Cablegate: Kazakhstan: Money Laundering Accusations Complicate Efforts

05:51 25.04.2007

1. Summary: The Eurasian Natural Resources Corporation (ENRC), an
enormous Kazakhstani metals conglomerate, has been preparing since
2006 to list on the London Stock Exchange. A criminal investigation
by Belgian authorities of alleged money laundering by the three
billionaires who control 54.6% of ENRC has become an obstacle to the
initial public offering (IPO), however. PricewaterhouseCoopers
advised the three primary shareholders to quit the company board in
light of the allegations. According to press reports, the company’s
management has postponed the IPO until the second half of 2007 to
address the auditing firm’s recommendations. End summary.


2. The Eurasian Natural Resources Corporation (ENRC) is controlled
by majority shareholders Patokh Shodiev, Alidjan Ibragimov, and
Aleksandr Mashkevich. ENRC is a holding company incorporating large
Kazakhstani metallurgical and mining operations, which were formerly
part of the Eurasian Industrial Association. The company reports
that its activities account for 5% of Kazakhstan’s GDP. ENRC
produces a range of commodities including coal, iron ore, manganese
and bauxite. According to a press release issued by ENRC, it is the
world’s third-largest producer of ferroalloys, with control over a
quarter of global chromium reserves.

3. In spring 2006, the trio appeared on Forbes magazine’s «richest
people» list with a net worth of $2 billion each. The three
billionaires together hold a 56.4% stake in ENRC; the Kazakhstani
government owns 24.8%, with 18.8% held by Vladimir Kim, chairman of
Kazakhmys, another Kazakhstani mining company.

4. Shodiev, known as the «Metallurgical King» of Kazakhstan, has an
ambitious plan to prepare ENRC for an IPO and join the ranks of
three largest metallurgical companies listed on the London Stock
Exchange (LSE). In 2001 he invited Johannes Sittard, a former
manager at Mittal Steel, and Dutch lawyers to put ENRC’s accounting
in order. Under Sittard’s management, ENRC is expanding into nickel
deposits in the Balkans and cobalt in Zambia.

5. ENRC, with a sales volume of $2.9 billion, is currently valued at
$1.5-2 billion. The Kazakhstani press has speculated that if ENRC
sold shares on Kazakhstani Stock Exchange, the company’s value might
increase to $3 billion. According to international experts, a
listing on the LSE may increase the valuation to $5 billion or more.


6. The «Megapolis» newspaper reported that Shodiev, Ibragimov and
Mashkevich are being investigated related to «dirty» funds used in
some property transactions in Belgium. The paper reported that the
Belgian law enforcement began an investigation in 1996, and in July
2001 a judge authorized a freeze of several Jersey bank accounts.
In an April 2007 hearing at the Brussels Court of First Instance,
the judge adjourned the case until June 21.

7. The trio also appears in other investigations in Belgium. One of
the investigations regards a dispute with a Geneva industrial group
«Trans-World» run by billionaire brothers David and Simon Reuben,
but has not resulted in any prosecutions. In 1997, the three were
also investigated for money laundering and were witnesses in a
government audit of Belgian industrial group Tractabel.


8. As a result of a pre-IPO audit of ENRC requested by the
government of Kazakhstan in its capacity as a minority shareholder,
PricewaterhouseCooper (PwC) advised Shodiev, Ibragimov, and
Mashkevich to quit the company’s board because of the outstanding
money laundering allegations against them. The confidential 16-page
draft document obtained by the Financial Times highlighted areas
that the company needs to address ahead of an initial public
offering later this year. The three principal shareholders deny the
allegations. According to the Financial Times and Kazakhstani
press, the main shareholders have not yet decided whether to accept
PwC’s recommendation that they should not quit the board and
therefore board membership for the IPO has not been finalized.

9. Comment: Although the current ENRC shareholders reportedly do
not see the Belgian investigation as an obstacle to a London IPO,
the publicizing of the money laundering charges and of
PricewaterhouseCooper recommendations will likely force them to take
at least some steps to improve corporate governance before taking