This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L  ALMATY 003449 
 
SIPDIS 
 
 
DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 09/25/2015 
TAGS: ENRG EPET AJ KZ ECONOMIC
SUBJECT: KAZAKHSTAN: PARTIES INITIAL KCTS IGA DRAFT 
 
REF: A. ALMATY 2833 
     ¶B. BAKU 1434 
     ¶C. BAKU 1224 
 
Classified By: POEC chief Deborah Mennuti, reasons 1.4(B) and (D) 
 
¶1. (C) Summary:  Kazakhstani and Azeri negotiators approved 
and initialed a draft of the Kazakhstan Caspian 
Transportation System (KCTS) Inter-governmental Agreement 
(IGA) in Almaty on September 24.  The delegations agreed upon 
a single text, though the GOK delegation insisted on 
highlighting a few passages -- including a key one on 
ratification -- as being "subject to the approval of the 
governments."  The Azeri delegation, in turn, linked eventual 
GOA signature of the IGA to promised GOK steps to correct 
recent flawed legislation which, as passed, appears to 
question the primacy of international treaties over national 
legislation (Ref A).  After a difficult first day of 
negotiations, the parties advanced quickly toward agreement 
following the Azeris' surprising embrace of the GOK's 
proposed language on taxation.  The IGA language grants 
project investors apparent tax stability (promising that any 
new tax will preserve "the balance of economic interests") 
while subjecting the investors to national tax legislation, 
except as otherwise stated in the future Host Government 
Agreements (HGAs).  Lead investor negotiator Fabrice 
Mosneron-Dupin told Econoff that, while agreed-upon position 
on taxes would render HGA negotiations long and difficult, 
the investors had chosen not to "go to the mat" on the issue, 
preferring to use their leverage to clarify 
recently-discovered ambiguous language in the definition of 
the scope of the Trans-Caspian system. End Summary. 
 
Kazakhstanis Concede Recent Legislation Flawed 
--------------------------------------------- - 
 
¶2. (C) During a September 22 "pre-negotiation" meeting with 
investor representatives, GOK Delegation Head Kairgeldy 
Kabyldin and Ministry of Foreign Affairs (MFA) representative 
Erkin Akhinznanov acknowledged that the August 2005 
Kazakhstani Law on International Treaties contained a 
"technical error."  This law, which as passed appeared to 
subordinate international treaties to domestic legislation, 
had provoked a storm of pre-negotiation protest from SOCAR 
(Ref B) and project investors.  The next day, during 
negotiations, Akhinznanov confirmed that the Kazakhstani 
parliament would pass an amendment rectifying the mistake, 
and promised the Azeri negotiating team (lead by SOCAR 
president Natik Aliev and, as a vocal second, Gia Chanturia) 
a formal, written response from the MFA and the 
Constitutional Council. 
 
¶3. (C) While both the Azeris and the investors seemed to 
accept the GOK's good-faith explanation of the offending 
legislation, the Azeri delegation at first insisted that the 
Kazakhstani parliament would have to amend the law before the 
GOA would sign the IGA.  When Akhinznanov replied that the 
parliament was unlikely to do so before "the first of the 
year," Michael Townsend (BP president in Azerbaijan, and a 
member of the Azeri team) suggested that the Azeri position 
would depend on the adequacy of the formal, written GOK 
response to SOCAR's letter.  Later in the negotiations the 
Azeris proposed an additional sub-article (6.3.2) to the IGA 
binding governments to "take all necessary measures to ensure 
that there shall be no national legislation that could have 
the effect of amending, suspending, terminating, and/or 
otherwise frustrating this treaty and its implementation." 
(Note:  This clause is one among those "subject to approval 
by the governments." While the GOK unwaveringly acknowledged 
that the law was flawed, at times -- particularly when the 
negotiations were tense -- GOK negotiators asserted that, 
since the flawed law was clearly unconstitutional, both 
amendment and the proposed 6.3.2 were superfluous. End Note.) 
 
 
Breakthrough on Taxation 
------------------------ 
 
¶4. (C) The parties repeatedly deferred discussion of taxation 
until September 24, clearly anticipating a difficult 
negotiation.  In fact, the Azeris quickly agreed to the GOK's 
proposed text, which subjects the investors to national (tax) 
legislation, except for what is specifically exempted in the 
(future) HGAs.  (Note: In May, the parties initialed an IGA 
 
embodying the opposite approach (Ref C): except as provided 
for in the HGA, parties would be exempt from taxes. End 
Note.)  In explaining the Azeris' assent to the GOK position, 
Aliev suggested that "it is up to each government" to decide 
what concessions to make to the oil companies; thus, the 
proper place to address the issue was in the HGAs.  Kabyldin 
argued that the investors' approach would "never make it past 
the Ministry of Finance;" on cue, the attending MOF 
representative agreed, underscoring his Ministry's view that 
a global exemption from taxes was inappropriate for an IGA 
which would potentially cover many future projects, all 
detailed in separate HGAs.  Better, he said, to negotiate 
specific project concessions in an HGA. 
 
¶5. (C) In response, Dupin argued that the GOK approach was 
more complicated than the investor's version, and would lead 
to drawn-out HGA negotiations.  "We're not experts in 
Kazakhstani tax law," he protested, noting that, under the 
GOK approach, lawyers for the investors would have to study 
"more than 100 Kazakhstani taxes" and their potential impact 
on the project.  In the corridor, however, Dupin was less 
strident, telling Econoff that "we still can get what we need 
during the HGA negotiations."  Conoco-Phillips' 
representative Hakim Janah (strictly protect) was less 
sanguine, protesting during the negotiations and privately 
telling Econoff that he was frustrated with "Dupin and the 
other TOTAL representatives" for having "conceded too easily." 
 
¶6. (C) The parties scarcely discussed the specific issue of 
tax stability. The investors accepted the GOK's basic 
language: "..stability of the Tax Regime implies, inter alia, 
the non-application of new Taxes, with the exception of cases 
where such Taxes are a replacement of previously existing 
ones, whilst preserving the balance of economic interests." 
When Econoff asked Janah whether the last phrase was 
sufficiently well-defined to avoid future disputes, Janah 
assured him that the term was "widely used and accepted in 
the industry" and thus was not vulnerable to manipulation. 
 
 
Ambiguity in Definition of Trans-Caspian System 
--------------------------------------------- -- 
 
¶7. (C) Dupin told Poloff that his primary goal during the 
negotiations was to clarify certain "ambiguities" which the 
investors' lawyers had discovered after the May negotiations 
in the text defining the "Trans-Caspian System." In English, 
at least (both the GOK and the GOA insisted that the problem 
did not exist in the Russian version), the draft May IGA 
inadvertently required future GOK assent to fundamental 
aspects of project infrastructure which were, in fact, being 
agreed upon in principle upon signature of the IGA (with 
project details to follow in the HGA).  At one point during 
this debate Aliev remarked that the investors' "insistence on 
a purely linguistic point gives me suspicions," but in the 
end compromise language was found. 
 
Ratification: Much Ado About "Temporary" 
---------------------------------------- 
 
¶8. (C) Perhaps the most contentious issue during the 
negotiations was how to define the ratification process.  All 
sides professed to support the same process: the IGA would 
come into effect upon signature, but not prevail over 
national legislation (i.e., operate as a treaty) until 
ratified.  The investors and Azeris, however, were troubled 
in general by the effect of the flawed legislation 
(paragraphs 2-3 above), and specifically by GOK inclusion of 
a clause (in English) which rendered initial application of 
the Treaty "temporary," without seeming to specify an end to 
the "temporary" status.  The Kazakhstani side, on the other 
hand, argued that they had taken the questioned phrase 
"straight from the Vienna Convention."  Only after a 
breakthrough on the tax issue softened the tenor of the 
negotiations did the GOK accept to insert the investors' 
alternative text "subject to approval of the governments." 
 
¶9. (C) Note: Only at the beginning of the negotiations did 
Aliev mention the newly-created Azeri "Presidential 
Commission" on negotiations (Ref B), commenting that the 
commission had been created "not just for negotiations," but 
to "resolve all questions related to the transport of 
Kazakhstani oil," particularly those "in the implementation 
stage, such as permits and the allocation of land." 
 
¶10. (C) Comment: The GOK tactic of bracketing several IGA 
phrases as "subject to approval by Governments of Kazakhstan 
and Azerbaijan" is, in once sense, a truism, but likely also 
represents Kabyldin and company's recognition that they may 
have been negotiating beyond their instructions or 
competency, especially in accepting Article 6.3.2. as penance 
for the flawed GOK legislation.  We don't expect signature 
anytime soon, as the Azeris demanded that the GOK produce at 
least a formal explanation of the flawed legislation, if not 
an amendment.  However, the GOK did get what it seemed to 
want most out of this negotiation -- no blanket exemption on 
taxes for project investors -- and thus may be in a mood to 
compromise on the issues "subject to government approval." 
End Comment. 
ORDWAY 
 
 
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