COMMERCE DAS ERIC STEWART VISITS ASTANA, DISCUSSES

UNCLAS ALMATY 000607

SIPDIS


DEPARTMENT FOR EUR/CACEN JMUDGE, EB/TPP/IPE SWILSON, JURBAN,


EB/TPP/BTA/EWH ELUFTMAN
COMMERCE FOR DAS STEWART, CENTRAL ASIA DESK OFFICER DSTARKS
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER
PLEASE PASS TO USTR KKUHLMANN

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EIND KZ ECONOMIC
SUBJECT: COMMERCE DAS ERIC STEWART VISITS ASTANA, DISCUSSES
INVESTMENT CLIMATE, IPR, INVESTMENT DISPUTES

REF: (A) 04 ALMATY 5022
(B) ALMATY 304


1. (SBU) Summary: Department of Commerce DAS Eric Stewart
(Market Access and Compliance-Europe) visited Astana
February 8 and met with several key contacts in Kazakhstani
ministries. DAS Stewart told the Kazakhstani officials
that, on balance, the economic and trade relationship
between the two countries is positive. However, he
identified several areas, such as taxation procedures,
contract sanctity and respect for arbitration as causes of
doubts in the minds of U.S. investors. DAS Stewart also
pressed Kazakhstani officials for action to resolve the
specific cases of AIG and Flight Director. While positively
judging Kazakhstan's progress in improving its IPR
environment, he expressed concern about several aspects of
Kazakhstan's record on enforcement. End Summary.


2. (SBU) Background: AIG Silk Road, a subsidiary of AIG, is
attempting to enforce an arbitral award from the
International Center for the Settlement of Investment
Disputes (ICSID). The $10 million dollar judgment arose
from the government's expropriation of AIG's interest in an
Almaty real estate deal in 1998. AIG recently obtained
(protect) a judgment from a British court that it could
attach the UK assets of Kazakhstan's National Fund to
enforce the award.


3. (SBU) Flight Director is a U.S. company that provided
equipment to the now-bankrupt national airline "Air
Kazakhstan". The goods provided are valued at about
$160,000. Flight Director was assigned a low priority among
creditors at the bankruptcy proceedings, but the government
assured the Ambassador (Ref A) that it would at least be
able to recover $45,000 in yet-unused equipment. The
company has been unable to do so, and its local attorney has
challenged the low priority assigned to its claim. End
Background.


4. (U) DAS Stewart met with senior officials at the
Ministries of Finance, Industry and Trade, Energy and
Mineral Resources and Justice in Astana.

Finance Ministry
--------------


5. (SBU) DAS Stewart met at the Ministry of Finance with
Vice Minister Aidar Arifkhanov. Arifkhanov's portfolio is
mainly the management of government debt. DAS Stewart
raised both the AIG and Flight Director cases. On AIG, he
offered several of the arguments advanced by the Ambassador
in earlier meetings (Ref B) for the government to pay the
arbitral award, particularly the effect that publicity over
their refusal could have on their bond ratings. Arifkhanov
said that the trouble was figuring out who is responsible,
the city akimat of Almaty or the national government. He
also told DAS Stewart that any payment would come from the
Ministry of Justice, which has funds assigned to it for the
purpose of paying judgments. While Arifkhanov admitted that
AIG was entitled to compensation, he said that the national
government would not pay for something the City of Almaty is
responsible for.


6. (SBU) With respect to Flight Director, Arifkhanov had
little to offer. DAS Stewart told him that not only was the
company unable to recover the $45,000 in equipment that was
promised to be returned because of red tape, but also that
their lawyers at Baker McKenzie are ready to challenge
Flight Director's status as a "fifth line" creditor of Air
Kazakhstan. Arifkhanov made no offer to act, but did
mention that Air Astana was considering bidding at auction
for seven Boeing 757s formerly operated by the now-bankrupt
U.S. airline ATA.


7. (U) Finally, DAS Stewart commended the Finance Ministry
for its efforts to introduce electronic filing of
taxes/government procurement and mentioned that Cisco
Systems was interested in pursuing contracts to work on the
new system.


Ministry of Industry and Trade
--------------


8. (U) DAS Stewart met with Vice Minister Bolat Smagulov and
representatives from the Trade and Investment Committees.
Smagulov spoke first and cited finalizing the amendments to
the law "On Investments" and WTO accession as the Ministry's
priorities for this year. He asked DAS Stewart to
investigate why certain Kazakhstani exports of metals are
subject to high tariffs in the U.S. He cited high tariffs
(extra 15 ) on titanium and very high (243-247 ) tariffs on
steel. Smagulov suggested that Kazakhstan's market economy
status should mean that it is not subject to these kinds of
defensive measures. DAS Stewart said that to his knowledge
all protective tariffs on steel were lifted, but that he
would find out if the Kazakhstanis were justified in their
complaint.


9. (SBU) DAS Stewart, for his part, praised the Ministry for
its work in trying to create a better environment for small
and medium enterprises. He again raised both the AIG and
Flight Director cases. He said that he has been approached
by several large U.S. companies in the telecom, construction
and aerospace industries about investing in Kazakhstan, but
that situations like AIG make it difficult to present
Kazakhstan in a very positive light. Smagulov did not seem
very well informed on AIG. However, on Flight Director, he
was much more helpful, and offered to broker a meeting in
Astana with one of his assistants, Air Kazakhstan, the
Customs Committee, the Ministry of Transport and Baker-
McKenzie to discuss the issue. Smagulov suggested having
the meeting before Feb. 11, when he is leaving on a business
trip. (Note: Baker-McKenzie was unable to agree to a
meeting so soon because they did not have the client's
concurrence. We will attempt to organize the meeting when
Smagulov is available. End Note.)


10. (U) Finally, DAS Stewart cited two areas of concern in
the bilateral trade relationship: sanctity of contracts and
taxation. Smagulov said that Kazakhstani investment laws
guarantee stability of contracts and that the concerns of
the investor community have been met by the interaction of
the President and the Foreign Investors' Council. Stewart
suggested that speeding the implementation of electronic
filing of taxes would help to improve the investment
climate.


11. (U) Smagulov and Stewart agreed in principle to organize
an Informal Commercial Exchange (ICE) between top officials
from the Ministry and the Department of Commerce.

Ministry of Energy and Mineral Resources
--------------


12. (U) DAS Stewart met with Vice Minister Lyazzat Kiinov
and spoke about contract sanctity and the investment climate
generally. He said that based on his meetings with
ChevronTexaco, Conoco Philips and Exxon Mobil, he had the
impression that U.S. companies do not regret their
investments in Kazakhstan, nor do they intend to leave.
However, their concerns about the government's intentions
leave them questioning whether to invest more in Kazakhstan.
Further, he said that other major companies (Cargill,
Caterpillar) have been considering investments in
Kazakhstan, and look to the situation of oil companies to
predict how they will fare. Stewart also urged Kazakhstan
to stay committed to diverse export routes and to move
forward on joining BTC and the expanded CPC.


13. (SBU) Kiinov said that he felt the investment climate
was very good, especially because President Nazarbayev
instituted the Foreign Investors' Council and its oil and
gas working group. He said Kazakhstan was the only country
in the world where the President maintains this kind of
dialogue with the foreign investment community. He defended
Kazakhstan's assertiveness and new preemptive legislation by
saying that Kazakhstan needed to retain the ability to 1)
keep undesirable companies out, and 2) prevent, if


necessary, one or two countries and their companies from
buying up too much of Kazakhstan's oil resources. He stated
that contracts are inviolable, and no existing contracts
will be violated; and that Kazakhstan would certainly yield
if it were outbid while trying to preempt the sale of a
share.

Ministry of Justice
--------------


14. (U) During DAS Stewart's meeting at the Ministry of
Justice with Dr. Nurgaysha Sakhipova, Chairperson of the IPR
Committee, Sakhipova delivered a long recitation of MOJ's
accomplishments in the struggle against piracy and in
modernizing Kazakhstan's IPR regime. She cited the
ratification of the WIPO Digital Treaties and the amendment
to the Copyright Law extending protection to pre-existing
works and shared statistics demonstrating far stricter
enforcement. She claimed a sixfold increase in the amount
of fines collected in administrative proceedings, and about
a fourfold increase in the number of people fined (the
average fine is about $40.) She also said that 35 and 29
people, respectively, had been charged with criminal
violations of copyrights and trademarks.


15. (U) Sakhipova said the ministry is now pushing
Parliament to amend the Criminal Code to make criminal
violation of copyrights easier to prove. The amendments
would replace the need of the prosecutor to demonstrate
"significant harm" to a copyright holder in order to gain a
conviction. The amendment would make the question of
criminality turn on the amount of pirated material that is
seized from the accused. The draft amendment envisions a
lower threshold of 500 monthly calculation indexes (about
$3500.) Sakhipova also expressed the hope that Kazakhstan's
efforts would be sufficient to merit the country's removal
from the Special 301 Watch List.


16. (U) In response to Sakhipova's discussion of MOJ
activities, Sakhipova was very complimentary and told
Sakhipova that Kazakhstan appeared to be far ahead of other
countries in the region in its efforts on IPR protection.
However, he also engaged her in a dialogue about the number
of convictions and fines that have been handed down as a
result of IPR violations. He noted that the aggregate
numbers and actual penalties assessed did not appear to be
very high.


17. (SBU) Comment. DAS Stewart's meetings with Kazakhstani
officials were a much-needed step in deepening cooperation
with the GOK on commercial issues, particularly in the areas
of market access and commercial dispute resolution. This
visit resulted in an agreement in principle to begin an
Informal Commercial Exchange (ICE) with the Ministry of
Industry and Trade, and was an opportunity to present
frankly US concerns about taxation practices, contract
sanctity and the investment climate. DAS Stewart pointedly
called for action in the AIG and Flight Director cases and -
in the case of AIG - made it clear to each Ministry that
they all have a vested interest in the government meeting
its obligation to pay the award. End comment.


18. (U) DAS Stewart did not have an opportunity to clear
this cable.


19. (U) Minimize for Dushanbe considered.

Ordway


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