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2005-10-05 12:40:00
US Office Almaty
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						S E C R E T  ALMATY 003607 



E.O. 12958: DECL: 10/05/2015

Classified By: Ambassador John Ordway, reasons 1.4 (B) and (D).

1. (C) Summary/overview: Your visit provides an extremely
valuable and timely chance to consult with President
Nazarbayev as the presidential election campaign officially
begins. Nazarbayev will undoubtedly share with you his
vision of Kazakhstan's development in the wake of
independence. He saw the nation's first task as the
establishment, for the first time in the history of the
Kazakh people, of a secure and sovereign nation state. That
accomplished, the second was to create the fundamentals of a
market economy. Only with that accomplished would it be
possible to move forward to serious democratic reform -- a
moment that Nazarbayev says has now arrived. His major
policy addresses in February and September outlined a good
approach toward political reform, albeit at a rather
unambitious pace. There is considerable justified
skepticism, however, about Nazarbayev's willingness and
ability to take the tough actions needed to realize the
reform plan. President Nazarbayev is clearly concerned about
his legacy and wants to be judged favorably by history as the
man who brought Kazakhstan to true independence. He
recognizes that to ensure future stability he needs to create
a stable, sustainable democratic political system.
Nazarbayev, however, either does not realize the destructive
potential, or cannot overcome the corrupt interests of his
own family and his inner political circle. He is therefore
torn between the need for reform, and the desire to avoid the
short-term pain and sacrifice this would require from him,
his family, and a large network of political and personal
cronies. End summary/overview.


The Political Context


2. (C) With presidential elections scheduled for December 4,
Nazarbayev is eager for as many high-level international
contacts as possible in order to buttress his domestic image
as the only leader capable of protecting Kazakhstan's
interests on the world stage. He will therefore be very
eager to meet with you and to highlight that meeting
publicly. At the same time, in the wake of the "color
revolutions," Nazarbayev has residual concerns about U.S.
intentions. He will be on alert for any hint that the U.S.
believes that it is time for him to move on. While A/S
Fried's September 30 meeting with Nazarbayev helped assuage
these concerns, Nazarbayev will welcome your acknowledgment
of his historical achievements and the strong partnership
that we have created over the past 14 years of independence
-- and your assurances that the U.S. is interested only in a
fair and open election process that will strengthen the

international and domestic authority of the winner.

3. (C) As the incumbent in a country experiencing 9% growth
over the past several years and benefiting from high oil
prices, Nazarbayev is justifiably confident that he will win
in December. These will be the first truly contested
presidential elections in Kazakhstan's history. The two
opposition candidates, Zharmakhan Tuyakbay ("For a Just
Kazakhstan") and Alikhan Baimenov ("Ak Zhol"), are relatively
weak, however. Both western polls and the GOK's own private
polling data give Nazarbayev a wide lead -- perhaps as much
as 70%.

4. (C) Our message to Nazarbayev and his inner political
circle has been that he will have far greater legitimacy if
he wins a fair election with 65-70% of the vote than if he
receives 90% and opens the door to charges of falsification.
We have also underscored the importance to Kazakhstan's
development and future stability of giving the opposition
room to develop. Nazarbayev has said all the right things
about holding free and transparent elections; in a September
9 decree he ordered ministries and the Central Election
Commission (CEC) to ensure the accuracy of voter lists, equal
access to the media for all candidates, and the accreditation
of foreign election observers and media. The CEC has already
invited the OSCE to observe the elections. The question is
whether the political will exists to break old habits and
insure that administrative resources are not misused and the
vote count is not falsified. Even if Nazarbayev is genuinely
committed to the goal, the political structure of the country
-- with regional leaders appointed by and loyal to the
president -- will make it very difficult to achieve truly
clean elections.

5. (C) There is a wide range of worldviews and opinions in

Nazarbayev's inner circle of advisors. Several, including
Presidential Administration head Dzhaksybekov and PA
officials Mukhamedzhanov and Yertysbayev, perceive the West
and western NGOs as threats and advise Nazarbayev to maintain
strict control of the political environment. There are
others, however, such as presidential advisors Karim Masimov
and Marat Tazhin, and FM Tokayev, who favor political reform
and increased openness. FM Tokayev told Ambassador Ordway in
June that in Kazakhstan the pendulum swings back and forth
between authoritarian and democratic tendencies. In the
months following the "color revolutions," those who advocate
an authoritarian approach have had Nazarbayev's ear. Tokayev
was optimistic that the pendulum will soon swing back the
other way. Our sense is that the pendulum has probably swung
as far as it is going to go, and there may be some small
movement in the other direction. However, continuous
high-level USG engagement with Nazarbayev personally is
important because it strengthens the hand of those in his
inner circle who understand and agree with our message.


The Economic Environment


6. (C) The Kazakhstani economy is of course dominated by the
energy sector, which provides approximately 22% of government
revenue. Oil exports account for approximately 20% of GDP.
The country produces 1.25 million barrels of oil per day.
The GOK realizes the risks associated with an
energy-dependent economy and has taken several wise moves to
manage the situation, including the creation of an offshore
National Fund to sterilize oil revenue and minimize budgetary
fluctuations. The energy sector is growing rapidly.
Kazakhstan will enter the oil-producing top ten in the next
decade, with production expected to reach 150 million tons
annually (3 million b/pd) by 2015.

7. (C) Conditions for foreign investors in the energy sector
have changed for the worse since 2002. Early contracts were
exceptionally generous, recognizing the very high risk
associated with investing in a newly independent country.
The GOK is now taking aggressive steps to increase revenue
and claw back equity through excessive tightening of its
fiscal regime. Changes to the tax code have reduced internal
rate of return (IRR) from a peak of 16-23% to 11-12%. While
foreign oil majors say they are looking for at least 15% IRR
before signing any large new deals, majors such as Shell and
ConocoPhillips are aggressively pursuing new blocks based on
present terms. The GOK is also seeking a larger ownership
share of new projects, claiming the right to take up to 50%;
it is doubtful, however, that the government can sustain the
required investments during the development stages. Cash
calls resulting from the acquisition of a share in AGIP-KCO
(Kashagan) will constrain the GOK's ability to maintain
ownership in other fields. Nonetheless, there is strong
competition for the majors. The Chinese have demonstrated
their willingness to overpay for assets with their proposed
purchase of Canadian-owned PetroKazakhstan; Russian, Indian
and other mid-tier oil companies are also eager to increase
their presence here.

8. (C) The GOK also emphasizes the need for economic
diversification to ensure long-term economic stability.
Although diversification features prominently in GOK
rhetoric, there have been few concrete results to date.
Efforts to develop non-energy related industries are hampered
by widespread corruption at all levels of society and
government. The GOK has taken some steps to address the
problem, but has not attacked it at the root or created the
truly independent judiciary needed. Nevertheless, the solid
macroeconomic policies of the past decade have created many
of the prerequisites for a more diverse economy, such as
moderate inflation rates, an excellent banking and banking
regulatory system, investment-grade ratings of sovereign debt
by all agencies, and the early pay-off of all IMF debt. We
are close to agreement with the Kazakhstani government on
co-funding of USAID economic development programs. The GOK
is also taking the necessary steps to integrate itself into
the regional and global economy, most notably through
membership in USTR's TIFA (Trade and Investment Framework
Agreement) and application for WTO membership.


The Security Relationship


9. (S) Kazakhstan has been a loyal partner in the war on

terror. The GOK has permitted almost 3,800 no-cost
overflights and numerous emergency diverts in support of OEF
operations in Afghanistan. For the past two years, it has
also deployed a 27-member military engineer team (KazBat) to
Iraq, which has disposed of over 3.5 million pieces of
ordnance. Given its size and resources, Kazakhstan could do
more in the international arena. The GOK declined our 2004
request to provide a battalion for UN security operations in
Iraq. U/S Joseph will pitch President Nazarbayev on expanded
PSI cooperation (i.e. interdiction of flights) when they meet
on October 8 in Ust-Kamenogorsk. Closer to home, cooperation
between intelligence agencies on domestic and regional
terrorist threats has grown dramatically. We are
extraordinarily pleased with the exceptionally close and
productive operational cooperation that we now have with

10 (S) [Deleted garbled text]
DOE helped to decommission the
Soviet-era BN-350 reactor, and is now addressing the issue of
spent fuel disposition. It has also helped Kazakhstan
increase materials protection, accounting, and controls at a
number of nuclear facilities and is working to convert the
Alatau reactor from HEU to LEU use.

11. (C) The signature of the Proliferation Prevention
Initiative agreement in August has created new opportunities
for cooperation on Caspian security. Although Kazakhstan has
fallen behind Azerbaijan, they now appear eager to move
forward. President Nazarbayev raised this cooperation with
A/S Fried in their September 30 meeting.


Your Visit


12. (C) I look forward to welcoming you to the rapidly
developing capital city of Astana next Wednesday and
introducing the staff of Embassy Almaty, the Embassy Branch
Office in Astana, and the OBO construction team to you. You
can expect to find President Nazarbayev in a relaxed and
confident mood, ready for wide-ranging and forward-looking
discussions of the entire bilateral relationship. With
President Berlusconi coming to see him the following day,
Nazarbayev is undoubtedly pleased that Kazakhstan is
receiving the international attention he so eagerly seeks.