtan’s Visor Holding, which filed a claim against Kyrgyzstan for as much as US$549m after it lost its license to the Jeeroy deposit in 2010 when Kyrgyzstan alleged it failed to begin operations on schedule. Vostok-Geolodobycha assumed responsibility for the suit as part of its winning bid thereby enhancing the perception that local actors are subject to special treatment from the government, which has steadfastly refused to consider other claims.

Kyrgyzstan’s political outlook remains precarious. A mixture of gold concerns, a changing geopolitical outlook, and fierce political rivalries are all set to come to a head in the coming months. Serious positives are few and far between even in a best case scenario and this October’s elections are likely to see a variety of political tensions come to the fore. The eventual outcome of the election will likely be equally threatening, regardless of its victor, and is unlikely to end Kyrgyzstan’s increasingly fractured political environment, at least not without major unrest. There can be no doubt that, for Kyrgyzstan, all that is gold does not glitter.

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This post was written by...

– author of 5 posts on 17_PersonNotFound.

Maximilian Hess is a political risk analyst. He works at AKE Group in London, having earned a BA from Franklin & Marshall College and an MA from the School of Oriental and African Studies, University of London. His interests include the Georgian language, Eurasian politics, separatist movements, and Russian foreign policy.

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