Are Kazakhstan’s Oligarchs Helping Putin Bypass Sanctions?

Kazakhstan Government: “We are not facing the threat of secondary sanctions”. Or…?

Despite the closure of data on mutual trade with the EAEU countries from the WTO during the conflict in Ukraine, the Minister of Trade of Kazakhstan Zhumangarin admitted the fact of supplying Russia with dual-use goods (source: Azattyk). The deliveries include the initial list of 7,000 codes of the commodity nomenclature of the Foreign Economic Activity. According to the Minister, so far the control has been carried out only on 104 goods found among the parts of the Russian missile shot down in Ukraine.

However, more than a hundred companies are under scrutiny today, although no Kazakh companies are included in the adopted 11th package of sanctions. Currently, the sanctions list of Zelensky’s office already lists 2 Kazakh companies, one of which is state-owned. A special portal for accurate goods tracking shows the codes of the foreign trade classification of goods in various groups. These include almost all types of goods in the machine-building sector (groups 84 to 91), and industrial products in the metallurgical sector (groups 70 to 83).

Minister Zhumangarin states there is no threat of secondary sanctions for Kazakhstan. Yet, he fails to mention that the 11th package of sanctions is aimed specifically at the companies outside Russia’s jurisdiction that violate the sanctions regime.

EURONEWS reports: According to the European Union, Astana and Yerevan allow the delivery of sanctioned goods through their territories, thus undermining Brussels’ sanctions pressure. The EU is concerned about a sharp increase in the supply of its products to post-Soviet countries such as Armenia, Uzbekistan and Kazakhstan, which then find their way to Russia through parallel import. Hence the 11th sanctions package that strengthens export controls and introduces a new mechanism to target non-Russian companies suspected of circumventing previous sanctions.

The European Union’s conclusions are based on the analysis of the dynamics of trade between the EAEU countries. In 2021, Kazakhstan exported to Russia goods worth over $7 billion. 59% of the exported goods are classified as sanctioned upon the adoption of the 10th package. According to the official data of the Statistics Agency of Kazakhstan, in January-December 2022, exports of goods to the EAEU countries amounted to $9.7 billion (up by 24.3%), 92.5% of which were exported to Russia (amounting to $8.96 billion).

Available data of the Statistics Agency of the Republic of Kazakhstan and the Customs Statistics Committee of the Ministry of Finance of the Republic of Kazakhstan reveal more data. In 2022, exports of formally “under-sanctioned” goods to Russia from Kazakhstan could amount (given that the cargo customs declarations of the commodity code are correct) to about $5.5 billion.

Speaking about more than a hundred companies “under scrutiny,” the minister does not name specific enterprises, for obvious reasons. Meanwhile, this secrecy jeopardizes many clients of these companies inside the country, as spot sanctions can immobilize the accounts of violators with fines and bans on transactions.

Government’s inner circle are top candidates for sanctions

In both the metallurgical and machine-building sectors, the “candidates for sanctions” are precisely those groups of monopolists that are referred to as “single-source” suppliers. They obtain the largest government orders without bids or any competition. As a rule, these are the biggest companies within industrial-financial oligopolies.

For example, the group “Alageum” received an order for the amount of 25 billion KZT ($55 million). It was made effective by the Government of the Republic of Kazakhstan DPS No 242 of 24.03.2023 “On the identification of suppliers for the construction of substations Arai in the city of Astana” (with an annex on one sheet) and signed by the Prime Minister in June. The government gives out gifts like this only to the chosen few oligarchs from the inner circle.

This “average ticket” illustrates how the new government program manages to fund up to $1 billion a year in energy system modernization at taxpayers’ expense. The marginal tariffs for power grid maintenance have also been increased by 3.38 times. These costs allowed to increase tariffs by 7-15% for energy producers. curiously, this is the program’s slogan – “tariff in exchange for investment”. From June 1, 2023 consumers will also face higher tariffs. And for regular citizens, the tariff increased by almost a third.

Among the individuals who control the entire market of electricity generation, electrical equipment, high-voltage and low-voltage distribution networks are such names as Kozhabaev, E. Ilyasov, Klebanov, Idrisov, Bozumbaev, Satkaliev, and K. Itemgenov K. In particular, Mr. Satkaliyev and his partner Itemgenov are openly lobbying the Russian company InterRAO and conducting electricity sales for its profits through shady schemes. Despite a series of accidents and failures of electricity supply for the current year, they did not suffer any consequences. Not only did the monopolists not reduce tariffs in compensation for under-delivery of electricity to consumers, but they made even more profits (all data is available in open sources).

How oligarchs manage to avoid sanctions and live off the state budget

There are a dozen of monopoly companies in Kazakhstan. They are listed as subjects of special law of the Republic of Kazakhstan. However, there are monopoly companies that are not included in this list but have a huge impact on the value formation of electricity in Kazakhstan. One, and in fact the only one, that operates outside the list is
“Alageum Electric”.

The “Alageum Electric” family empire is based at the Kentau transformer plant. It also includes the JSC “Elektromontazh” (“ELMO”) construction company, the JSC “KazNIPI&TES Energia” design institute, and 33 other affiliated companies.

This monopolist’s action scheme is simple and straightforward. A few years back, the holding purchased JSC “KazNIPI&TES Energia”. Nowadays, “KazNIPIITES Energia” designs and implements into projects the equipment from its own plant “Alageum”, allegedly of Kazakhstani content. JSC “Elektromontazh”, in its turn, buys equipment from its own plant, which is then registered at various Regional Electric Networks. It then builds facilities for the state at inflated prices.

By the way, this whole scheme is managed by the son of the holding’s owner, Yerkebulan Ilyasov. In other words, this family has spread their networks into a mafia structure, an illegal monopoly, existing thanks to and supported by the corrupt government and enablers. That is a full-scale family monopoly on the market that ensures the absence of any competition or squeezes out competitive companies.

Now what scheme has the monopolist company “Alageum Electric” worked out to circumvent sanctions imposed on supplies to Russia? Again, its business plan is simple. First, the enterprise opened and registered a company in China, which buys various components of electrical equipment for transformers, control cabinets, and telemechanics – all in wholesale. And then it sells these in small bulk (or even in retail) to its own company “Alageum Electric” in Kazakhstan. In other words, the company buys from the same enterprise (but it is technically located in China) and then imports goods to Kazakhstan under different codes by means of vague schemes. Thus, the main products for export are assembled at the enterprises of Kazakhstan, carrying the “Made in Kazakhstan” label.

Assembling these components into the final products under the “Made in Kazakhstan” label allows exporting of sanctioned Chinese electrical products to Russia. This process doesn’t require the disclosure of information for international trade statistics in Russia. This is relevant for the company’s clients in the Russian military-industrial complex.

Recently, the company acquired the Ural Transformer Plant located right by the border between Kazakhstan and Russia. What is this purchase indicative of? It certainly shows that the monopolist holding easily manages to circumvent all Western sanctions and freely re-export Chinese electrical and electronic products of various purposes to the Russian Federation.

Why Kazakhstan’s business community is worried about monopolists’ actions

Let’s imagine that sanctions have reached and affected “Alageum Group”. We do not rule out that sanctions against legal entities include the freezing of assets. How this happens in practice can be seen on this portal. Under sanctions, it will no longer be possible for a company to avoid responsibility through the change of codes coordinated through shadow schemes with the Customs Control Committee of the Ministry of Finance of the Republic of Kazakhstan, as it was before.

Additionally, there is no way to hide dual-use goods coming in bulk from China to later reassemble the final sanctioned products. The freezing of the group’s assets would mean the failure of all state contracts for the modernization of the electric power sector infrastructure from high-voltage to low-voltage distribution networks, since 90% of all transformer substations are supplied “by a single source” on the basis of approved design and estimate documentation. This source is, as we know, the “Alageum Group”.

And all this is going on at the same time as the monopolist Kozhbayev is giving loud testimony about the ways of obtaining such orders in court. The testimony was published across the mass media of Kazakhstan!

Moreover, this enterprise is the main supplier of sanctioned products to Russia by the “state order for 55.5 million, for bribes of 2.8 million dollars”. Again, it happens against the background of declarations of the Minister of Trade that “Kazakhstan is not under threat of facing secondary sanctions”. All this is raising big questions in the business community of Kazakhstan.

Doesn’t this seem like something the U.S. Treasury Department and State Department should be paying attention to?

*All data in the article is taken from public sources as well as from:

• https://www.youtube.com/watch?v=TaDb1yMDxaY;
• https://www.youtube.com/watch?v=Zgt46XT08sc&t=1023s;
• https://mail.kz/ru/news/kz-news/predprinimateli-krupnyh-zavodov-voyuyut-za-nalogovye-preferencii-na-territorii-sez;
• https://ratel.kz/raw/biznesmen_kozhabaev_zajavil_chto_peredaval_dlja_gabidully_abdrahimova_28_mln_dollarov;
• https://vera.kz/delo-rashida-ayupova-za-nepravdivye-pokazaniya-izvinilsya-v-sude-biznesmen-iz-spiska-forbes-kz/.