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Kumtor is the largest non-state employer and taxpayer in Kyrgyzstan and represents some 10% of its overall GDP makes up 25% of its industry and contributes 50% of export earnings. (Image courtesy of Centerra Gold)

An between the Kyrgyz Republic and Canada’s Centerra Gold (TSX:CG) took a turn for the worse Tuesday, as President Almazbek Atambayev ordered state prosecutors to review the legality of agreements signed with the company in 2003-2004 and 2009.

The move comes barely two weeks after the Toronto-based firm, which operates Kyrgyzstan’s biggest gold mine, Kumtor, decided to take the impasse with the Central Asian country .

“People need to know why Kumtor, which was to become the pride of Kyrgyzstan and the largest investment project, is in fact perceived by the people as ‘the biggest scam’,” Atambayev said in comments .

The main bone of contention seems to be the ownership structure of Kumtor mine, Kyrgyzstan’s largest private sector employer and taxpayer and Centerra’s main gold producing mine.

In 2003, Cameco — Centerra’s former parent company — inked a deal with state miner Kyrgyzaltyn in which the latter traded its two-thirds stake in Kumtor for about a third of the newly formed Centerra.

Such agreement was revised in 2009 and replaced by with a new pact that increased taxes and other fees as well as restored Kyrgyzaltyn’s one-third stake in Centerra, a stake that had been sold down.

In 2013, prosecutors charged 10 former government officials with corruption over the 2003 deal.

Centerra has denied any wrong-doing and allegations of involvement in corruption haven’t been proven in court.

It has also noted it considers the latest actions by the Kyrgyz authorities as “clear breaches of the agreements” that govern Kumtor, the largest open-pit gold mine in the region, responsible for more than 10% of Kyrgyzstan’s GDP.

Centerra once suggested a 50/50 joint venture, but former prime minister Joomart Otorbayev said last year that . Rumours pointing to an  quickly spread out after that, but were later .

Otorbayev resigned later that month after failing to clinch the restructuring deal. His successor, Temir Sariyev,  would be among his priorities.

In April, Kyrgyz prosecutors and other state law enforcement agencies raided Centerra’s office in Bishkek, the capital of Kyrgyzstan. (Image courtesy of Centerra Gold)

Adding confusion to the matter, the State National Security Committee, or GKNB, issued a press release this week mixing the Kyrgyz government’s battle against Kumtor with investigations into former politicians charged of plotting a coup in 2010 against then President Kurmanbek Bakiyev.

“Investigators do not rule out the possibility that efforts to destabilize the situation in the country in March and May were connected with the government’s active investigations into corruption schemes at the Kumtor project,” the statement said .

Centerra, which sits on more than $500 million in cash, is actively diversifying away from Kumtor as the risks associated with the operation have proved a drag on the company’s market valuation.

The firm has been using the cash generated by Kumtor to develop projects in Mongolia, Turkey and Canada, with the goal of becoming a 1 million ounce per year producer over the next few years.

The company is yet to receive a new license from the government required to continue operating the mine beyond June 30.

Kumtor has produced around 10 million ounces since inception and remaining reserves are 5.6 million ounces.