Cablegate: Uzbekistan: From a to Zeromax

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INFO ALL SOUTH AND CENTRAL ASIA COLLECTIVE
EUROPEAN POLITICAL COLLECTIVE

244365 2010-01-20 11:23:00 10TASHKENT27 Embassy Tashkent CONFIDENTIAL 07TASHKENT2029|07TASHKENT237|08TASHKENT1072|08TASHKENT153|09TASHKENT921 VZCZCXRO2796\
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DE RUEHNT #0027/01 0201123\
ZNY CCCCC ZZH\
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TO RUEHC/SECSTATE WASHDC 1766\
INFO ALL SOUTH AND CENTRAL ASIA COLLECTIVE\
EUROPEAN POLITICAL COLLECTIVE C O N F I D E N T I A L SECTION 01 OF 04 TASHKENT 000027 \
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TAGS: ECON EPET UZ
SUBJECT: Uzbekistan: From A to Zeromax \
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REF: 07 TASHKENT 237; 07 TASHKENT 2029; 08 TASHKENT 153 \
08 TASHKENT 1072; 09 TASHKENT 921 \
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CLASSIFIED BY: Berliner,Nicholas, PolEcon-Chief; REASON: 1.4(B), (D) \
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1. (SBU) Summary. Zeromax Gmbh (Zeromax) is a privately- owned, \
Swiss-registered company that operates in Uzbekistan through a \
series of joint ventures and investments in the oil and gas, \
mining, agriculture, textile, logistics and banking sectors. The \
company keeps a tight lid on all financial and ownership \
information. It is widely believed, however, that the company is \
controlled by Gulnara Karimova, the daughter of Uzbek President \
Islam Karimov, and a small number of Uzbek business people. Through \
its close government connections, Zeromax has positioned itself as \
a key player in Uzbekistan's highly lucrative natural resource \
sector and continues to expand into other areas of the Uzbek \
economy. End Summary. \
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CLOSE CONNECTIONS TO UZBEK STATE GAS AGENCY \
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2. (SBU) With proven natural gas reserves of 1.58 trillion cubic \
meters, Uzbekistan is the third largest natural gas producer in the \
former Soviet Union after Russia and Turkmenistan and one of the \
top ten natural gas-producing countries in the world. Uzbekistan \
also contains around 594 million barrels of proven oil reserves, \
and there are 190 discovered oil and natural gas fields in the \
country. The natural resource sector is strictly controlled by the \
Government of Uzbekistan (GOU). The GOU, however, relies on foreign \
firms to provide funds, equipment and expertise to help extract and \
export its resources. Uzbekneftegaz, a state-controlled national \
holding company, has responsibility for managing the sector, \
including supervising tender offers and other proposals for oil and \
gas concessions. (Note: Contract terms must be confirmed by the \
Uzbek Cabinet of Ministers, which has ultimate authority for \
granting licenses.) \
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3. (SBU) Leveraging its unofficial government ties though Karimova \
and a small group of Uzbek powerbrokers, Zeromax has established \
several lucrative joint ventures (JVs) with Uzbekneftegaz and \
aligned itself with foreign investors who wish to tap into \
Uzbekistan's natural resource sector. The company began operations \
in Uzbekistan in 1999, securing natural resource concessions from \
the Uzbek state at highly advantageous terms. Now, Zeromax is \
involved in almost every aspect of the Uzbek oil and gas business: \
planning and engineering; exploration and production; construction \
of pipelines and other oil and gas infrastructures; and refining \
and retailing. By November 2007, Zeromax reportedly had invested \
approximately USD 400 million in the rehabilitation of Uzbekistan's \
industrial infrastructure, making it (at the time) the country's \
largest private foreign investor as well as its largest private \
sector employer. The same year it also sold a portion of its assets \
in Uzbekistan to Russia's Gazprom for a considerable profit. \
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4. (SBU) As of December 2009, Zeromax has at least eight \
subsidiaries/JVs operating at various points along Uzbekistan's oil \
and gas supply chain. These entities include a fifty-fifty joint \
venture with the Uzbek state (Neftgaz Sanoat Loyiha) devoted to \
project engineering and a second Uzbek-Swiss JV (NefteGazMontaj) \
that designs and constructs pipelines. Zeromax is working on \
construction of the Uzbek portion of the new Turkmenistan-China \
pipeline in consortium with the China Petroleum Pipeline Bureau \
(CPP) and the China Petroleum Engineering & Construction \
Corporation (CPECC). Zeromax is also the dominant player in the \
retail gasoline industry, particularly high-grade octane, through \
its wholly-owned subsidiary, UzGazOil. UzGazOil operates 80 retail \
stations throughout Tashkent, Ferghana, and Karshi and controls \
approximately 70 percent of the retail gasoline market in these \
areas. \
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THE SWISS LINK \
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5. (SBU) Founded in 1999 under the name Zeromax LLC in Delaware, \
USA, Zeromax re-domiciled as a Swiss entity in the Zug Canton in \
2005 (now Zeromax GmbH), presumably to take advantage of the \
country's tax and finance laws. Other observers note that this move \
coincided with a downtown in U.S.- Uzbek relations following the \
U.S.'s condemnation of events in Andijon in May 2005. At this time, \
Karimova was also subject to an arrest warrant in the U.S. for \
refusing to obey a New Jersey court ruling granting her husband, an \
American-Afghan citizen, shared custody of their children. \
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6. (SBU) Switzerland is now Uzbekistan's second biggest trading \
partner with export of natural gas comprising the largest part of \
Uzbek-Swiss trade. Zeromax is a main Swiss recipient of Uzbek \
currency receipts under a complicated gas export arrangement with a \
wholly-owned Swiss subsidiary of Gazprom Germania Gmbh called ZMB \
Schweiz, a natural gas trading company focused on the exploration, \
production and sale of hydrocarbons. The details of the \
arrangement remain unclear; it is known that Uzbekistan is the core \
market for ZMB Schweiz's gas purchase activities, and Zeromax is \
the key supplier. 2008 natural gas deliveries from Uzbekistan to \
ZMB Schweiz totaled 11.5 billion cubic meters, exceeding the \
previous year's figure by 26%. ZMB Schweiz's 2008 Annual Report \
notes that its plans to set new contractual arrangements for the \
purchase of natural gas in 2009 with Zeromax. As a private company, \
Zeromax is not required to make public detailed financial \
information. Zeromax has disclosed that its operating revenues and \
total assets (on a consolidated basis) have doubled each year since \
2006, reaching approximately USD 3 billion in revenue and assets \
for 2008, representative of about 10% of Uzbekistan's 2008 gross \
domestic product (USD 27.9 billion). \
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7. (SBU) Officially, Zeromax's management team is headed by Miradil \
S. Djalalov, an Uzbek national with close ties to the Karimov \
family and Russian-Uzbek tycoon Alisher Usmonov. However, Zeromax \
is widely rumored to be controlled by Gulnara Karimova and is \
thought to account for a significant portion of the family's \
purported multimillion-dollar fortune. In September 2008, President \
Karimov appointed his daughter Permanent Representative to the \
United Nations in Geneva, which some observers have noted helps \
position her to wield greater control over Zeromax. There are \
reports that Karimova has recently taken on new duties as Uzbek \
Ambassador to Spain, although she continues to reside in \
Switzerland and remain accredited to the U.N. in Geneva. \
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ZEROMAX'S MINING EMPIRE EXPANDS \
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8. (SBU) Zeromax is active in the mining industry and does business \
thorough JV Bentonite, an Uzbek-Swiss company that is 74% \
Zeromax-owned with the remainder held by a subsidiary of \
Uzbekneftegaz. The company extracts and processes bentonite, a clay \
found predominately in the Navoi Region of Uzbekistan. Bentonite \
may be used in more than 200 consumer products, such as paint, \
textiles, soap, and cosmetics. Zeromax is also the general \
contractor for Almalyk Mining and Metallurgy Combine OJSC's (AGMK) \
ore and mining processing plant project at the Khandiza field in \
Kashkadarya. AGMK, a GOU-controlled entity, is the largest copper \
producer and exporter in Uzbekistan. It intends to launch ore \
mining and processing operations in Khandiza in the first half of \
2010. Zeromax began construction of the project in 2007. \
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9. (C) In 2006, Zeromax became a strategic partner of Oxus Gold \
PLC, a company listed on the London Stock Exchange's Alternate \
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Investment Market, by acquiring 16% of the company's share capital. \
Oxus is a 50 percent joint venture partner with the GOU in \
Amantaytau Gold Fields (AGF), a gold mining operation that is \
developing concessions in Uzbekistan's Tien Shan Gold Belt, which \
boasts the world's second largest gold reserves after South \
Africa's Witwatersrand Basin. Some observers assert Oxus Gold \
aligned itself with Zeromax after becoming weary of dealing with \
local corruption and cronyism and to settle a dubious tax charge of \
USD 225 million, which was dropped by the GOU following the deal. \
The marriage has reportedly been difficult from the beginning with \
confidential Embassy sources stating that Oxus Gold executives \
privately have expressed both professional and personal differences \
with Zeromax management. Zeromax purchased its holdings at GBP \
0.215 per share (about USD 0.35 at current exchange rates); with \
Oxus Gold currently trading at about GBP 0.09 per share and \
recording a 52-week high of GBP 0.15 per share, the Oxus Gold \
investment represents a significant paper investment loss for \
Zeromax. \
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AND THERE'S MORE - AGRICULTURE & TEXTILES & LOGISTICS \
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10. (SBU) Zeromax entered the agricultural sector in 2003 with the \
opening of a food processing plant and storage and distribution \
depot. The company has since expanded into cotton and wheat \
cultivation and cattle-breeding. In 2005, Zeromax acquired \
cultivation rights to more than 12,000 hectares of cotton-producing \
land and 15,000 hectares for wheat and other crops in Uzbekistan's \
Tashkent, Dzhizak and Syr Darya regions. All agricultural \
operations are consolidated under the subsidiary Muruvvat- \
Agrosanoat, which employs 3,000 fulltime workers and 9,000 seasonal \
workers. \
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11. (SBU) In 2005, Zeromax also entered into textile production and \
manufacturing projects. Through its subsidiary Muruvvat-Teks, \
Zeromax operates six sewing factories, a Tashkent shopping mall, \
and a textile company in Khorezm region. To provide for efficient \
transit for its goods, Zeromax established Temiryul-Khizmat, a \
wholly-owned freight-forwarding subsidiary, in 2005. The company \
specializes in providing complex freight-forwarding services of \
valuable industrial equipment and other goods throughout the CIS. \
Other Zeromax assets include ownership of 64% of the "UzCable" \
factory, one of the larger cable producers in Central Asia; media \
businesses; and tourism. \
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CURRENT U.S. CONNECTIONS \
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12. (C) Despite re-domiciling in Switzerland, Zeromax continues to \
maintain close connections with certain members of the American \
business community. A U.S. citizen businessman now resident in \
Maryland was formerly President of and now serves as "Counselor" \
to Zeromax and as a member of the board of Oxus Gold. Zeromax is a \
major sponsor of the American-Uzbekistan Chamber of Commerce, which \
recently hosted the U.S.-Uzbekistan Investment Summit 2009 on \
October 8, 2009, in New York City. Elyor Ganiev, Deputy Prime \
Minister and Minister for Foreign Economic Relations, Investment \
and Trade and high-ranking figure, attended on behalf of the GOU. \
Another U.S. businessman claims that Zeromax, as part of a \
consortium with seven U.S. companies, will bid on Afghan transit \
business opportunities related to the Northern Distribution Network \
(NDN). \
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QUESTIONABLE BUSINESS PRACTICES \
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14. (SBU) There have been reports that the Uzbek state has used its \
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power in support of Karimova's private business interests, allowing \
her to bully competitors and to channel additional assets into \
personal entities such as Zeromax. In a lawsuit filed in federal \
court in Houston in 2007, a Texas-based tea company that operated \
in the Uzbek packaged tea market sued its insurer for failing to \
pay out on extortion and kidnap coverage after Karimova allegedly \
used her influence with the government to drive the company out of \
the country, even arresting or threatening to arrest company \
employees to force them to sign over assets. \
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15. (SBU) New Jersey-based Roz Trading Ltd. (ROZ), a company owned \
by Karimova's former in-laws - the Maqsudi family, brought a series \
of claims against Zeromax for unlawful conspiracy and \
misappropriation of its ownership interest in a joint venture in \
the soft drink industry in Uzbekistan. According to ROZ, following \
Karimova's divorce from Mansur Maqsudi, the GOU, on behalf of \
Karimova, seized ownership of Roz's assets in Coca-Cola Bottlers of \
Uzbekistan (CCBU) on the grounds that ROZ had failed to comply with \
tax and anti-monopoly regulations. Through a series of "sham \
proceedings," the GOU sold Roz's assets to Zeromax. Claims against \
Zeromax in the U.S. were dismissed due to lack of jurisdiction. In \
related arbitration initiated by ROZ at the International Arbitral \
Centre of the Austrian Federal Economic Chamber, the arbitral \
tribunal terminated the proceedings as to Zeromax Group, Inc. - the \
dissolved former affiliate of Zeromax, and the only Zeromax entity \
named as a defendant in the arbitration. \
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Comment \
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16. (C) Despite a lack of concrete data regarding its operations, \
Zeromax is widely perceived to be a powerful and not necessarily \
benign force in Uzbekistan's economy. Its expansion from the oil \
and gas industry and mining industry into other areas of the Uzbek \
economy means most international companies seeking to operate in \
Uzbekistan may find themselves engaging in business with \
Zeromax-related entities. The Embassy's message to those proposing \
to enter into business arrangements with Zeromax or its affiliates \
is to carry out full due diligence. We are not saying "don't do \
business with Zeromax" because such a stance may not be legally \
justified or sustainable in practice. However, any business \
arrangements should be entered into with open eyes, and the Embassy \
is prepared to advise and try to assist any American company that \
feels subjected to aggressive business tactics in Uzbekistan. \
NORLAND \

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