AMBASSADOR ORDWAY'S MEETING WITH FINANCE MINISTER

UNCLAS ALMATY 000933

SIPDIS


DEPARTMENT FOR EUR/CACEN JMUDGE, EUR/ACE JMCKANE
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER
COMMERCE FOR CENTRAL ASIA DESK OFFICER DSTARKS
BERLIN FOR TAX ATTACHE

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV KZ ECONOMIC
SUBJECT: AMBASSADOR ORDWAY'S MEETING WITH FINANCE MINISTER
DUNAYEV

REFTEL: 04 ALMATY 5022


1. (U) Ambassador Ordway met with Kazakhstani Minister of
Finance Arman Dunayev March 2 in Astana. The Ambassador
pressed Dunayev for progress on ratification of the U.S.-
Kazakhstan Bilateral Assistance Agreement and for prompt
payment of the $10 million award to AIG by an international
arbitration body. Dunayev told the Ambassador that
discussions were underway about possible compromises in the
tax case against Parker Drilling and provided additional
details about the GOK's revised concept for utilizing the
National Fund. The latter subject prompted the Ambassador
to encourage Dunayev to consider participating in the
Extractive Industries Transparency Initiative (EITI.) End
Summary.


2. (U) Also attending from the Finance Ministry were Deputy
Chairman of the Tax Committee Asiya Bazarbekova and the head
of the Department for International Taxation Murat
Dzheksembin.


3. (SBU) Ambassador Ordway first raised the question of
Kazakhstan's ratification of the 1992 Bilateral Assistance
Agreement, and emphasized the principled U.S. position that
no form of assistance funds should be subject to taxation.
Ratification of the Agreement will commit Kazakhstan to this
principle as well. Dunayev maintained that this question is
the responsibility of the Ministry of Economy and Budget
Planning. However, he did in the end acknowledge that the
International Taxation Department's delay in producing an
Implementing Memorandum that had been requested by the
Ministry of Foreign Affairs was holding the process up. The
Implementing Memorandum, after several extensions, is now
due March 15.


4. (SBU) The Ambassador also pressed Dunayev to weigh in
with his Ministerial colleagues to speed the process of
payment to AIG of the $10 million awarded in arbitration.
He urged Dunayev to consider the serious effects that
Kazakhstan's intransigence would have on its credit rating
and international reputation if it persists in refusing to
pay. Dunayev claimed to have no influence on this issue
either, stating that the Ministry of Justice would not allow
him to interfere -- although he clearly understood the
potential threat to Kazakhstan's credit rating. He did say
that the government has funds available within the budget to
pay judgments of this type.


5. (SBU) Dunayev also mentioned that the Finance Ministry
was in contact with U.S.-based Parker Drilling about a
possible compromise in the company's tax troubles. Dunayev
said that the Ministry was in contact with the company's
lawyers and "American tax authorities."

Background: Parker Drilling operates a large floating oil
rig called "Sunkar" that had a contract to provide services
to the Kashagan consortium. The rig was brought to
Kazakhstan free of customs duties because of its involvement
with the consortium. The rig remained at the port of
Bautino after the contract's completion in November 2003.
In the spring of 2004, the authorities of Mangystau oblast
(which contains Bautino) confiscated the rig and obtained a
judgment against Parker for over $6 million, arguing that
the rig was subject to duties the moment the contract
expired. Parker agreed to pay the $6 million in November

2004. End Background.


6. (U) Finally, Dunayev updated Ambassador Ordway on the
GOK's progress in implementing the new concept of the
National Fund (reftel). Dunayev said that full
implementation of the new concept may take until 2007 due to
the significant changes it will require in the Budget Code.
In addition to the information provided Reftel, he stated
that the National Fund's contribution to the "development"
budget will be organized as a three-year appropriation
indexed to the consumer price index; and confirmed that the
Fund would still be used to finance budget sequestration if
necessary. Dunayev opined that the new concept will make


the Fund substantially more transparent and enable it to
contribute to the development of the non-oil sector. The
Ambassador again recommended to Dunayev that the GOK
consider joining the Extractive Industries Transparency
Initiative (EITI) as part of the implementation of the new
concept.


7. (SBU) Comment: We sought this meeting primarily to
encourage the Finance Ministry to use its influence to
effect ratification of the Bilateral Assistance Agreement
and to create movement on the compensation issue for AIG.
On the former issue, we believe the message was communicated
on the urgency of completing the Implementing Memorandum,
but we expect to get better traction by meeting with
Minister of Economy and Budget Planning Kelimbetov. With
respect to AIG, the Finance Ministry may understand the
risks the GOK is taking with its current course but appears
stymied by the Justice Ministry. We will likely need to
advocate above the Ministerial level in order to prod the
GOK into taking the necessary action. End comment.

Ordway


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