The Muruntau mine, one of the largest open pit gold mines in the world, lies 250 miles west of Tashkent, near the city of Zarafshan. Under excavation by the Soviet Union since 1969, Newmont Mining Corporation’s involvement began in 1990 when a Newmont geologist joined the first group of Western experts to visit the mine. Newmont was the first overseas company to enter into a joint venture in any part of the Former Soviet Union when it signed an agreement with Uzbekistan in February 1992. The Zarafshan-Newmont joint venture broke ground in October 1993 and poured its first gold bullion in May 1995.

Until 2006, the Newmont joint venture represented the largest direct foreign investment in Uzbekistan with some 800 employees and more than $500 million in payments to the Uzbek government since its inception. The company enjoyed good relations with Uzbek president Islam Karimov’s government. Under the auspices of a governmental decree, the Newmont venture enjoyed tax privileges and a “regime of special favor” and during his 2002 visit to Washington, Karimov met with Newmont’s Chairman and CEO, Wayne Murdy.

In March 2006, Uzbekistan informed Newmont that tax laws would be changing. In June, Newmont received a $48 million bill for back taxes from 2002-2005. Newmont challenged the bill in an Uzbek court and on August 2, 2006 the court ruled in favor of the tax authorities, seized the company’s assets and halted gold exports. On August 8, Newmont filed an appeal with Uzbekistan’s High Economic Court arguing that the retroactive application of new tax legislation violated former agreements. On August 10, Newmont was declared bankrupt and the following day the Uzbek government opened criminal investigations into Newmont. The joint venture’s creditors, the European Bank for Reconstruction and Development, froze the company’s bank account and Newmont declared in a report to the U.S. government that it “no longer has day-to-day control” over its operations.

Some sources place Uzbekistan’s de facto expropriation of Newmont’s assets in the context of wider purges of Western companies and organizations in the country. Since a government crackdown in Andijon in May 2005, relations between Uzbekistan and the West have been strained, particularly between Tashkent and Washington. Many NGOs have been forced to leave the country and numerous foreign companies have been forced to pay higher taxes or cease operations.

Other sources suggest that simple economics are at play. Corruption and tax evasion have resulted in low tax receipts and Karimov’s government is in need of hard currency. Gold prices have been high in recent years and a takeover of foreign-owned assets represented a lucrative opportunity. Of course, these two motivations are not mutually exclusive.

Regardless of Tashkent’s intentions, the dispute between Newmont and the Uzbek authorities has taken on an international dimension with implications for foreign direct investments in Uzbekistan in general and the global extractive industry in particular.

Newmont has filed international arbitration claims against Uzbekistan in two separate venues. The first claim was filed in the International Centre for Settlement of Investment Disputes in Washington, D.C. and the second claim was docketed at the Arbitration Institute of the Stockholm Chamber of Commerce.

Even if the two international tribunals find in favor of Newmont Mining, it is unlikely that Uzbekistan will enforce the foreign awards. Although Uzbekistan’s law on guarantees and measures of protection of the rights of foreign investors provides for international arbitration, the Uzbek Constitutional Court said on November 20, 2006 that the wording of the law “is not an expression of consent” to arbitration. If Uzbekistan does not carry out the rulings of international arbitration tribunals, it will be a clear sign that foreign investments enjoy little protection in the country.

Extractive industry and foreign investment periodicals have already taken this view. Frontier Strategy Group, a global consulting and research firm recently downgraded Uzbekistan’s investment climate rating to the lowest level possible, naming the country as one of the ‘worst places to invest’ in 2006. Other industry news sources say that Tashkent’s actions are indicative of a wider trend in governments increasing their control over national extractive industries. Thomas Johnson of Covington and Burling LLP, Newmont’s legal counsel, also represents investors who have filed claims against the Russian government for forcing the sale of the Yukos oil company’s assets in order to recover past-due taxes. Yukos was declared bankrupt in 2004, its assets were seized in 2006 and it was announced last week that they would be put up for auction throughout 2007.