The news on KazTransGas’ exit from Georgia did not catch much interest of the Kazakh press. But it should have. According to kz.expert’s estimates, the total amount of the losses tied to this investment project is likely to surpass $200 mln. This is not as striking as Nazarbayev’s son-in-law’s Romanian fiasco, but the sum is still quite impressive.

At the start of October, the Kazakh media-resources published a number of articles on KazTransGas’ current successes. The information wave started when the company’s performance results for the period of nine months of the current year had been released.

Here is the press-release (text in bold by kz.expert).

“According to the operative data, the KazTransGas’ consolidated net income for the nine months of the current year constitutes 118.6 bln tenge which surpasses the results of the same period of last year by 72.4 bln tenge or 156%. The income allows the national operator to subsidize the Kazakh gas consumers (the expected losses on the domestic market trade operations are to constitute 46 bln tenge in 2018) as well as to maintain the loan portfolio of 560 bln tenge”.

Meanwhile, KazTransGas’ another October success which, in our opinion, surpasses the 9-month results of the company’s performance has received much less press. We are talking about KazTransGas’ exit from Georgia. Judging by the fact that KazTransGas’ corporate cite does not mention a word about this achievement, one can assume that the company’s management considers it a defeat and prefers to silence it down.

So, to analyze the situation, we will use the foreign press publications, for instance, those on the Eurasia Daily (EADaily) website. Here are some paragraphs from the article (text in bold by kz.expert).

“WALTBAY LTD has become the new owner of the capital city’s gas distributor KasTransGas – Tbilisi registered in the Marshall Islands, informs the company’s press-service.

“WALTBAY LTD that operates as part of Georgia’s biggest business group CBS LLC has already signed the contract on purchasing 100% of the shares with KazTransGas – Tbilisi… The changes have already been introduced to the public registry. From now on, the company will have a new CEO as well. Sanzhar Shokatayev has been replaced with Nikiloz Chiaureli”, says Pervyi Kanal (First Channel) of the Georgian public television citing the company’s press-release.

EADaily had informed earlier that, on September 21, 2015, Kazakhstan’s state company KazTransGas addressed the Georgian Government offering to start a negotiation on settling the long-lasting dispute about getting back the rights to manage KazTransGas – Tbilisi, the company that KazTransGas owned. Otherwise, KazTransGas threatened to move the dispute to the international arbitration court.

KazTransGas acquired gas distributor Tbilisi in 2006. In 2009, it was divested of the right to manage the company by the Georgian Government and a special administrator was appointed by the Georgian National Energy and Water Supply Regulatory Commission. The issue entered the interstate relationships agenda when the Georgian governmental delegation led by ex-Prime Minister Irakliy Garibashvili visited Kazakhstan in November 2014. At that same time, Georgian Minister of Energy and Natural Resources Kahka Kaladze announced that, “in the nearest future” the management of the gas distributing company would go back to the Kazakhs.  

The Kazakh state company wants to start the negotiations on “regulating the investment dispute tied to the investments of KazTransGas JSC in KazTransGas – Tbilisi operations without petitioning the arbitration court. In 2006-2009, the sum of the investments constituted about $130 mln. KazTransGas says that, if the pre-arbitrage resolution of the dispute will not bring results, the company is to start the court proceedings demanding the return of the control over KazTransGas – Tbilisi and the recovery of the damages in the amount of no less than the sum of the investments".

More information on KasTransGas’ Georgian problems and the company’s efforts to resolve them has been found in this Georgian publication. Here are some quotes (text in bold by kz.expert).

“As we know, the Georgian Government and the Kazakh company had been trying to settle the dispute in the international arbitration court since 2017. The Kazakh side was demanding the recovery of the damages in the amount of more than 486 mln lari. At the same time, KazTransGas – Tbilisi’s debt to the state was growing thus constituting 96 mln lari. Apart from that, as of July 31, 2018, KazTransGas – Tbilisi owed 347 721 491 lari to the Kazakh companies-owners”, says the statement.

According to the statement, releasing KazTransGas – Tbilisi from its state obligations and giving WALTBAY LTD the right to demand the payment of more than 347 mln lari borrowed from the Kazakh creditors was the prerequisite of the KazTransGas – Tbilisi purchase made by WALTBAY LTD to the Kazakh businessmen to which the latter agreed”.

“However, in exchange for forgiving the debt, the Georgian Government demanded to end the dispute in the international arbitration court in favor of Georgia. At the same time, WALTBAY LTD was to withdraw the demand to be paid more than 347 mln lari which, the authorities explained, was for the benefit of the consumers. WALTBAY LTD and the Kazakh creditors had satisfied all the demands in exchange for which KazTransGas – Tbilisi was released from its obligations to the state. WALTBAY LTD was ready to face the existing challenges and the acquired social responsibility which means the high-quality and safe supplying of the natural gas to the population”, says CBS Group”. 

Among the Kazakh media, it was Forbes.kz that gave the most detailed account of the story in its publication “Georgia and KazTransGas Settle the Dispute on Condition of Debt Relief”. The resource, however, does not name the individual persons responsible for what happened.

Here are some quotes (text in bold by kz.expert).

“In May 2006, KazTransGas bought the assets of the bankrupt Tbilisi gas distributor Tbilgas JSC for $12.5 mln after which the company changed its name to KazTransGas - Tbilisi. For Georgia, it is a strategic enterprise that provides the gas to 25% of the country’s population. In the course of 2006 – 2009, KazTransGas had invested about $130 mln in the development of KazTransGas – Tbilisi and the city of Tbilisi’s gas supply system. 

In March 2009, due to the KTG – Tbilisi’s rising debt, a special administrator was appointed following the decision of the Georgian National Energy and Water Supply Regulatory Commission. At that time, KTG – Tbilisi’s dept to the creditors constituted more than 80 mln lari ($32.2 mln) of which 68 mln lari ($27.5 mln) was the debt to the Georgian Oil and Gas Corporation owed for the natural gas supplies.

The Kazakh management was banned from operating the company. During all these years, the company had been trying to regain the control of the business and appealed to the international arbitration court. The negotiations were held at the governmental level; the problem was supposed to be solved via the debt offset since Georgia owed Kazakhstan more than $27 mln. The owners agreed to sell the company on the condition of the investments return. The amount of the claim constituted $180 mln of which $130 mln were KTG’s investments in the Tbilisi company while $50 mln were the losses suffered during the years of the business management’s banishment. 

In mid-September 2018, it became known that Georgia and KazTransGas were working out a friendly settlement on the condition of the mutual debt offset. KTG – Tbilisi was relieved from paying the debt in the amount of about $37 mln.

As Business-Georgia informs citing the company-buyer, releasing KazTransGas – Tbilisi from its state obligations and giving WALTBAY LTD the right to demand the payment of more than 347 mln lari (about $52 mln) borrowed from the Kazakh creditors was the prerequisite of the KazTransGas – Tbilisi purchase made by WALTBAY LTD to the Kazakh businessmen to which the latter agreed”.

The presented materials help us understand the reason for silencing down the topic: it is unlikely that KazTransGas’ buyer has compensated all the invested money to the seller. The price of the deal was most likely if not the nominal then a notional one. Besides, the national company had to forgive the debit debts.

Thus, the total amount of the Kazakh losses on this investment projects is likely to surpass $200 mln.

Nonetheless, although KazTransGaz and its parent company KazMunaiGas, their principal agency NWF Samruk-Kazyna and the Republic of Kazakhstan have suffered the significant losses, they may be congratulated on a serious success.

Why do we think so?

• First, KazTransGas has finally left Georgia and the Georgian market thus solving the problem that has been torturing everyone all these years.
• Second, the losses tied to this project both the monetary and the reputational ones have been fixed and will grow no more.
• Third, a next scandal tied to the influential Timur Kulibayev (President Nazarbayev’s son-in-law and the Head of the Atameken National Chamber of Entrepreneurs) has been avoided.

We will recall that it was Timur Kulibayev who was the initiator and the main operator of both the Georgian and the Romanian KazMunaiGas’ ventures. Note that the latter cost Kazakhstan much more than the former: by our estimates, about $5 bln.

Now the only thing left is to find out the price of Kulibayev’s Chinese venture tied to the selling of the participation interest in the Kazakh oil-production enterprises. Then we can calculate the total size of the cumulative losses resulted from his “service of the people of Kazakhstan”.