Journalicious Dots from Switzerland

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E.O. 12958: DECL: 2020/01/20
TAGS: ECON EPET UZ
SUBJECT: Uzbekistan: From A to Zeromax

REF: 07 TASHKENT 237; 07 TASHKENT 2029; 08 TASHKENT 153
08 TASHKENT 1072; 09 TASHKENT 921

CLASSIFIED BY: Berliner,Nicholas, PolEcon-Chief; REASON: 1.4(B), (D)

¶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.

CLOSE CONNECTIONS TO UZBEK STATE GAS AGENCY

¶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.)

¶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.

¶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.

THE SWISS LINK

¶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.

¶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).

¶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.

ZEROMAX’S MINING EMPIRE EXPANDS

¶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.

¶9. (C) In 2006, Zeromax became a strategic partner of Oxus Gold  PLC, a company listed on the London Stock Exchange’s Alternate 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.

AND THERE’S MORE – AGRICULTURE & TEXTILES & LOGISTICS

¶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.

¶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.

CURRENT U.S. CONNECTIONS

¶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).

QUESTIONABLE BUSINESS PRACTICES

¶14. (SBU) There have been reports that the Uzbek state has used its 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.

¶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.     Comment

¶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

XTAGS: XTAGECON, XTAGEPET, XTAGUZ 10TASHKENT27