Identifier
Created
Classification
Origin
06ALMATY214
2006-01-23 09:36:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
US Office Almaty
Cable title:  

KAZAKHSTAN: SECRETARY JOHANNS' JANUARY 11 MEETING

Tags:  OVIP PREL ECON KZ ECONOMIC 
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UNCLAS SECTION 01 OF 02 ALMATY 000214 

SIPDIS

SENSITIVE

E.O. 190356: N/A
TAGS: OVIP PREL ECON KZ ECONOMIC
SUBJECT: KAZAKHSTAN: SECRETARY JOHANNS' JANUARY 11 MEETING
WITH HALYK BANK CEO MARCHENKO

UNCLAS SECTION 01 OF 02 ALMATY 000214

SIPDIS

SENSITIVE

E.O. 190356: N/A
TAGS: OVIP PREL ECON KZ ECONOMIC
SUBJECT: KAZAKHSTAN: SECRETARY JOHANNS' JANUARY 11 MEETING
WITH HALYK BANK CEO MARCHENKO


1. (SBU) Summary: During a January 11 meeting with
Secretary of Agriculture Johanns and his delegation, Halyk

SIPDIS
Bank CEO offered his opinion of the greatest challenges to
the country's economic future: in the medium term, the
choice of a new Prime Minister and the nature of reforms
the new government might undertake; in the long term,
diversification of the economy and the 2012 presidential
succession. Marchenko described Kazakhstan's mortgage
market and private pension system, and identified areas of
potential export growth in Kazakhstan's agricultural
sector. The former presidential advisor and Central Bank
chairman was pessimistic about the prospect of Central
Asian economic cooperation, claiming that, economically,
Kazakhstan was "looking outside the region." Marchenko
gave Kazakhstan high marks for managing its oil revenues,
while cautioning that the Chinese were aggressively
pursuing additional Kazakhstani oil assets. End Summary.


2. (U) Secretary of Agriculture Mike Johanns met with
Grigory Marchenko, former presidential advisor and Chairman
of Kazakhstan's Central Bank and current CEO of Halyk Bank,
on January 11 in Astana.
In addition to Secretary Johanns and Marchenko, meeting
participants included Ambassador John Ordway, Under
Secretary of State Josette Shiner, Under Secretary of

SIPDIS
Treasury Timothy Adams, Mrs. Stephane Johanns, Deputy
Assistant Secretary of State Matthew Bryza, and Jim
Loveland (Embassy notetaker).

Identifying Kazakhstan's Economic Challenges
--------------


3. (SBU) Ambassador Ordway opened the conversation by
asking Marchenko to identify Kazakhstan's major
macroeconomic challenges. Marchenko identified two long-
term challenges: diversification of the economy ("easier
said than done"),and managing the 2012 presidential
succession. "We have a good, strong president, he said,
"but what will happen in seven years is a wide-open
question."


4. (SBU) Marchenko told Secretary Johanns that, in the
medium term, the question of who would be the next Prime
Minister was important, as were the reforms that the next
government would undertake. "We've lost two years of the
reform process," Marchenko lamented. "Reforms are harder
to come by when oil prices are high." Marchenko explained

that, in the competition to attract outside capital,
Kazakhstan had to push its reform process faster than
Russia's; otherwise the latter would attract all the
outside investment. "Due to the reforms Kazakhstan
undertook in the 1990s, we're still ahead - especially in
the banking sector." However, Kazakhstan lagged behind
Russia in education, health care, and culture. Marchenko
concluded by listing three other challenges which lay ahead
for the Nazarbayev government: fighting corruption,
"legitimizing" the shadow economy, and undertaking housing
reform. Kazakhstan's construction boom should not be
construed as a sign of genuine housing reform, he warned.
"What was done was only a billion-dollar interest-free loan
to the construction companies."

Characteristics of the Kazakhstani Economy
--------------


5. (SBU) Treasury Under Secretary Adams asked Marchenko if
Kazakhstan possessed a mortgage market. Yes, Marchenko
replied, with two principal instruments - some 15-year
mortgages, modeled after Freddie Mac and an Indonesian
security; and a large number of 10-year "mortgage lites,"
offered with an effective 13-14% effective interest rate.


6. (SBU) Marchenko described the Kazakhstani population as
"confident in the medium-term" about the Kazakhstani
economy, as evidenced by their willingness to hold short-
and medium-term securities denominated in the local
currency. However, he said, "of deposits longer than three
years, 91% are in dollars."


7. (SBU) Continuing his description of the economy,
Marchenko noted that in Kazakhstan the ratio of pension
assets to GDP was very high, due to widespread employer
contributions to pension plans. Marchenko described the
rules governing pension fund investments as "fairly
liberal," especially a rule which allowed up to 40% of
pension assets to be invested abroad.

Dependency on the Oil Economy
--------------


8. (SBU) Secretary Johanns asked Marchenko how dependent
Kazakhstan's economy was on the current, high price of oil.
In reply, Marchenko characterized the GOK's management of
oil revenues as "positive," explaining that a cumulative $7
billion had been saved in the National Fund, both to combat
Dutch Disease and to provide for budgetary stabilization.
(Marchenko noted that, as Central Bank Chairman, he, along
with the then-Minister of Finance, had set up the Fund.)
"The Fund could support the budget for two-and-a-half to
three years if oil prices went down," Marchenko explained.
While money was being set aside, he concluded, little had
been done to diversify the economy. The National
Innovation Fund and Development Fund, he said, "have made
little progress."

Rural Sector Potential
--------------


9. (SBU) Asked about the economic potential of Kazakhstan's
rural sector, Marchenko replied that exports of wheat,
cotton, sunflower seeds and oils, and rice were "positive,"
and that animal husbandry had "huge potential," especially
the raising of sheep for lamb and mutton export. With the
country's free pasture, "we could triple the number of
sheep we raise." Marchenko also lauded the potential of
the food processing and wool processing industries, noting
that, unlike the oil sector, these industries generated
significant employment. "The potential is big, but success
so far is limited."

Growing the Regional Economy
--------------


10. (SBU) Under Secretary Shiner asked Marchenko how
important the regional economy was to Kazakhstan.
"Regional cooperation," Marchenko answered, "is as dead as
always." Kazakhstan, he said, was looking outside the
region, comparing itself to Russia, Poland, and Hungary.
In terms of Central Asia, "the key to the region is
Uzbekistan, but they are not interested in cooperation."
Marchenko told the Secretary that Halyk Bank had tried to
open a branch in Uzbekistan "for five years before I
joined," without success. From Uzbekistan, he concluded,
Kazakhstan gets only capital flight and illegal labor.
President Karimov, he said, is "very smart, but very much
into state capitalism." In Uzbekistan, he added, "Stalin
is alive." "It's a pity," he said, "because the Uzbek
entrepreneurial spirit is good."

Increasing Market Forces in the Energy Sector
--------------


11. (SBU) U/S Shiner asked how the U.S. could help increase
market forces in the region's energy sector. First,
replied Marchenko, "a pipeline through Iran would be good."
Second, "try to counter what China is doing." China, he
said, "will offer 25% more for oil assets than anyone
else...at some point, they will have a really healthy chunk
of our market." When Ambassador Ordway noted that the
Chinese were not getting "first-line" Kazakhstani oil
assets, Marchenko grudgingly agreed: "There are not too
many first-line assets left. Still," he said, "your energy
policy is not that clear." U/S Shiner responded: "we are
clear that the Chinese approach to energy security -
actually owning the producing assets - isn't helpful."


12. (U) Secretary Johanns did not have the opportunity to
clear this cable.

ASQUINO