Kyrgyzstan’s Kumtor gold mine is responsible for some 12 percent of the country’s GDP. Nevertheless, or perhaps for that reason, politicians can’t seem to keep their hands off it.
This week, following a parliamentary commission report describing environmental damage in and around the high-altitude mine, deputies began debating whether to revoke Kumtor’s operating license. Centerra Gold Inc, which runs Kumtor and is one-third owned by Bishkek, believes the report’s “findings are without merit.” But the debate, and lingering proposals for nationalization, wreaked havoc on Centerra’s stock: It plunged over 30 percent in Toronto. Once again, Centerra’s headaches doing business in Kyrgyzstan provide a cautionary tale for potential investors.
It’s a high-stakes debate: Falling production at the 4,000-meter mine, linked to a strike in February, has already cut projections for Kyrgyzstan’s growth this year from 7.5 percent to 1.8 percent.
The arguments in parliament – including one proposal to have Centerra pay revenues to the Kyrgyz state five years in advance – will do little to encourage investors who find Kyrgyzstan’s relentless political turmoil hard to stomach. Moreover, this isn’t the first time in Kumtor’s long history that Kyrgyz politicians have talked nationalization, or threatened to rip up existing agreements. Centerra has faced regular problems over the years, including sudden tax hikes and Kyrgyz demands for a larger share of the company, which also operates a mine in Mongolia.
While analysts believe it is unlikely Kyrgyzstan has the technical know-how to run the mine on its own, Prime Minister Omurbek Babanov has said that cash could temper environmental concerns.
“We will create a commission to learn what case may be filed in court, to find out whether there is a genuine danger to the environment,” he said on June 21, in comments carried by 24.kg. "Based on these results we will determine how much money is needed for recultivation. We need to file a lawsuit so the Canadian side will pay [compensation] in money or assets,” he added, noting he has President Almazbek Atambayev’s support.
Centerra says it meets all pertinent environmental regulations.
"The project is in full compliance with Kyrgyz laws, meets or exceeds Kyrgyz and international environmental, safety and health standards, and serves as a model for other mining projects in the Kyrgyz Republic and internationally. It has been the subject of systematic compliance audits by both Kyrgyz and international experts, who have confirmed its high level of performance,” Centerra's President and CEO, Ian Atkinson, said in a June 22 statement.
There may be some basis for Bishkek’s anxiety: In January, a report published by the Prague-based watchdog Bankwatch said Kumtor is “releasing numerous chemical constituents into the environment” that are affecting fish populations downstream and the health of local people.
But few believe the environment tops politicians’ concerns.
Kumtor is the target of regular protests from well-organized locals demanding a bigger share of proceeds be invested locally. For example, in late November villagers in Balykchy, several hours from the mine, blocked the only road to the site for a week. The roadblock resulted in an abrupt drop in the mine's production. According to the National Statistics Committee, the slowdown was significant enough to drive down the country's year-on-year GDP growth from 8.5 percent for the first 11 months of the year to 5.7 percent by year's end.
No doubt, Kumtor is critical to Kyrgyzstan’s ailing economy. So it is somewhat unfortunate that parliamentarians have little sense of measured timing. They released their report the same day, June 18, the government announced the country's budget deficit would be almost 18 percent higher than anticipated, reaching an estimated $392 million. With its own stock in Centerra sinking by hundreds of millions of dollars, and tax revenue falling as operations slow at the mine, it seems, at least in the short term, it is Kyrgyzstan that will be hurt most by whatever calamities befall Kumtor.