Kazakhstan’s resource-fuelled economic boom and thriving market economy have turned it into the economic powerhouse of Central Asia, setting it even farther apart from the poorer, less developed and reform-resistant economies of the region.

Kazakhstan’s resource-fuelled economic boom and thriving market economy have turned it into the economic powerhouse of Central Asia, setting it even farther apart from the poorer, less developed and reform-resistant economies of the region. Now the second most dynamic economy in the post-Soviet space after Russia, its Gross Domestic Product ($186.27 billion in 2011) is three times the combined GDP of neighbouring Uzbekistan, Kyrgyzstan, and Tajikistan.[1]

Rising economic growth and prosperity have transformed Kazakhstan from an emigration country of the 1990s to a flourishing migrant-receiving state. The void left by the departure of 1.8 million Russians-speakers in its first decade of independence is being filled by the return of ethnic Kazakh diaspora (referred to as oralman) under the state-sponsored repatriation programme.

'Rising economic growth and prosperity have transformed Kazakhstan from an emigration country of the 1990s to a flourishing migrant-receiving state.'

By 2010 about 800,000 had relocated to Kazakhstan, placing Kazakhstan among top ten migrant-receiving states.  But what is less known abroad and little discussed within Kazakhstan is the fact that, after Russia, it is the next regular destination for earning livelihoods, albeit without a legal work permit or a formal status, for a growing number of Central Asians.

Legal status and jobs

Migrant workers from other states of Central Asia remain uncounted and invisible to the state authorities due to the lack of an appropriate legal framework and labour policies, which dooms them to an ‘illegal’ or ‘irregular’ status. These are Kazakhstan’s ‘gastarbaitery’ (the Russianized plural of German Gastarbeiter), a term that is widely used to designate the sizable pool of unskilled or semi-skilled foreign migrant workers from Central Asia. Though no longer widely used in Germany, the term has arrived through the Russian media into Kazakhstan along with its negative baggage and racial stereotype.

Despite the lower wages, many migrant workers from Central Asia choose Kazakhstan to look for jobs. It is closer to their home countries, and it is easier for them to adapt to local cultural norms and values (photo: Fergana News Agency, all rights reserved)

In the absence of reliable government statistics, the International Organization of Migration (IOM) estimated that in 2010 migrant workers in Kazakhstan number from 500,000 to a million people, with almost two thirds of them from Uzbekistan, some 25% from Kyrgyzstan and the rest from Tajikistan and other CIS states. Others suggest that the number of foreign workers in Kazakhstan is likely to reach 3 million within the next years and only 200,000-300,000 of these are likely to be working legally.

At least half of them work in construction, performing what are considered 3-D jobs (‘dirty, dangerous, and degrading’) shunned by the locals. Several others work in the expanding service sector – catering, transportation, delivery, retail and sales; and the remaining work as seasonal labourers in agriculture – in tobacco, cotton fields, foodstuff packing and processing.

'Migrant workers from other states of Central Asia remain uncounted and invisible to the state authorities due to the lack of an appropriate legal framework and labour policies, which dooms them to an ‘illegal’ or ‘irregular’ status.'

The ready availability of cheap semi-skilled and short-term migrant labour is contributing significantly to spurring rapid growth in construction and service sectors in the prominent cities Astana, Almaty, Shymkent, Atyrau, and Aktau. However, no authoritative official data, statistics or studies on the role of migrant workers in the labour force or in the informal economy exist. It is becoming increasingly apparent that although the state authorities continue to combat ‘illegal’ migration, regarding it as a security threat or as promoting criminal activities, they covertly allow the influential recruiters or employers to hire the gastarbaitery.

Cultural affinity, legal barriers

How do these ‘guest-workers’ find work, negotiate the risks involved and find a niche for themselves in Kazakhstan? With its widespread reputation for ethnic stability and tolerance, Kazakhstan is seen as a more hospitable place than Russia for fellow Central Asian migrants, particularly the young, first time migrants. For Bakhtiyor and Raushan, two young Uzbek men in their early 20s from Fergana, Kazakhstan’s new capital, Astana, is modern, vibrant,  easy to get around and full of opportunities. They left home for the first time to look for work for in construction so that they could earn money for their own marriages and those of their sisters.

For more experienced migrant workers such as Babamurad and several of his extended kin who were working together as a 26-men construction brigade, the pay in Kazakhstan is lower than in Russia but its proximity makes it more convenient. All are ethnic Tajiks from the same mahalla in Bukhara, hired by a sub-contractor through their connections in Russia to build a mosque in Karaganda and cottages for Astana’s wealthy. Several of them have been working in various cities in Russia over the past 7 years, where ‘work is plentiful, but so are the racists and skinheads.’ The absence of overt racism and the relative ease of forming connections with the locals on the basis of shared Islamic practices and linguistic affinity are appealing to the initiates as well as to the veteran migrants.

Notwithstanding these positives and its assiduously cultivated image as a peaceful and tolerant multiethnic state with a long tradition of hospitality, Kazakhstan is neither a migrant-welcoming nor a migrant-seeking state. The term ‘migrant’ or ‘migration’, as used in law, official statements and media reports refers to ethnic Kazakh returnees - oralman - and to the internal rural migrants to the major cities. Even the oralman, who are assured of Kazakhstani citizenship and settlement assistance, face innumerable problems in negotiating the legal-institutional and bureaucratic obstacles in formalizing their status.

While the ruling establishment, policy experts and academics pay scant attention to the growing number of labour migrants, the urban residents as well as the media tend to lump together all categories of migrants: the oralman who don’t speak Russian well, the migrants from rural areas living in the city without registration (propiska), and the gastarbeitery, clustered around construction sites or bazaars.

'With its widespread reputation for ethnic stability and tolerance, Kazakhstan is seen as a more hospitable place than Russia for fellow Central Asian migrants, particularly the young, first time migrants.'

But unlike the oralman and the internal migrants, who at least have formal legal rights and entitlements as citizens, the Central Asian migrant workers lack a legal status, rights or social protection which renders them most vulnerable to exploitation, extortion by officials, arbitrary fines and deportations. Here’s how an article in a local media describes them, with the aim of highlighting their vulnerability:

‘Gastarbaiter - an ill-shaven person with a pale look, and smell of cheap deodorant. [This] labour migrant is shabbily-dressed with a scared look. He’s afraid of everything: cold, police, dark streets on which well-fed lads walk with hands tucked in their pockets, ever-so watchful babushki [Rn. grannies] in the bazaars who suspect a thief or a terrorist in the face of a foreign nationality. He’s vulnerable from all corners because he has no rights, is cut off from his homeland and doesn’t know the laws of a foreign land.’

Modern architecture in Astana, the new capital of Kazakhstan, is the best evidence of the country’s economic boom. The local construction industry there relies heavily on the migrant work force (photo: www.flickr.com, peretzp's photostream).

In contrast to the juridical category of Gastarbeiter in Germany, who were brought in legally as contract workers for a fixed term and offered legal and economic protection, these migrants have no job contract or work permit. The typical Turkish Gastarbeiter, on the other hand, was alone, facing socio-cultural isolation and lacking any proficiency in German, whereas most migrants from the near abroad either have some personal connections or quickly form these, and are able to mingle with the locals on the basis of cultural-linguistic and religious affinity.

The migrants who agreed to meet me were evidently those who had networks or ‘friends’, and thus more protected than the vast majority of the more vulnerable migrants who work in near complete isolation from the locals, shun any contact with strangers and strive to remain invisible to the state. They acknowledged the help and goodwill extended by the locals – be it the employer, intermediary or a business partner – and mentioned how they together had to find ways of dealing with the stringent regulations preventing them from working and avoid the gaze of the police and officials.

Legal and bureaucratic hurdles

Kazakhstan adopted a new Migration Law in August 2011, after considerable delay but without adequate public discussion. It identifies three key directions and objectives of migration: 1] facilitating repatriation, settlement, and integration of the oralman, denoting an ethno-national vision; 2] maintenance of national security and prevention of illegal migration, reflecting a ‘securitization’ perspective; 3] management of internal migratory processes from rural to urban areas, particularly resettlement of citizens residing in ecologically depressed regions to other regions, which addresses issues of social welfare and equal distribution. The law also contains quota provisions for highly-skilled foreign workers. But the quota set is miniscule: it was set at 66,300 in 2009, then reduced by a third in 2011; it avoids any reference to the shortages in various other sectors; and the mechanisms and implementation remain deficient.

The law is also silent about the status of the CIS labour migrants who enter the country legally under the visa-free regime, indicating the purpose of their visit as ‘personal’ on the migration card when evidently looking for paid work for the duration of their stay. Such migrants are required to register within 5 days, may remain only for the authorized period of stay (reduced from 90 to 30 days after political instability in Kyrgyzstan in April 2010) and cannot work.

The apparently simple task of visiting the local Migration Department, filling out the registration form and supplying the address of a temporary residence with the name of the property owner may take a few hours or a few days. Most migrants are deterred from going in person to register by the fear that the authorities will deliberately look for mistakes on the form, demand further documents, question them about their intent to visit Kazakhstan or use the information they provide to monitor them. They often fail to grant the registration within the time limit so that they can demand bribes. ‘It is much easier to pay the required 3000-5000 tenge ($20-$33) to an intermediary or a friend than to spend the precious work time in the queue and to risk not being able to register in time,’ said a migrant from Bishkek, highlighting what is a widespread practice.

'The migrants working in the bazaars as traders, shopkeepers, in catering or cleaning jobs tend to be protected by their employers.'

The migrants working in the bazaars as traders, shopkeepers, in catering or cleaning jobs tend to be protected by their employers. A majority of those working in the multiethnic mosaic of Kazakhstan’s bazaars are of non-Kazakh nationality. Alia, an oralman who came to Almaty from Tashkent in the late 1990s, sells tea and pirozhki [Rn. pies] in Almaty’s barakholka [Rn. flea market] bazaar. She agreed to be my interlocutor and introduced me to other migrants.

I asked her why other nationalities and migrants, and not Kazakhs, are so visible. Her response: ‘Of course all these stalls are owned by Kazakhs [Kazakhstani citizens] who rent them out to others. Legally, only a Kazakhstani national may own the stalls and work there. So all those [migrants] selling goods are neither the official owners nor employees. And virtually all the police, migration officials, those in charge of migrants’ registration, tax collection, health and safety inspection, compliance with hygiene and sanitary standards, and those organizing raids and checks are Kazakhs.’

Typically, the legal owner of a stall in the bazaar, who can only be a Kazakhstani national or permanent resident, leases it to migrants or non-citizens. He or she arranges registration and other relevant documentation for a set fee of 3000-5000 tenge (depending on citizenship and other factors), helps with obtaining housing and offers overall protection from the police.

Gulnara, whose husband is a policeman, owns three retail outlets in the barakholka. One is leased to a Kyrgyz woman who, together with members of her extended family (shuttling back and forth between Almaty and Bishkek to manage their legal status), sells garments made in Bishkek. Her husband drives a ‘taxi’ between Almaty and Bishkek and also carries passports of fellow Kyrgyz migrants to secure a new migration card. The other two are leased to Kyrgyz and Uzbek migrants selling fruit and vegetables. Gulnara is a ‘fixer’ who recognises that her business interests and the well-being of migrants are interlinked: she also ran a marriage agency that helped migrants to obtain citizenship or residency in Kazakhstan through marriage.

Alisher, an Uzbek from Andijan, is a contractor with permanent residency in Kazakhstan (through marriage to a Kazakhstani citizen) and has opted to retain his Uzbek passport. He frequently travels to Andijan to recruit construction workers. ‘These are my family,’ he said as he introduced me to the young Uzbek men on the construction site. ‘Are there no Kazakh workers?’ I asked him. He laughed and said, ‘Kazakhs don’t know how to work!’ Connections with the police enable him to bring workers from Uzbekistan and protect them. ‘Work keeps them away from Islam and narcotics,’ he averred.

Avoiding ‘illegality’

Kazakhstan’s Migration Law defines an ‘illegal migrant’ simply as a person who has ‘violated the laws of the Republic of Kazakhstan pertaining to migration,’ offering no further elaboration. Migrants are routinely charged for violating terms of stay under Article 394, Part 1 of the Code ‘On Violations by foreign citizens or stateless people of rules of stay in Kazakhstan’ and deported for repeated violations under Part II of the same code. They negotiate the one-month limit by leaving the country to re-enter on a new migration card with a new one-month permit.

'An entire informal industry of acquiring documentation has emerged: train conductors facilitate the acquisition of new migration cards for those who have overstayed their authorised term, bus and taxi drivers or other intermediaries carry documents back and forth with the necessary stamp or to facilitate the safe passage home of a person who has overstayed his registration period.'  

Sharof, from Tajikistan, goes to Bishkek every month together with many Kyrgyz in order to obtain a new entry stamp. Many now find it is easier and cheaper to pay someone to take their passport to the border for a new entry stamp. An entire informal industry of acquiring documentation has emerged: train conductors facilitate the acquisition of new migration cards for those who have overstayed their authorised term, bus and taxi drivers or other intermediaries carry documents back and forth with the necessary stamp or to facilitate the safe passage home of a person who has overstayed his registration period.

Many simply overstay – the construction job needs to be completed in order to collect the payment, the documents are in possession of the employer or middlemen, they may lose their job and pay for the work completed so far if they leave. Migrants who overstay can now pay an ‘administrative fine’ of about 15,000 tenge ($100), giving them a 12 day grace period within which to leave the country. Failing this, a deportation order is issued. Some choose to pay the fine in order to maximise the term of their stay and enjoy some provisional immunity from deportation. Others simply risk it in the hope of reaching a ‘settlement’ at the border.

The Department of Migration Police organises frequent inspections and raids to track down ‘illegal’ migrants and releases the data to the press. Anuar, a Dungan from Bishkek noted, ‘We know very well that they are given orders from above, need to impress their superiors on how well they’re doing their job, and that they need to earn extra money,’ adding ‘they especially come before festival times or some big event such as this summit [reference to the OSCE summit in Astana in December 2010], when they deported some 500 from the bazaars. But they weren’t really deported – just sent to Karaganda for the weekend – and all came back the next week.’

Rasul, a Tajik migrant who has now regularised his status by marrying a Kazakh, reported how raids are carried out: ‘They either come as a band when an official raid is organised or come in a group of two to four to inspect..…they always target the most vulnerable ones. those who are ignorant, inexperienced or simply not very smart.’

What next?

Almost all the people I interviewed in Almaty and Astana claimed that their documents were ‘in order.’ Further conversations revealed that virtually everyone had procured an official status through ‘friends’, intermediaries or employers by paying a fee or making other informal deals. These reveal how a complex web of personal connections, strategies and informal arrangements enable the migrants to acquire the relevant documentation to maintain their status as a ‘visitor’ and keep their real status invisible to the law. Every lacuna in the law, as well as every restriction imposed by the law, is dealt with by relying on informal connections and personal networks and resorting to quasi-legal practices.

'Migrants have a very clear understanding of their niche in the labour market and the jobs that Kazakhstani citizens are unwilling or unable to perform.' 

The state remains trapped in a self-limiting discourse within the framework of ethno-nationalism and the ‘securitization’ of cross border mobility. This prevents it from addressing the complexities of a rapidly growing economy and adopting appropriate labour and migration policies. The likely result will be the further erosion of its ability to regulate or manage migration flows and the informal labour market. In this way the state has covertly opted to let migrant workers remain invisible and illegible while utilizing the ‘cheap’ labour they provide. To acknowledge the scale of undocumented or informal labour migration would require an obligation to enact appropriate legislation and regulatory measures.

Migrants have a very clear understanding of their niche in the labour market and the jobs that Kazakhstani citizens are unwilling or unable to perform. ‘There’s so much yet to build, so much work to finish…if only they let us stay for 6 months rather than making us go here and there,’…. ‘who will feed the Astanites if we don’t work here.…?’ is what some of the Uzbeks working in Astana said.

As urban Kazakhstani citizens increasingly rely on the migrants to perform so many of their housekeeping functions, it may not be too soon to conclude that many of them will establish at least a temporary abode for themselves in Kazakhstan and subvert the very notion of being gastarbaitery.

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[1] The GDP for 2011 for Tajikistan was $6.52 billion, Uzbekistan $45.36 billion, and Kyrgyzstan $6.4 billion. Migrant remittances constitute 48% of Tajikistan’s GDP, at least a third of Kyrgyzstan’s GDP and an estimated 30% of Uzbekistan’s GDP.

Since the collapse of the USSR, various attempts have been made to (re)integrate the newly independent republics, but they have proved largely ineffective. These initiatives have been seen as vehicles for Russia’s traditional dominance of the region, expressed in a mix of crude power and institutional weakness, and wrapped up in historical discourses.

The formation of the Eurasian Customs Union (ECU) would appear to change this. While its economic rationale remains debatable, the ECU has been set up as a rule-based organization conforming to World Trade Organization (WTO) regulations and modern international norms. At the same time, it is clearly seen by Russia as a vehicle for reintegrating the post-Soviet space and offering a modernizing alternative to the EU.

‘Eurasian Customs Union …. is clearly seen by Russia as a vehicle for reintegrating the post-Soviet space and offering a modernizing alternative to the EU.’

This is particularly significant for Ukraine, where Russia has been actively promoting the ECU as an alternative to the EU integration mechanism, the Association Agreement. Given the apparent viability of the ECU, this rivalry is likely to grow and will require other international organisations, such as the EU, to adjust their strategies.

The Eurasian Customs Union: continuity or change?

The main significance of the ECU is its departure from previous initiatives for integration in the post-Soviet space.

The first and best-known of these was the Commonwealth of Independent States (CIS), which proved a mere vehicle for channelling the orderly disintegration of the Soviet Union, rather than the re-integration of its former republics. By the mid-1990s Russia’s focus shifted to investing in smaller groupings and the origins of the ECU date back to 1995, when Russia signed a treaty for the formation of a customs union with Belarus and Kazakhstan (Kyrgyzstan joined in 1996 and Tajikistan in 1997). This initiative retained the ineffective CIS institutional formula. Putin’s accession to the presidency, however, added a new impetus to the project and in 2000 the grouping was transformed into a fully-fledged international organization, the Eurasian Economic Community (EEC), although many of the old problems persisted, putting its effectiveness in question.

However, the middle of the 2000s saw the emergence of a vanguard group of states. The leaders of Russia, Belarus and Kazakhstan decided to set up a customs union in 2006, and swiftly established a Customs Union Commission as a permanent executive body. The group launched a common customs tariff in January 2010; in July 2010, the common customs territory was declared and the Customs Union Code, the key regulatory document, adopted. In July 2011, internal physical border controls were eliminated between the member states.

‘…the member states aim to progress towards an economic union with a common market of goods, capital and labour, and the operation of common macroeconomic, competition, financial and other regulation, including the harmonization of policies such as energy and transport.’

Their ambitions did not stop there: the member states aim to progress towards an economic union with a common market of goods, capital and labour, and the operation of common macroeconomic, competition, financial and other regulation, including the harmonization of policies such as energy and transport. This Eurasian Economic Union is due to be launched in January 2015.

Integration with a difference?

While we need to retain a degree of healthy scepticism about the transition to the Eurasian Economic Union, developments so far signal a pivotal change in integration patterns. The ECU offers a forward looking integration model that is a clear improvement on previous initiatives in terms of both design and implementation. The Union operates in the context of Russia’s accession to the WTO: while Belarus and Kazakhstan remain outside it, Russia’s accession protocol is designed to become an integral part of the legal framework of the ECU. So the Union represents a modernized economic regime, very different from previous attempts at regional integration within the post-Soviet space.

Undoubtedly the question remains whether Russia will be bound by this multilateral regime. Previous regional groupings were very asymmetric, allowing Russia to use its superior bargaining power and avoid being bound by potentially costly decisions. Yet there are indications that Russia may be prepared to move towards greater multilateralism and, at least in theory, it can be outvoted by its partners on certain types of decision.

It is clear that much of the progress so far has been dependent on the personalities of the leaders in the three countries (Putin, Nazarbayev and Lukashenko), making the union vulnerable to any leadership changes. But despite the reliance on personalities, the ECU is different from its predecessors not only in terms of the political will that is driving it forward, but also, crucially, in terms of its institutional effectiveness. The removal of internal borders, despite transitional periods in relation to the Russia–Kazakhstan border, symbolizes this. This means that the ECU cannot be reversed without cost. It is likely to stay.

This ambitious deepening of the ECU has coincided with a drive to widen it by making it a ‘centre of attraction’. Russia has viewed the ECU as a core for the wider integration of its ‘near abroad’, and in Kyrgyzstan, for example, accession to the ECU is high on the political agenda. But the most important battleground is Ukraine.

'This ambitious deepening of the ECU has coincided with a drive to widen it by making it a ‘centre of attraction’. Russia has viewed the ECU as a core for the wider integration of its ‘near abroad’, and in Kyrgyzstan, for example, accession to the ECU is high on the political agenda. But the most important battleground is Ukraine.'

This is not the first time Russia has sought to include Ukraine in a regional integration initiative. But it is the approach to Ukraine that illustrates the shift in Russian policy most clearly, because it is presenting the ECU as a ‘governance-based’ vehicle in direct competition with the EU.

Russia’s export of governance in the ‘shared neighbourhood’

The ECU is the vehicle through which Russia is increasingly engaging in ‘normative rivalry’ with the EU in the so-called ‘shared neighbourhood’ (i.e. Ukraine, Belarus, Moldova, Azerbaijan, Georgia and Armenia). Russia has begun to compete in a domain where until now the EU has exercised a monopoly.

The European Union, which launched the European Neighbourhood Policy (ENP) and the Eastern Partnership in the 2000s, has been seen (and regards itself) as the primary source of modernization and improved governance in the post-Soviet space. It promotes a rule-based, future-orientated economic integration regime designed in accordance with its own governance model via an offer of Association Agreements, Deep and Comprehensive Free Trade Areas (DCFTA), Visa Facilitation Agreements and full visa liberalization in the long term – but not membership.

The DCFTA goes beyond a ‘standard’ free trade agreement, entailing major changes in the regulatory framework of the country associated with the EU in a wide range of areas. The expected benefits of such an agreement are capabilities so far lacking in most of the eastern neighbours: the ability to sustain reforms or a degree of confidence in the economy thanks to improved domestic institutions and system of economic governance. The EU has offered Association Agreements, with the DCFTA, to all post-Soviet countries in Europe which are also members of the WTO (i.e. Ukraine, Moldova, Armenia and Georgia).

Ukraine

Russia has endeavoured to undermine the rationale for Ukraine’s political association and free trade agreement with the EU. Ukraine was the first country to conclude negotiations on an Association Agreement (although it is yet to be signed and ratified). In 2011 Russia came up with its own offer, presenting a forceful economic counterargument.

'The EU has offered Association Agreements, with the DCFTA, to all post-Soviet countries in Europe which are also members of the WTO (i.e. Ukraine, Moldova, Armenia and Georgia).'

Joining the ECU would apparently benefit Ukraine to the extent of $219 billion of increased GDP between 2011 and 2030 (i.e. $12.2 billion per annum at 2010 prices). Joining the ECU would allow Ukraine to retain access to the Russian market, particularly for its agricultural products. As Putin put it, ‘No one is letting Ukraine in; we are.’

So far the EU has not responded in any concerted way to the anti-DCFTA campaign in Ukraine. It is no doubt relying on its own ‘power of attraction’ and Ukraine’s long-standing ‘European choice’. Recurring fatigue and disillusionment with the country mean that the EU has largely failed to promote this flagship and pioneering agreement effectively in Ukraine.

Russia, meanwhile, is not relying solely on promised economic gains for Ukraine, and is backing up its invitation with a traditional ‘carrot-and-stick’ approach. The incentive comes in the form of a reduced price for gas, benefiting Ukraine by up to $8 billion per annum. The penalty, on the other hand, would consist of economic sanctions against Ukraine, which would be primarily justified in terms of the negative implications for Russia of the EU–Ukraine DCFTA. Russia is hinting at deploying a range of mechanisms to ‘persuade’ Ukraine of the ‘benefits’ of the ECU. This reinforces the perception of the initiative as a vehicle for projecting Russian power, particularly as the Russian approach also makes it more difficult to resist the ‘offer’.

What punitive measures could Russia introduce? These could range from applying anti-dumping tariffs and limiting imports of Ukrainian food products through the application of phytosanitary standards for plant and plant products, to lowering the quotas for steel pipes – a key export for Ukraine. Selective, targeted sanctions have already been repeatedly deployed by Russia against states such as Moldova, Ukraine or Georgia, which are deemed to be pursuing unfriendly policies.

But how far could Russia go in ‘punishing’ Ukraine? Russia’s membership of the WTO precludes it from using certain punitive trade measures, and Ukraine, as an existing member, could resort to WTO mechanisms to address politically-motivated trade sanctions. However, Russia may take extra-legal measures, in contravention of WTO rules. Ultimately, it is difficult for Ukraine to make a choice based on a prediction of Russia’s propensity to break the rules of the organization to which it has just acceded.

This campaign complicates Ukraine’s already difficult relations with the EU. The signing of the Association Agreement has been put on ice owing to the deterioration of democratic standards in Ukraine, as evidenced above all by the political prosecution of opposition figures such as former prime minister Yulia Tymoshenko. These prosecutions have been loudly condemned by EU institutions and member states as a clear breach of democratic standards and the rule of law.

By contrast, the ECU does not require its current and prospective member states to conform to any democratic standards. Ukraine is being invited to join with no political conditions attached, and given that Russia’s offer comes at a sensitive moment in Ukrainian–EU relations, it represents a significant counterweight to the EU’s democratic demands.

The campaign to persuade Ukraine to abandon the Association Agreement with the EU could be seen as a short-lived attempt to attract the country at a time when the authorities have declared their interest in concluding the Agreement rather than opting for the ECU. However, this is not just a matter of short-term choice but also a longer-term conflict of interests. Even if and when the Association Agreement is concluded, its implementation will be prolonged, costly and highly sensitive for Ukraine in both political and economic terms. Ukraine’s dependence on the Russian market means that the country has to adapt simultaneously to two competitive integration regimes, the EU and the ECU.

'Ukraine’s dependence on the Russian market means that the country has to adapt simultaneously to two competitive integration regimes, the EU and the ECU.'

This context gives Russia plenty of opportunities to offer incentives and disincentives to slow down or jeopardize the implementation of the Association Agreement. Integration with the EU is certainly premised on the lengthening of the time horizons of Ukraine’s political class, essential if the country is to embark on the political and economic reforms that would generate benefits in the medium to long term (5–10 years). Russia is well positioned to offer beneficial mutual conditions, changing the stakes and shortening the time frame.  

Conclusion

While EU–Russian relations have remained static in the last decade, the same cannot be said of their respective relations with the countries in the ‘shared neighbourhood’. Recently, Russia has been putting a premium on rule-based economic integration with robust institutional regimes. It is, however,  highly uncertain whether such a rapid pace of integration can be maintained, to allow the  projected creation of the Eurasian Economic Union by 2015.

Yet what has been achieved so far provides a firm institutional basis for economic integration. As such it means that a viable form of advanced economic integration has emerged in the post-Soviet space, in direct competition to that offered by the EU, and has, moreover, moved Russia into rivalry with the EU in a domain in which the EU has not yet been challenged on the European continent.

For more detailed analysis see R. Dragneva and K. Wolczuk, 'Russia, the Eurasian Customs Union and the EU: Cooperation, Stagnation or Rivalry?' (August 6, 2012). Chatham House Briefing Paper REP BP 2012/01 available at http://www.chathamhouse.org/publications/papers/view/185165

Since independence in 1991, Kazakhstan’s ‘southern capital’, Almaty, has engaged in fairly extensive efforts at ‘Kazakhising’ local toponyms. Now the central arteries of the city, once part of the old Soviet planimetry, display ‘genuinely’ Kazakh names. Streets once bearing the names of Bolshevik icons like Kalinin and Kirov are now named after legendary heroes (Kabanbai Batyr) or other figures from Kazakhstan’s nomadic past (Bogenbai Batyr).

'The local rumour is that the ‘Kazakhization’ of Furmanova ulitsa has been put on hold until the passing of Nursultan A. Nazarbayev, when this leafy street in Almaty will be renamed after the first President of post-Soviet Kazakhstan.'

Surprisingly, however, the street named after Bolshevik writer Dmitry Furmanov has retained its original Soviet name. The local rumour is that the ‘Kazakhization’ of Furmanova ulitsa has been put on hold until the passing of Nursultan A. Nazarbayev, when this leafy street in Almaty will be renamed after the first President of post-Soviet Kazakhstan.

Political speculation

The example of Furmanova ulitsa offers a fitting metaphor to describe the sense of political stagnation that pervades today’s Kazakhstan. A sense that much-needed change has been postponed until the inevitable, though not yet imminent, leadership change.

Externally, the Kazakhstani government continues to promote its image of internal dynamism and international leadership. Success in obtaining the rotating chairmanships of prestigious multinational organisations such as the Organisation of Islamic Cooperation and OSCE is treated as an indicator of Kazakhstan’s international vitality.Data on GDP growth and economic vigour are often offered in support of this narrative.

However, when the situation is observed internally, it seems that Kazakhstan’s politico-economic evolution has definitely entered an intermediate stage, in which the (authoritarian) impetus of the 1990s and the 2000s has been replaced by the immobility typical of the end of an era.

The makings of a political cul-de-sac

Virtually every political conversation going on in the country touches sooner or later on the critical issue of what will happen when Nazarbayev leaves power. And debates on the President’s (political and biological) longevity are usually accompanied by speculations on the existence of potential arrangements for a pre-determined succession.

It was through this very prism that commentators analysed the reshuffle of late September 2012, when outgoing Prime Minister Karim Masimov was appointed to run the Presidential Administration. Similarly, in December 2011, the dismissal of Timur Kulibayev (one of Nazarbayev’s sons-in-law) from the chairmanship of Samruk-Kazyna, Kazakhstan’s sovereign fund, stimulated much debate about the importance of family connections for the presidential succession.

'In Kazakhstan, as in the rest of post-Soviet Central Asia, power can be considered as the function of one’s proximity to the President.'

In Kazakhstan, as in the rest of post-Soviet Central Asia, power can be considered as the function of one’s proximity to the President. Masimov’s career trajectory can thus be regarded as a significant promotion, and Kulibayev’s marginalisation as a weakening of his power position.

The country remains locked in all kinds of speculation, periodically reinforced by news of Nazarbayev’s failing health. All the while, political, economic and social decisions still have to be taken. and Kazakhstan’s foreign policy machinery still has to identify new ways to increase the regime’s international legitimacy. The junction that the Kazakhstani regime has entered is thus, in effect, a political cul-de-sac. For the moment, high oil prices continue to support the Kazakhstani economy and sustain record GDP growth, though there are no guarantees that will continue.

It is possible to identify the precise moment at which Kazakhstan entered this phase of possibly irreversible decline, and that is Nazarbayev’s decision to run in the snap presidential election of early 2011. By entering his third decade at the helm, Nazarbayev, who turned 72 last July, manifested his intention of remaining in power indefinitely.

'Kazakhstan’s decision-making mechanisms appear to have lost much of their momentum, leaving the country stagnating in both political and social terms'

He thus established an invisible link between his mortality and the power position of the elite that supported him throughout the post-Soviet era.

Dealing with opposition

Two things mark the post-election landscape: the appearance of a more stable regime and the neutralisation of every form of internal opposition. The neutralisation happened quickly, and targeted both discontent within the elite, as with the radicalisation of society, which in the recent months had come to be viewed as even more dangerous.

The ongoing struggle for labour rights in the Mangystau oblast [region]obviously represents the most visible aspect of the radicalisation of Kazakhstani politics. At the same time, a substantive part of the dissent has been channelled through more violent outbursts, which have been presented as conclusive evidence of Islamist resurgence in Kazakhstan. The country, in recent times, experienced its very firstsuicide bombing (Aktobe, July 2011), another deadly attack was carried out in Atyrau in late October 2011, while, on 12 November 2011, a more brutal attack claimed several lives in the southern city of Taraz.

The Nazarbayev regime’s response was implacable: repression was adopted as the uniform reaction to these very different expressions of discontent. The state’s brutal response to the demonstrations of oil workers in Zhanaozen, and the draconian law on religious rights introduced in the aftermath of the 2011 attacks are hence two sides of the same coin. They reveal the struggling outlook of a stagnating regime that is no longer capable of effective policy-making and has resorted to classic authoritarian methods in its dealing with the wider population. This sense of decline is perfectly captured by the images coming from Zhanaozen, where, on the day in which the country was celebrating the 20th anniversary of independence (16 December 2011), Kazakhstani armed forces opened fire on citizens demonstrating in the street.

An Islamist threat?

There is, however, more than brutal repression and punishing legislation to the confrontational tendencies that have emerged in Kazakhstani politics. The 2011 wave of terrorist attacks allowed the government to capitalise increasingly on the population’s sense of insecurity. This consideration became crucially important in the stagnating panorama of post-2011 Kazakhstan, with the regime flagging up an ‘Islamist threat’ while outlining its plans for tighter security.

This is a very different reaction from that of Uzbek President Islam Karimov to the events of 9/11: he embarked upon a similar campaign to increase the country’s international prestige. In Kazakhstan, however, the alleged resurgence of radical Islam has served Nazarbayev and his associates in their efforts to recuperate some of the internal legitimacy lost in Zhanaozen. As a consequence, more than half of the Kazakhstani mosques are now monitored through CCTV systems, the regime continues to show unease at foreign-trained religious leaders, and a fully-fledged scare campaign is underway (with media, especially radio, increasingly denouncing the oddities of Wahhabism and other extreme interpretations of the Islamic credo).

'The regime’s systematic refusal to engage in political dialogue and its deliberate plans to marginalise any unsanctioned manifestation of Islamic sentiment have emerged as two pillars of the leadership’s domestic position.'

While there is no conclusive evidence regarding the genuine radicalisation of Kazakhstani Islam, there can be virtually no doubt about the existence of a concerted scare campaign against Islam. An example might be useful here: immediately after the discovery of the bodies of 14 Kazakhstani border guards and one ranger in the Almaty oblast (May 2012), local sources attributed responsibility for the murder to a cell of Saudi Salafis aiming to sabotage the Kazakhstan-China relationship. Although the killing was later attributed to the homicidal outburst of another border guard, an aura of mystery still shrouds public perception of the event, which continues occasionally to be described as a manifestation of Islamic violence in Kazakhstan.

The regime’s systematic refusal to engage in political dialogue with the opposition and its deliberate plans to marginalise any unsanctioned manifestation of Islamic sentiment have hence emerged as two pillars of the leadership’s domestic position. This intransigence, in all likelihood, will continue to characterise Kazakhstani governance until the end of the Nazarbayev era.

Kazakhstan’s future outlook, in this sense, does not appear bright, as the rapid deterioration of whatever little internal dialogue had survived 20 years of fictitious liberalisation is now exacerbating the socio-political stagnation into which the regime slid in 2011. As in the case of Furmanovaulitsa, change for Kazakhstan is postponed to a later date.

When Peter the Great built St Petersburg, Russia looked firmly towards the West. Conversely, Russia’s eastern provinces – often considered peripheral – stay connected with China and Asia. Geography is one thing, but strategic choice is quite another. During the Cold War,  strategic trenches were dug between the US and Russia’s predecessor, the Soviet Union. In this scenario, China was the minor third partner pivoting between the USSR and the US. Now the question has moved on to instead how Russia in the years to come will orient itself, towards East or West, in the growing power game focussed on China.  

Strategic alliances

Russia will choose from any number of different and opposing visions for Russia. In his book Strategic Vision, American geo-strategistBrzezinski argues that Russia should form part of a more ‘vigorous West’, suggesting that long-term strategic planners in the US and the EU should seek to enlarge the West by including Russia. He is of the opinion that Russian thinkers and leaders need to understand that their country is much closer to the EU and the US than to China. 

‘Russian ‘nostalgia for a leading global role’ leads it to conclude that the relative decline of the US would be to its advantage.

Yet it is Russian ‘nostalgia for a leading global role’ that makes it incapable of seeing long-term on this and leads it to conclude that the relative decline of the US would be to its advantage.  In such a strategic reading, the partnership with China will probably be temporary because, in the long run, China will overshadow Russia. Thus, Russia should not be satisfied with siding with China in their ‘coalition of the unwilling’.  

In the same vein, a European Council on Foreign Relations (ECFR) report argued that Russia was ‘post-BRIC’, meaning that it was not attaining the booming economic standards of the other emerging powers, particularly China. Others have taken the argument further: right-wing US Congressman Dana Rohrabacher suggests forging an alliance with Russia, Japan and India for the purpose of containing the Chinese threat. 

Brzezinski’s thinking is far-sighted. Yet official US policy doesn’t necessarily reflect it and the earlier ‘reset’ with Russia and the later ‘pivot’ towards Asia were thought up in their own self-contained strategic bubbles.  In the EU, this type of thinking is quite absent from policy: Russia is narrowly viewed through a bilateral lens and there is no calibrating of policy towards the position of either Russia or the EU in the Pacific Century.  

Might superpower hubris lead Russia on a one-way track to becoming China's junior partner? Photo: (c) RIA Novosti/Sergei Guneev

On the other side of the coin (and the world), Yan Xuetong, one of China’s geo-strategic hawks, proposes in the ECFR debate book, China 3.0, that China and Russia should form a strategic alliance. There is already a large overlap in their world view, as can be detected in China and Russia’s ‘veto entente’ with its joint track record of vetoes in the Security Council (Myanmar, Zimbabwe, and Syria). Like Brzezinski in the US, Yan Xuetong doesn’t represent the official government line, which is more cautious. This move would be a big change for the Chinese because official policy on relations with Russia is informed by the principle of non-alignment. What could bring official policy closer to Yan’s viewpoint would be a move towards a containment strategy and China would need increase its number of allies. Actually, Yan Xuetong thinks the current Chinese policy has already failed to yield results and argues for the necessity of forming this alliance to ‘shift the world from unipolarity to bipolarity’, in short as a means to bring down the US faster  

Russia and China

The subtlety in Yan’s wording deserves our attention. He writes that the Russia-China alliance will bring about bipolarity, not multipolarity. Does he mean that an alliance with Russia would help elevate China to equal position with the US, rather than make Russia and other powers into equal poles in a more multipolar system?  If Yan’s use of bipolarity is to be interpreted that way, it would mean an instrumental alliance that helps China take the last step into the G-2 or bipolar order, leaving Russia behind in the second tier. 

‘Russia’s major strategic focus is still towards its Western partners, which still make up half its trade, but there is a growing realisation of the need to turn towards the Asian economic power house.’ 

This possible outcome of a strong Russia-China relationship worries some people in Russia. Sergey Karaganov reflects in an op-ed that Russia could become ‘an appendage of China – a warehouse of resources’. To avoid that fate, the country needs a larger-scale Asia strategy, which Karaganov coins as ‘project Siberia.’ This would ensure that investments filter into Russia’s remote Asian regions, not just from China but more broad-based, so that economic development simultaneously guarantees Russian sovereignty. 

These two extremes show the pull factor from West and East on Russia. Actual policy tends to end up in the middle ground, described by some as lack of strategic choice and others as necessary strategic flexibility 

Russia’s major strategic focus is still towards its Western partners, which still make up half its trade, but there is a growing realisation of the need to turn towards the Asian economic power house. Russia has joined the main multilateral institutions from the East Asia Summit, Six Party Talks on North Korea to Shanghai Cooperation Organisation (SCO), but the Russian impact in strategic Asian affairs is still limited. For example, SCO, set up by China and Russia jointly with Central Asia, reflects the gradual power erosion in China’s favour, as analyst Pavel Salin notes.  This was evident in 2008 when Russia called for the organisation to anoint its incursion into Georgia and for the establishment of two new autonomous republics (Abkhazia and South Ossetia). China, seeing repercussions for its own Taiwan-situation, blocked this by clever back-door diplomacy with Central Asian states.

Still, official policy is much more anti-Western than China-sceptic, as political scientist Igor Zevelev points out. For Russia, joining up with China to put a spoke in the wheels of the US seems more important.  China’s military growth and more muscular policy with its neighbours have not had a profound effect on Russia. In opinion polls on potential adversaries, the US outpaces China by 20%, so China can’t spook the public in Russia as it can in the US. ‘Russia continues to view China as an Asian neighbour and key economic partner, but not as a new global power’ says Zevelev. 

Russian thinking isn’t without its concerns about an uncertain future with China. Editor-in-chief of Russia in Global Affairs JournalFyodor Lukyanov, for example, highlighted the risks for Russia ‘in the growth of China’s economic potential and international status’. In a similar spirit of hedging bets, the Russian Navy participated for the first time in the US-hosted Pacific Rim Exercise 2012 (RIMPAC). 

In the end, Russia might not pivot anywhere, thus making neither American nor Chinese geostrategic dreams come true. Russia could remain in a strategic ostrich position between East and West in the years ahead. If this strategic flexibility is well orchestrated, it could turn out to give Russia short-term leverage both in the East and the West. Yet there is also a danger that when, and if, it looks up and East, it will see that its Asian neighbour China is a global power in a league of its own, a realisation which will have serious implications for Russia.       

Astana, December 2010. The OSCE summit is approaching an inconclusive end. In preparing the meeting’s final document, the parties seem incapable of reaching consensus on any of the several drafts, leaving the Kazakhstani government – the summit’s host – facing one of its worst nightmares: failure on the international stage. Just as the proceedings are drawing to a close, Silvio Berlusconi – then Italy’s Prime Minister – intervenes to negotiate a last-minute communiqué on ‘security in Eurasia.’ Pushing his colleagues to endorse the declaration, the Italian PM remarks that the document has the preliminary approval of the elder statesmen in both the West and the East – Berlusconi himself and Nursultan Nazarbayev, the president of Kazakhstan. Rather quickly, the plenary assembly approves the Astana Declaration; Berlusconi returns home to face his many political troubles; and Kazakhstan can chalk up another achievement in its long-term search for international legitimacy.

The Shalabayeva affair

Until recently, the Astana summit represented a rare public manifestation of one of the worst kept secrets in international affairs: the dangerous liaison between Berlusconi and Nazarbayev. In the last six weeks, however, the leaders’ personal ties have become the subject of public debate, when the Italian government facilitated the‘extraordinary rendition’ of family members of Nazarbayev’s principal opponent, Mukhtar Ablyazov.

On 29 May, Ablyazov’s wife, Alma Shalabayeva, and her six-year old daughter, were asleep in a villa in Rome; they were woken up in the middle of the night by a group of masked and armed men – variously said to be Italian intelligence agents or forces from the Ministry of the Interior – who said that they were looking for Mukhtar Ablyazov. Not finding him, they forcibly removed his wife and daughter from the house at gunpoint; and held them in custody pending deportation. Following a remarkably speedy expulsion process, on 31 May mother and daughter were forced by the Italian police onto a private jet and deported to Kazakhstan, on a special flight provided by the Kazakhstani government, with the Kazakhstani ambassador to Italy on board. The Italian authorities claimed there were irregularities in Shalabayeva’s documents. However, Shalabeyeva’s lawyers have since provided evidence that her documents were legitimate; Mrs Shalabayeva and her daughter were living in Italy under an EU residence permit issued by the government of Latvia. They are currently being held in precautionary custody in Almaty.

The arrest of the family of a Kazakhstani opposition politician in the middle of Rome - and subsequent expatriation - raise serious concerns about how the EU deals with Central Asian dictatorships. Photo: ablyazov.org

On July 12th,  the Italian government retroactively rescinded the expulsion order, in belated recognition that the forced return had violated Italian law.

A foreign policy disaster

Courtesy of the Italian government – or the Italian Police, if you believe Angelino Alfano, Italy’s Deputy PM, Minister of Interior Affairs and political secretary of Berlusconi’s party – Nazarbayev now holds a very valuable trump card in his political fight against Mukhtar Ablyazov. The Italian press, is demanding Alfano’s resignation, and has quickly identified Silvio Berlusconi as the political mastermind of the Shalabayeva affair, a foreign policy disaster that is now threatening the already shaky foundations of the government headed by Enrico Letta.

Cosy relationships

The Shalabayeva affair, however, represents only the tip of the iceberg in the murky connections between Nazarbayev and Berlusconi, who share a fondness for conducting state business on the basis of long-standing friendships and personal associations with foreign leaders.

These personal political relationships have determined Kazakhstan’s approach to Central Asian politics throughout the period in which first-generation leaders ruled the other regional states. The long-standing friendship between Nazarbayev and the late Saparmurat Niyazov dominated Kazakhstani-Turkmenistani relations; and Nazarbayev’s personal ties to Askar Akaev similarly dominated the interaction between Kazakhstan and Kyrgyzstan, until the regime change in Bishkek (2005). With the notable exception of Berlusconi, however, Nazarbayev never managed to establish personal relations with his Western counterparts; he had to content himself with staged photo-calls; flattering enough for a leader obsessed with his international image.

L’amico

Berlusconi’s foreign policy was similarly personal. He has often explained Italy’s involvement in the 2003 occupation of Iraq as the result of his personal support for the policies of l’amico George (former US President George W. Bush) and l’amico Tony (former British PM Tony Blair). The former Italian PM rarely failed to extend the hand of friendship to less presentable heads of state: the rapprochement between Italy and Libya was sealed by the very personal relationship that Berlusconi established with Muammar al-Gaddafi, who was always granted special treatment when travelling to Rome.

In dealing with Central Asian dictators, Berlusconi tried hard to keep his friendships out of sight, although not always successfully. The embarrassment of the Berlusconi government was particularly visible in 2009, when Turkmenistani president Gurbanguly Berdymuhamedov travelled to Italy. The Palazzo Chigi repeatedly denied that the visit was actually happening, and endeavoured to conceal Berdymuhamedov’s official schedule to Italian news outlets.

Obfuscation was never a part of Italian-Kazakhstani relations because, In Berlusconi’s view of geopolitics, the energy ties between Rome and Astana were too critical to be sacrificed on the altar of international respectability. Kazakhstan – the European Union’s fifth largest partner in the oil sector – is Italy’s main commercial partner in post-Soviet Central Asia, and the recipient of significant FDI in the otherwise struggling Italian industrial sector.

Quid pro quo

ENI, the Italian energy conglomerate (and, some would say, the economic arm of berlusconismo)in particular, has substantial economic interests in Kazakhstan, including direct involvement in the onshore Karachaganak field, and the offshore Kashagan project, both located in Western Kazakhstan. ENI’s involvement in Kazakhstan did not come without controversy: Paolo Scaroni, the long-term CEO of ENI, has been accused of paying bribes to family associates of Nazarbayev, to facilitate the granting of concessions to operate in the Kashagan project.

A photo of smiling 'amici', proudly displayed on Nazarbayev's personal website. Photo: akorda.kz

Friendly ties with Nazarbayev have so far served the economic purposes of Berlusconi and his associates; and helped improve Nazarbayev’s international standing. The two leaders are known to enjoy each other’s company, giving rise to much press speculation about what they get up to: the Italian press is rife with rumours surrounding Berlusconi’s stay in Nazarbayev’s dacha; and Kazakhstan’s independent media outlet Respublika has been reporting on a July 2013 informal ‘summit’ held in Sardinia, where Nazarbayev was holidaying in a villa belonging to one of Berlusconi’s cronies.

A cover-up

The Shalabayeva affair is unpleasant, but so is the attempt at a cover-up. Berlusconi and Nazarbayev have both adopted a similarly condescending posture when publicly commenting on the event in question. Berlusconi flatly denied his personal association with Nazarbayev, remarking that, in ten years as head of government, he had only visited Kazakhstan on one occasion. Nazarbayev has so far refused to comment on the affair: beyond criticism, as he sees it, he directed the Kazakhstani Ministry of Foreign Affairs and the Embassy in Rome to address the many media requests concerning the ‘extraordinary rendition’ of Mukhtar Ablyazov’s wife and daughter.

Silvio Berlusconi himself has nothing to lose from the forced extradition of Ablyazov’s family. His own party has no choice but to cover up his responsibility in the affair, as criticism of Berlusconi’s political decisions is not an option for members of the Popolo della Libertà. Berlusconi’s principal ally in the current government, the bitterly divided Partito Democratico, has no interest in prompting a government crisis; and has so far channelled its anger towards Angelino Alfano. Italy’s international reputation, on the other hand, has certainly been compromised by the Shalabayeva affair: the political and personal friendship of one Italian politician, for a foreign dictator with a record of human rights abuses, has allowed a democratic European state to engage in an act of illegal rendition.

The Italian Government colluded with a Central Asian dictator to remove his political opponent

One would not wish to paint Mukhtar Ablyazov as a man whiter than white – a warrant for his arrest on fraud charges, has been issued by the UK authorities - but, nevertheless, the Italian Government colluded with a Central Asian dictator to remove his political opponent. Even as Ablyazov is becoming less influential in Kazakstani politics, the Nazarbayev government is visibly obsessed with persecuting him, his family, and his political associates. The international pursuit of Ablyazov and his circle – besides Mrs Shalabayeva and her daughter, the Kazakhstani government has also requested extraditions of Ablyazov’s associates from Spain and Poland– is a further indication of the fragility of the Kazakhstani power system. The president’s age, his frail health and unwillingness to nominate a successor have fanned speculation about Nazarbayev’s political succession. Clearly, in hounding Albyazov, the aim of the regime is to prevent his involvement in the political process of a post-Nazarbayev era.

The Shalabayeva affair is nothing new in Central Asian politics; CIS governments have been regularly complying with each other’s requests for the extradition of opponents, and kidnapping and violence have often been used. The governments of Tajikistan and Uzbekistan have had great success with such methods. What is new, is the more unsettling fact that extraordinary rendition is now becoming common practice well beyond the CIS, with European states much less inclined to resist the extradition requests formulated by Central Asian republics, and post-Soviet states); thereby demonstrating scant regard for individuals likely to be tortured or persecuted post-extradition..

Realpolitik is dictating the protection of Western energy interests

The Shalabayeva affair highlights the inherent contradiction underpinning the uncritical relations that Western European democracies, and the wider European Union, have established with Central Asia’s dictatorships: paying lip service to human rights, while posing for photo-calls. Realpolitik is dictating the protection of Western energy interests, and simultaneously protecting the interests of dictators.

Kazakh banking is in a state of disarray, as banks assimilate the consequences of a recent 20% devaluation of the tenge, a surprise bid by the Central Bank to maintain export competitiveness with Russia, the country’s largest market. As a result, and notwithstanding Kazakhstan’s membership of the Customs Union, which includes Russia and Belarus, companies and individuals have had to pay a high price in terms of more expensive imports from Russia and the Russian bloc. The government, moreover, wants to deal with the consequences of its economic crisis of 2008, and is looking hard at the banking sector. Some restructured state banks are set to be sold to the private sector, with owners promising to initiate a much-needed banking consolidation in Kazakhstan.

Kenges Rakishev - one of the well-connected businessmen vying for control of BTA Bank. CC Kenges RakishevKazakhstan has 38 banks, but this number could be substantially reduced if some mergers go through. The catalysts in the process of banking consolidation are: local oligarch Bulat Utemuratov, who is currently seeking to push together Alliance and Temir banks; and Kazkomertzbank, with its partner Kenges Rakishev, who is seeking to acquire BTA. Both deals are currently under negotiation with Samruk-Kazyna, the sovereign wealth fund, which owns the stakes.

Both Utemuratov and Rakishev are well-connected confidants of the president. Utemuratov is married to the president’s daughter Dinara, while Rakishev is married to the daughter of Imangali Tasmagambetov, the mayor of Astana, and a former prime minister in the early 2000s. Rakishev, who is 34, owns the SAT conglomerate, and is regarded as a young turk in the business establishment.

Background

Banks in Kazakhstan can broadly be divided into four groups. Some Kazakh banks suffered badly post-2008, and were taken over either by Samruk-Kazyna or the government directly; these banks are routinely described as ‘restructured banks,’ and they are under close watch. Their balance sheets need to be cleaned up, with some three-quarters of their loans non-performing.

Even those first-tier banks that experienced difficulties in the crisis but managed to ride it out without support have NPLs (Non Performing Loans) of between 15% and 40% of their balance sheets.

The third tier of some 15 banks has found market opportunities in the carnage that was the crisis; and they have started growing their business. Eurasia is one such bank, with between 5% and 15% of NPLs.

The final group of banks entered the country after the crisis, and they have remained relatively unscathed from the economic downturn. Their NPLs stand at less than 5%. 

Market growth

Corporates are proving a rich source of revenue for banks; and the oil and gas, mining and infrastructure sectors have all expanded with the economy. However, banking for small- and medium-sized enterprises, on the other hand, has seen little growth, and is experiencing marginal stagnation, a result of regulatory hurdles and poor credit worthiness.

The highlight for Kazakh banking has been the retail sector, which has grown considerably as GDP has increased and the general population has started consuming again. The rate of growth over the last four years has been impressive, and this has resulted in a boom in car loans, credit cards, and mortgage business.

‘The marketplace and the banking population show that Kazakhstan is over-banked.’

Over-banked

Looking at this mixed picture, Alexander Kottmann, PWC’s financial services director in Kazakhstan, thinks consolidation is a given: 'We will see some consolidation happening. The marketplace and the banking population show that Kazakhstan is over-banked.’ The introduction of Basel Three capital ratios will push smaller banks into the arms of the larger, he says. ‘If you look at the proposed capital increases, this is quite significant, and by full introduction in 2019 it will require many banks to go to the market to look for additional equity funding, which is quite difficult given the overall state of the Kazakh banking sector. They compete for equity not only against other banks but also other industries, which is obviously difficult if there's a more promising return for investors.’

Potential buyers have deep pockets. Bulat Utemuratov, for example, who has bought an 80% stake in state-owned Temir Bank, as a prelude to buying Alliance Bank and merging the two, is one of Kazakhstan’s long-standing banking oligarchs. He not only controls Forte Bank and Kassa Nova Bank, but is also involved with Verny Capital, a well financed private equity fund, which owns a 1.33% stake in Glencore Xstrata, the massive commodities and natural resources trader and operator. Verny has bank management skills – the senior partner is Timur Isatayev, former managing director of ATF Bank – and these will be harnessed to manage the merger of Temir and Alliance.

Wheeler-dealing

Verny, which has assets in a wide range of local sectors including hotels, is funded by the proceeds of what has been termed the Kazakh ‘banking deal of the century,’ when Utemuratov sold ATF Bank, the fifth largest lender by assets, to the Italian UniCredito for £1.25 billion at the height of the credit boom, in 2007. In late 2012, UniCredito offloaded ATF, which had been founded by Utemuratov, for no more than the size of its equity, valued at less than £300m, to KazNitrogenGaz, the vehicle of Galimzhan Yesenov, the son-in-law of Akhmetzhan Yesimov, the influential mayor of Almaty.

BTA Headquarters in Kazakhstan. Though widely known as a retail bank, BTA Bank is suffering from a mass of bad loans. CC Esetok

New money is also set to enter the banking market with the sale to Kenges Rakishev of 46.5% of BTA Bank. Rakishev’s interests, through his SAT conglomerate, are spread around engineering, technology and natural resources, rather than financial services. Rakishev has formed a partnership with KazKommertsBank (KKB), where KKB has an interest in a 4% stake held by Samruk-Kazyna, to give it overall control. Local analysts say the deal cost the two parties between £120m and £268m.

Bad loans

The process of consolidation, however, is unlikely to be straightforward for two reasons. First, the outstanding bad loan picture is still far from clear, with daily surprises making the prospect of improving the loan book, everywhere more arduous. Bad loans are a feature of every Kazakh bank loan book – a legacy of an unresolved pre-crisis property boom -– with an average of 30% of bad loans. Second, an organisational restructuring is required for both Temir and Alliance banks, involving staff and IT systems.

‘This minefield hasn’t been cleared yet and mines keep exploding.’

The rapid deterioration of the bad loan portfolio was outlined by Timur Issatayev, who explained to a group of analysts that, ‘This minefield hasn’t been cleared yet and mines keep exploding.’ Two of the banks’ major state borrowers in the agricultural sector, he said, were ‘about to declare bankruptcy,’ leading to a non-payment of £60m worth of loans. The combined Alliance and Temir banks will also have an extensive property portfolio, ranging from prime real estate to countryside greenfield investments. Issatayev, however, warned that one property, which was on the books at 30m tenge, could be sold for no more than 7m tenge, while another that was on the books at 100m tenge could be sold for just 50m tenge. He said, ‘There are huge holdings of real estate which all banks have on their balance sheets. We realise the challenges; we will only depress the market by putting up for sale half of each bank. No one has ever done something of this magnitude before in Kazakhstan.’

‘No one has ever done something of this magnitude before in Kazakhstan.’

Incompatible IT systems

Overstaffing and incompatible IT systems also confront the managers of Verny, tasked with pushing together Temir and Alliance. The greater strategic challenge is building a unified IT system says Guram Andronikashvili, CEO of Forte Bank (Kazakhstan): ‘It is a two-step process. Alliance runs two systems, one for retail and one for corporate. Temir runs an outdated system. The first challenge will be to move all the business of Alliance into a new expanded banking system, then put the Temir business into the Alliance platform. The IT platform at Alliance also needs to be improved to accept Temir.’ Alliance managers are driving a process that will result in Temir’s absorption, says Andronikashvili. ‘The size of tasks Alliance is facing is much bigger. The IT expertise required for Alliance is much greater, so that is the focus.’

Moreover, the planned job-cuts threaten to create a storm in the country say the bank’s leaders. Verny is planning to dispense with 3,500 staff out of a combined total of 6,100. Andronikashvili says, ‘A huge challenge is disposing of staff. This would be an unprecedented shedding of labour.’

BTA Bank, whose assets were put at £6.2 billion in October 2013, continues to track down the loans made by former CEO Mukhtar Ablyazov.

BTA and KKB

The likely structure of the merger between BTA and KKB remains mired in concerns about the scale of the bad loans portfolio. BTA bank, whose assets were put at £6.2 billion in October 2013, continues to track down the loans made by former CEO Mukhtar Ablyazov, who is a fugitive currently in jail in France, and facing extradition to Russia. He is charged with perpetrating a massive fraud on the bank. Pavel Prosyankin, the BTA board consultant (and former managing director) who has been pursuing the loans over the last four years, says that ‘there is no exact value placed on what can be recovered.’  He says that ‘no more than a few hundred million dollars’ worth of loans have been turned into liquid cash. Chris Hardman, the lawyer at Hogan Lovells, the London lawyers hired to pursue Ablyazov, says that the former CEO made £8.9 billion worth of fraudulent loans.

Mukhtar Ablyazov, currently in prison in France, may have made up to £8.9bn in fraudulent loads. CC 1612TV

One local banker speculated that Ablyazov-related loans may be amalgamated with other BTA bad loans and placed into a ‘bad bank’ inside BTA. KKB would put BTA’s performing loan portfolio into a ‘good bank’ based round KKB. Prosyankin says, ‘they may function as two separate banks for some time. It doesn’t affect the asset recovery. The new shareholders have to decide whether the experts at KKB should examine the bad loan book at BTA that is not Ablyazov-related. KKB has a great deal of experience, as the largest bank, in dealing with bad loans in Kazakhstan.’

Merger costs will be saved if BTA is retained as a retail-facing brand, and KKB focused on corporates, says Anton Soroko, an analyst from FINAM Investment Holding: ‘The most likely scenario of this deal would be to divide the business between the two owners into retail and corporate ones. This way there will be no need to spend money on a re-branding, since BTA bank is well known in Kazakhstan, and the new owners should build on the brand's visibility.’

NPLs present a particular problem to Kazakh banks because tax rules make it particularly difficult to allow banks to wipe off bad loans.

A write off

NPLs present a particular problem to Kazakh banks because esoteric tax rules make it particularly difficult for banks to wipe off bad loans. According to one Kazakh banker, ‘In most jurisdictions, banks say, ‘We are never going to get back the money we lent so we’ll write it off; this is the difference between a provision and a write off… when you write it off, that’s it. In most countries, when you write it off, eventually your NPL rate comes down. But in Kazakhstan, if you take a write off, under current rules, they make you pay back the 20% of the tax benefit; in short it costs you money to do a write off.’  As a result of this rule, he says, ‘No one in Kazakhstan writes anything off; they just sit there forever with this NPL. When our competitors deem something unrecoverable, they write it off and move on. Now, if a Kazakh bank has a 30% NPL rate and a Russian bank has a 8% NPL rate, some would say on that basis that the problem in Kazakhstan is four times worse than in Russia. But Russian banks are able to include write-offs over time. Kazakh banks are being unfairly penalised against their peers because the statistics look worse than they are on a relative basis.’

The broader picture

The growing consumer market remains of keen interest to all banks. Eurasian Bank, for example, which focuses on the retail consumer, has seen considerable growth in mortgages, personal and car loans, says Michael Eggleton, the CEO. This rate of general consumer growth, however, causes concerns for Charles Seville at Fitch Ratings, ‘household debt to GDP is very low compared to the developed world, but the level of household debt is rising, and the share of debt to disposable income is rising to high levels. It is not frightening yet, but we could see problems in the banks’ loan books if this growth in consumer lending continues.’

Visual map of Kazakhstan's economy by sector. Oil and Gas continue to predominate. CC Haussmann, Cesar Hidalgo, et.al.

How will Kazakhstan’s banks handle the recent 20% in the devaluation of the tenge? Pavel Prosyankin says, ‘Banks that are in compliance with their regulatory requirements for currency exposure, shouldn’t be affected. But longer term, it may affect their largest clients and it will squeeze their liquidity positions. Clients may then turn to the banks for additional lending, but the banks may not have the resources to lend. The devaluation may have a knock-on effect on their deposit base, and that could cause a run on a weak bank.’

‘We don’t understand why anyone would risk money in this way.’

While the underlying Kazakh economy remains strong, with annual 5% GDP growth, based on a high oil price, scepticism about current banking sector manoeuvres pervades the local market. Almas Chukin, a former executive with Kazyna Capital Management, says ‘We are puzzled. We don’t understand why anyone would risk money in this way. The banks the government is selling are all in very bad shape. Why are people prepared to risk so much money trying to make money? Most of us are very doubtful. We don’t know what their motives are.’ 

It's not surprising that some of the states in Central Asia spy on people. Authoritarianism across the world relies on the intrusion into, and lack thereof, of a private sphere. From the KGB to their modern incarnations, the autocracies in the region continue to rely on state surveillance and other entrenched means of political control to stay in power.

New technologies and communications means, heralded as great tools of progress, are being met the world over with censorship and surveillance. At best this minimises the utility of these technologies; at worst, it turns them into tools for unprecedented state spying and repression.   

What may be somewhat surprising in Central Asia is the sophistication of some of the surveillance technologies that are being used, and the amount of foreign companies supplying them. An investigation into surveillance in Central Asia conducted by Privacy International–the findings of which were recently released–raise serious questions as to how democratic progress stands a chance at all in Central Asia in the face of such a comprehensive system of political control facilitated by state surveillance. It also exposes the complexities, dangers and unaccountable nature of a private surveillance industry, and the governments and companies that facilitate their activities. 

The global surveillance industry 

There is a growing but intentionally murky and unquantifiable private industry that is selling technologies to governments to allow them to monitor individuals and society. Initially developed and traded from countries with significant ICT (information and communications technology) and security sectors, these technologies are used across the world by law enforcement and intelligence agencies to listen to phone calls, read emails, view individuals' web history, and gain a complete overview of their social connections. Some technologies allow authorities to turn on the webcam and microphone of a device.

Its growth is being driven by two factors. As more data about everyone's lives are transmitting somewhere across networks or are being stored in devices or servers, it greatly increases the intrusive and revelatory nature of surveillance and its appeal to governments and the security industry. Secondly, as networks and devices are themselves spreading and become increasingly sophisticated, authorities are seeking new and advanced solutions for accessing them.

The outcome of this growth–combined with outdated legal regimes incapable of regulating the use and sale of many of these technologies–is an unaccountable industry facilitating unaccountable surveillance practices.

Surveillance in Central Asia

In many respects–and similarly to other places across the world–the legal framework governing electronic surveillance practices in Central Asia is either inadequate, nonexistent or not in compliance with international human rights standards. A lack of transparency within the industry itself, reliant upon non-disclosure agreements, undermines any form of accountability.

This has predictable consequences. In Uzbekistan, testimonies show how human rights activists’ emails and calls are being targeted by what is believed to be their own government in an effort to monitor and silence them and their activities, in some cases having transcripts of their communications presented to them and receiving visits from security forces following phone calls. One activist, Mutabar Tadjibayeva–now based in France–details her repeated interrogation by Uzbek agents after discussing the infamous 2005 Andijan massacre over the phone. What modern surveillance techniques allow however, isn't just an insight into an individual, but that of their entire network, and of society itself.  

Understanding how authorities obtain these capabilities is key to finding potential solutions in what is a technical and complicated area. There are various technologies identified as having been sold to the region which would allow authorities to do this.

In one of the most glaring examples, two NASDAQ-listed multinationals operating out of Israel have supplied sophisticated spying technology directly to the secret police of Kazakhstan and Uzbekistan. Verint Israel and NICE Systems have both supplied facilities in these countries from which agents of the SNB in Uzbekistan and KNB in Kazakhstan–the two successor agencies to the KGB–receive, request and analyse intercepted phone calls, mobiles calls and internet data. 

These monitoring centres aim to allow analysts of two agencies well documented as involved in widescale abuses of human rights access to the communications of every person living in the country. Verint Israel even attempted to facilitate the Uzbek SNB trying to crack encrypted secure web traffic such as banking and emails. The purchase of these technologies isn't simply a one-off; both companies have had surveillance related project in the countries since the early 2000s, and in addition to the technology itself, provide training, maintenance, and technical support.  

Large multinational telecommunications companies also provide Central Asian governments with surveillance capabilities because of legal mandates placed upon them in order to operate. Across Kazakhstan, for example, a series of monitoring points exist which facilitate access and interception of communications. In some cases, this architecture allows the authorities direct access to telecommunications networks without any form of oversight by judicial bodies or the telecommunications operator itself. This means that equipment and services provided by large multinational vendors and operators is being used for surveillance with their knowledge and assistance.

Need for address

The ability to communicate freely and use modern ICTs free from state surveillance is essential to ensuring economic, political, and social progress in places such as Central Asia. Ensuring that this isn't destroyed by modern surveillance techniques requires a multifaceted approach involving technological, policy-based and legal solutions.

At a minimum, it requires that international bodies and governments must not approve the export of technologies the use of which risks undermining human rights. But the private sector itself must also act. It should not be left up to governments to regulate trade; commercial actors must ensure that their activities and sales do not undermine international human rights, and that their customers data is free from arbitrary or illegal state surveillance. 

There of course exist many disincentives for this. Central Asia is not alone in having systems for electronic surveillance of communications. As the Snowden disclosures show, even liberal democracies with established systems of oversight are engaging in state surveillance on an unprecedented scale, and on a highly dubious legal footing. But 'what-about-ism' does not detract from the fact that the wrongdoing of one party does not legitimise that of another.

For too long in Central Asia, energy, economic, strategic, and security interests have meant that foreign governments have substantially ignored human rights abuses and democratisation as priority areas in the region. Indeed, many foreign interests can be guaranteed by regime stability. As terrorism and trafficking–two legitimate issues in the area–are prioritized, and as economic opportunities present themselves, the incentive for governments to allow or actively promote state surveillance capabilities will only grow.

This however would be woefully short-sighted. Effectively countering such issues is best done across the long term through democratization, ensuring representation and economic rights, good governance, and respect for human rights. Security, far from being something which needs to be balanced against these, is something that is intimately linked. Enabling authorities such as those in Central Asia with highly-revelatory surveillance capabilities will only enable political control and all but crush individual privacy–along with political and social progress. 

Project design for Tashkent City's Lot 3, a shopping centre with two 30-storey buildings. Source: Tashkent City.Two years after the death of Islam Karimov, Uzbekistan’s first president, the once impenetrable country has shown interest in opening up to international investors. Enthusiasts regard this as the “Uzbek spring”, a new beginning for the country under its new leader, Shavkat Mirziyoyev. Others have pointed to the sluggish and inconsistent pace of liberal reforms in the Central Asian state, which could just be used as façade to attract foreign capital.

Take Tashkent City, a government-sponsored project that aims to develop a high-tech business hub in Uzbekistan’s capital at a total cost of around $1.3 billion. British, Korean and German companies were awarded the main lots for construction. This flagship project seeks, in the words of analyst Dilmira Matyakubova, to “rebrand Uzbekistan as a country interested in political reform, economic investment, and friendly relations with the rest of the world”. As Mirziyoyev, who is overseeing the project, stated in October 2017: “Tashkent City is a project which we will use to announce ourselves to the international community.”

But closer scrutiny into one of the foreign investors into Tashkent City reveals a complex network of companies and individuals closely linked to Central Asia, casting doubt on the positive news that Uzbekistan’s official media initially trumpeted. Hyper Partners GmbH, though heralded as a German investor for Tashkent City’s Lot 3, seems to belong to a network of Uighur businessmen, partnering with a Kazakh entrepreneur currently facing fraud charges. Neither this company, nor others associated with its public directors, has any record of experience of large-scale construction projects.

The Uzbek government’s desire to showcase its friendliness to foreign investors led journalists to investigate the ownership of the companies that won the tenders to develop Tashkent City, unveiling a complex network of companies and individuals which operate without a clear financial rationale. With the help of legal experts in Germany, we were able to disentangle the threads and highlight the network behind Hyper Partners GmbH, one of Tashkent City’s main investors and foreign contractors.

The German front

Hyper Partners, a company registered in Germany and contracted to develop Tashkent City’s Lot 3 – a shopping centre with two 30-storey towers – is everything but German.

Financial data shows that since 3 August 2018 the company’s sole owner has been Mustafa Palvan, who was 18 when he assumed the company’s directorship and 100% of the shares. The company’s capital amounts to €25,000, the minimum amount required to register a company in Germany. Research suggests that relatives and their business partners, not young Mustafa, could be the ones really in charge of Hyper Partners. There seems to be little justification or rationale for the Tashkent City project management in awarding a tender on a large project to a 19-year-old.

Shareholder list for Hyper Partners GmbH shows Mustafa Palvan, now 19, as the main shareholder. The founders of Hyper Partners are Waleri Wolf, 54, and Evgueni Rosenberg, 61. It’s not clear what nationality Wolf and Rosenberg hold, but the spelling of their names suggests a Russophone origin. Wolf and Rosenberg registered the company on 26 February 2018.

The two had previously founded two other companies, W&R Handelsgesellschaft GmbH in November 2008 and Statuswest GmbH in August 2016. Since October 2018, all three companies have been registered at the same address: Assar-Gabrielsson-Straße 10-14, in Dietzenbach, Germany.

Judging by the financial statements of W&R, the decade-long partnership between Wolf and Rosenberg has been a rocky road. The company mainly sold bathroom supplies. Data from the German State Trade Registry of Companies shows that W&R piled up debts.

A German legal expert, who agreed to analyse the data on condition of anonymity, said that W&R appeared to be on the brink of bankruptcy until a Kazakhstani shareholder appeared three years ago.

Data from German Trade Registry shows that Baurzhan Baimukhanov took a third of the shares in W&R Handelsgesellschaft GmbH in 2015. In 2015, Baurzhan N. Baimukhanov, a Kazakhstani national, became a shareholder in W&R, acquiring one-third of the shares. Following Baimukhanov’s investment, the company’s troubled finances were saved by a loan.

According to the records of the German State Registry, the company declared a €78,419 debt, marked “740 VB gg. Gesellschaftern”. The company’s previous debts towards Wolf and Rosenberg were always marked “730 VB gg. Gesellschaftern”. A shareholder (Gesellschaftern in German) provided the new loan.

While W&R kept logging growing debt in its balance sheets in 2015, the following year the debt was slashed by around €70,000, without clarification in the income tables of the company’s balance sheet. According to the legal expert, this warrants further analysis:

“There are two possible scenarios here: either a shareholder gave the company a ‘credit’ of at least €78,419, or a contract was signed, without a cash transaction, but a promise of repayment. If a credit was given, it's strange that the money never showed up on the balance sheet. If this scenario is correct, the credited amount must have been spent immediately.”

In 2016, W&R’s debt was reduced to €156,336 from €245,462 the previous year.

“The company did not have the capital to reduce the debt in 2016, so the question remains: who paid in €89,126 to settle the debt? In other words, almost €90,000 circulated through the company without a public trace,” the expert concluded.

Wolf and Rosenberg’s associate Baimukhanov is a Kazakhstani businessman with close relations to Chinese business interests. In 2015-2016, Baimukhanov’s small construction company Bazis Alatau, registered in Kazakhstan, worked with a Chinese company, Zhongfu, to bid for a regional government project in Kazakhstan. We can confirm Baimukhanov’s identity from the Kazakh state registry of taxpayers, where his date of birth is consistent with the documentation from the German Trade Registry.

Earlier this year, Baimukhanov was arrested. On 20 February he was detained together with his business partner G. Nabiyeva and charged with fraud of one billion tenge (€2.4 million) in relation to building contracts and leasing land, and with attempting to issue illegal gambling permits in the Khorgos International Centre for Border Cooperation, a joint business project that stretches over both sides of the Chinese-Kazakh border. On 26 February 2018, Baimukhanov’s business partners Wolf and Rosenberg founded Hyper Partners GmbH.

The Uighur connection

Here, this story turns towards the border between Xinjiang and Kazakhstan, the geographic crux where ethnic identities merge and business connections intertwine.

In July 2016, a Dubai resident, Kazakhstani national and ethnic Uighur with the name Abdukadyr Khabibula became a major shareholder in W&R. Khabibula and Baimukhanov each took control of 40% of the company, leaving Wolf and Rosenberg with a 10% stake each. Two weeks after this transaction, Wolf and Rosenberg registered a new company, Statuswest GmbH, together with a resident of the German town of Dietzenbach by the name of Palvan Habibullah. The company was registered at the same address as W&R. Palvan Habibullah owned €20,000 of the shares, or 80%, and Rosenberg and Wolf controlled €2,500 worth of shares each.

The new Tashkent City project from above. Source: Tashkent City. Palvan Habibullah not only has a strikingly similar surname to Abdukadyr Khabibula, who took over W&R – he was also born on the exact same day, 16 February 1964. Cross-referencing through different jurisdictions and the matching date of birth suggest that Palvan Habibullah and Adukadyr Khabibula could be the same person, though differences and mistakes in spelling in the German business registry make it difficult to establish this with any certainty. Several iterations of this person’s name appear in business registries around the world. Here we chose to use the official spelling of the Kazakhstani citizen Abdukadyr Khabibulla, as registered in the UK Companies House database.

In 2014, Khabibulla founded a new company, Palwan Limited, in London. Palwan is the German spelling of the name Palvan, the name Khabibulla may be using as a German resident. But in the UK registry, Khabibulla figures as a UK resident. Palwan Limited has remained dormant, and counts possible relatives of Khabibulla among its shareholders: Aibibula Paliwanmuhaimaiti (born August 1991), a UK resident and Chinese national; Rezi Maliya (born April 1967), UK resident, Chinese national; Aibibula Yamimaiti; and Aibibula Nuerbiya.

Two of the shareholders in Palwan Limited, Abibulla Paliwanmuhaimaiti and Rezi Maliya, are also shareholders and directors of another company, AKA London Trading Limited (later renamed AKA London Limited). This company was registered on 29 October 2015 in the British town of Kingston upon Thames. Abibula Nuermaimaiti (born June 1989), a UK resident and Chinese citizen, is also listed among the company’s shareholders.

With companies registered in Dubai, Kyrgyzstan, London, Germany and Turkey, holding Chinese and Kazakh passports, and with a variety of residencies, these directors and major shareholders are part of an international Uighur community that makes use of different jurisdictions and investment options across Europe and Asia. According to public accounts, some time between in 2015 and 2016, AKA London Trading borrowed around £2 million from a man named Abdurkadyr Khabibula, in all probability a spelling mistake of Khabibulla’s full name, since it was disclosed in the accounts that he was a “related party to the directors” of AKA London Trading Limited.

This UK company also borrowed around £7.1 million from Palvan Insaat Turizm Lojistik San. TIC. Ltd, a Turkey-registered company related to the Uighur group, between 2015 and 2016. Aibibula Paliwanmuhaimaiti, a director of the UK company Palwan Limited, is registered as the head of this Turkish company, according to information from Turkey’s Yellow Pages business directory. The Palvan Insaat company is located in a residential area of Istanbul. A cursory look through Google Street View and a thorough search failed to return any details of business activity at the address.

The business address of Palvan Insaat Turizm Lojistik San. TIC. Ltd. Source: Google Streetview. A Dubai subsidiary, AKA International DMCC, owned by Khabibulla and two other Palwan Limited shareholders, appears to be the only company among this network with an actual real estate portfolio. Indeed, this company invested in a high-tech project in Kyrgyzstan, Bishkek Smart City. This government-led project aimed to install cameras for road safety and surveillance, utilising facial recognition technology to identify people of interest to the authorities. According to the Kyrgyz government, a Chinese state investment fund, Beijing China Veterans Lingxin Capital Management, is acting as the main investor, with Huawei Technologies providing implementation. According to the January 2018 deal, the Beijing China fund will provide $51 million of the investment. The Kyrgyz government was due to provide the remaining funds ($9 million), but backed out at the last minute. According to the director of the Investment Promotion and Protection Agency of Kyrgyz Republic, Huawei identified a new partner ready to invest these funds: a Kyrgyz-registered company, AKA Invest.

At this time, AKA’s investment and ownership came under scrutiny by Kyrgyz investigative websites Kloop.kg and Respublika KG. When contacted by Kloop, AKA Invest admitted to being a subsidiary of the Dubai company AKA International DMCC, and stated that it is owned by three ethnic Uighurs: Abdukadyr Khabibulla from Kazakhstan and Aibula Nuermaimaiti and Aibula Palivanmukamiati, both from China. At the time, AKA Invest’s office was located at the address of a cafe in Bishkek, Kyrgyzstan’s capital. The company’s clerk told Kloop journalists: “You can ask your questions there [in the cafe] and they will pass them on to us.” It seems an unlikely base from which to make a $9 million investment in a high-tech urban development project, still more so given that these Uighur businessmen are also investing in another – Tashkent City.

While Wolf and Rosenberg served as the public directors for the German companies, Palvan Habibullah obtained 60% of the shares in Statuswest in 2016. According to data from the German State Registry of Companies, Statuswest took a loan of €500,000 in 2016 from an unknown source. Given the paucity of their assets, it is unlikely that the loan came from Wolf and Rosenberg. After the loan, Khabibulla/Habibullah appeared in the company’s documents as a 60% shareholder.

Shareholders in W&R Handelsgesellschaft GmbH, according to German Trade Registry.

Between 2017 and 2018, control of these companies was ceded to family members of Khabibulla, Wolf and Rosenberg. W&R is now owned by two men in their thirties named Wolf and Rosenberg. After the August 2018 buyout, Hyper Partners’ main shareholder is now 19-year-old Mustafa Palvan.

Thomas Mayne, an anti-corruption campaigner and author of a recent report on asset recovery and return, said:

“This shows how easily it is to obscure the true owners of a project – the beneficial owners – using companies registered abroad. The project certainly raises many red flags: the source of the funds is unclear, and a 19-year-old is unlikely to be the true beneficial owner of the company responsible for the Tashkent City shopping centre project.”

With complex rounds of loans and cash, this network of German companies could be used as a shell for opaque investments. The difficulty of identifying the investors and shareholders of Hyper Partners GmbH, Abdukadyr Khabibulla and the other businessmen may be no accident.

Concealing their identity and affiliations in relation to this project would have been a plausible response to the scrutiny that arose following the investigations from Kloop.kg and other watchdogs. Similarly, Baimukhanov’s initial role in W&R and the fact that Hyper Partners was founded less than one week after he was arrested on fraud charges in February this year could suggest that his role as the middleman between the project and the unknown beneficial owners of these companies was spoiled.

An expert with over a decade of experience in major financial crime cases in Europe and Central Asia, who agreed to comment on the case on the condition of anonymity, said the German front companies raised suspicion:

“The commercial rationale for funding a Germany-based company through unsecured personal loans originating from a high-risk jurisdiction raises eyebrows. Looking at the data, the money from such unsecured loans would then go from Germany to Uzbekistan. What would be the benefit of [this circle of transactions] other than guaranteeing a degree of anonymity for the ultimate beneficiaries of the investment?”

Funds are transiting from Central Asia through German companies back into Central Asia. These funds are now poised to be funnelled back into Uzbekistan through Hyper Partners’ investment in Tashkent City. Two key questions remain: why did the Uighur businessmen set their companies up in this way? And are these men the end of the chain or are they another front for other figures behind the money flows?

Destruction of an apartment block for Tashkent City project. Tim Stanley, senior partner for Russia and Commonwealth of Independent States at Control Risks, a global risk consultancy, said: “This investigation into a potentially fraudulent investment scheme involving a flagship investment project is a timely reminder to investors and the donor community of the risks they run if they fail to conduct adequate due diligence or take the required steps to identify and mitigate their third-party risks.”

Thomas Mayne further stated: “[This information] also poses many questions for the German authorities, who should investigate the funds flowing through the German companies in question. If the Uzbek authorities are serious about attracting foreign investment, they should not only collect and verify full beneficial ownership information of companies bidding for such projects, but also make that information available to the public.”

In sum, it appears that not only did Tashkent City accept a teenage investor, the project also chose to work with a company closely associated with a Kazakh businessman currently facing significant fraud charges for 1 billion Kazakh tenge (€2.4 million) – and with Uighur investors representing a group of active and dormant companies, which issue personal loans of several million pounds. It might be high time to request a public audit of Rosenberg and Wolf’s companies.

Open Democracy contacted Hyper Partners GmbH, Statuswest GmbH, W&R Handelsgesellschaft GmbH and International Business Center Tashkent City for comment, but did not receive a response.  

Tashkent City is having human impacts on the ground. Read a personal account of dispossession here.