Power putch

business and economy

By SRI ⋅ May 16, 2008 ⋅

After an armed seizure, years of criminal investigations and millions of dollars in suspicious fines, U.S. power company AES Corp. is retreating from Kazakhstan–the latest American victim of cronyism in poor, resource-rich nations.

Without warning, 24 foot soldiers of the Pavlodar Oblast Financial Police showed up, carrying AK-47 Kalashnikov automatic rifles. Their target: the Maikuben coal mine in northern Kazakhstan, owned by the American firm AES Corp. Demanding documents connected to a tax case in Kazakh courts, the troops brandished their weapons to remove AES employees and seize the mine’s administration building, according to internal AES e-mails. With no cellular service in the area, AES managers in the country struggled to communicate with their staff as the occupation dragged into a second day. They negotiated an end to the standoff with regional officials, who persuaded the goons to pull back. AES never told investors or the press about the armed takeover. Operations at the open coal pit continued, and the company got slapped with a tax fine.

That scary incident took place in June 2005–hardly the first confrontation with the Kazakhs and certainly not the last. Still, AES soldiered on. In a 12-year sojourn in the former Soviet republic, it invested at least $200 million, becoming one of Kazakhstan’s largest providers of electricity. But now, three years after the Financial Police raid and facing $200 million in potential fines, AES is largely throwing in the towel. It is closing a deal to sell its main assets in Kazakhstan for what appears to be a fire-sale price.

A $14 billion (sales) firm with headquarters in Arlington, Va., AES is in the business of supplying power, for the most part in developing countries (among them: Cameroon, Brazil, Colombia and Pakistan). So it has had plenty of experience dealing with nasty legal regimes and expropriations of foreign capital. But Kazakhstan, where it had not just contract and regulatory disputes but also the threat of criminal investigations, was too much for it.

AES’ hosing in Kazakhstan is a distressingly familiar sign of the times for U.S. and European corporations trying to do business in poor but resource-rich countries. Venezuela, Bolivia and Ecuador badly need foreign investment and know-how. Yet they’re making it tough for outsiders to make a decent return on investment. ExxonMobil has been in a tense legal standoff over frozen assets with Venezuelan President Hugo Chávez since last year. Ecuador is using its court system in an attempt to extort as much as $16 billion from Chevron as compensation for environmental damage that was caused mostly by the Ecuador national oil company after Chevron left. Russia has come to rely on spur-of-the-moment environmental laws and fines as leverage to force Western partners to sell at depressed prices. Thus was Royal Dutch Shell squeezed out of its majority stake in the Sakhalin oil bonanza for pennies on the dollar.

By Nathan Vardi (Forbes)