SCENESETTER FOR DEPUTY ASSISTANT SECRETARY

S E C R E T SECTION 01 OF 04 ALMATY 002905

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DEPT FOR SCA/DAS (EFEIGENBAUM)

E.O. 12958: DECL: 08/15/2016
TAGS: PREL KZ
SUBJECT: SCENESETTER FOR DEPUTY ASSISTANT SECRETARY
FEIGENBAUM'S VISIT TO KAZAKHSTAN

Classified By: Pol-Econ Chief Deborah Mennuti, reasons 1.4 (B) and (D).


1. (C) Summary: Your visit comes at a time of accelerating
U.S. Kazakhstan bilateral engagement. With its economic
strength, vast energy resources, strong commitment to the
fight against international terrorism, and capacity and
demonstrated willingness to craft an independent foreign
policy, Kazakhstan has become the most important partner for
the United States in the region. Consequently, the past year
has witnessed visits by Vice President Cheney, Secretary of
State Rice, Secretary of Energy Bodman, Secretary of
Agriculture Johanns, then-DCI Goss, and CENTCOM Commander
Abizaid. At the same time, Kazakhstan has shown uncertain
commitment to political reform in recent years. President
Nazarbayev,s promises before and during the 2005 election
campaign to increase the participation of civil society and
opposition forces in national politics remain unfulfilled.
That said, the government is keenly interested in
strengthening its image abroad. Part and parcel of this is
ensuring that President Nazarbayev,s visit to Washington in
September is a success. That being the case, now is an
excellent time to refocus U.S. attention on the protection of
political liberties and human rights in Kazakhstan in an
attempt to prompt some movement forward in these areas. End
summary.

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The Political Context
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2. (C) President Nazarbayev is the only leader independent
Kazakhstan has ever known. In December 2005, he was elected
to a new 7-year term. Nazarbayev has repeatedly stated that
he intends to follow the term limits laid out in
Kazakhstan,s constitution and step down when this term ends.
While genuinely popular, Nazarbayev probably did not receive
91.6% of the popular vote in December, as officially
reported. (Note: a U.S.-funded exit poll put his support at
83%. End note.) Indeed, the OSCE characterized the December
elections as flawed and falling short of international
standards. That said, the OSCE also noted that the elections
were a significant improvement over those held in 1999. Two
independent challengers were able to register and remain in
the race.


3. (C) As a presidential candidate, Nazarbayev made a series
of promises about opening up Kazakhstan,s political space to
greater involvement by the opposition and civil society.
Nazarbayev has since shown little zeal for instituting such
reforms, however. To some degree, this may be the result of
the assassination of prominent opposition leader Altynbek
Sarsenbaiuly, along with two of his associates, in February.
President Nazarbayev reportedly viewed this incident as an
affront to his personal authority, and to the image of a
stable, modern Kazakhstan that he is working so hard to
promote. The assassination was politically disrupting both
in terms of the public outcry it caused, and in terms of the
flurry of activity it produced among the political elite,
many hoping to avoid accusations of responsibility or to spin
the tragic incident to their personal advantage.


4. (S) Ten individuals, including seven members of an elite
anti-terrorism unit, are currently on trial in connection
with the murders. The FBI provided technical assistance
during the criminal investigation, including FBI-administered
polygraph examination of the two main suspects. While it
remains unclear as to where the order for the assassinations
originated, the Embassy is convinced that the President was
not involved and that those who stand accused are in fact
guilty. Closing arguments in the trial began August 14, with
a verdict expected in the coming weeks.


5. (SBU) In July 2006, the two main pro-presidential parties,
Otan and Asar, merged in a maneuver that appears to have
sidelined President Nazarbayev,s daughter, Dariga. Ms.
Nazarbayeva, considered by some as a contender to succeed her
father, had led Asar on a platform of moderate political
liberalization, within an overall context of loyalty to the
president. The merger occurred fairly suddenly, following a
series of statements by Dariga that criticized the
president,s inner circle regarding the Sarsenbaiuly murder.
In addition, the Information Minister is waging a vigorous
campaign to reduce her ownership and influence in the
national media that she and her husband dominate. For the
moment, at least, Dariga has lost her primary vehicle for
establishing an independent support base, and may even lose
part or all of her media empire.

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6. (C) In its drive for greater international standing, the
GOK has put significant emphasis on gaining the Chairmanship
in Office of the OSCE in 2009. Despite Secretary Rice,s
discussion with FM Tokayev in July as to why the U.S. could
not support Kazakhstan,s bid in 2009, some in the GOK --
Deputy FM Aliyev and his supporters -- have pressed ahead in
its efforts to gather supporters. Germany has openly
expressed its backing for Kazakhstan,s bid and is working to
convince other OSCE members to do the same. We suggest that
you use your meeting with FM Tokayev to reemphasize the
Secretary,s point that Kazakhstan would do better by

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delaying its bid.


7. (C) The OSCE issue is one of several indicators that
suggest the GOK has undertaken a wide-ranging strategy to
augment the country,s image on the international stage.
President Nazarbayev,s upcoming visit to Washington is a key
component of this effort, and as such the GOK is placing
significant emphasis on making it a success. Already,
perhaps with a view toward the September meeting, the GOK has
publicly stepped up its efforts to address the problem of
endemic corruption in the country. Your visit will be well
timed to suggest other areas in which the USG hopes to see
improvements before the presidents, meeting.

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The Macroeconomic Situation
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8. (SBU) Kazakhstan,s economy exceeds those of all the other
Central Asian states combined, largely due to the country,s
vast energy supplies and other mineral resources. Kazakhstan
has enjoyed nearly double-digit GDP growth for the past five
years, and inflation has been manageable. The financial
sector is the healthiest in the former USSR. Other important
sectors include construction, mining, transport, and
communications. In 2000, Kazakhstan completed its loan
repayments to the IMF ahead of schedule. Currently,
Kazakhstan is moving through the final stages of bilateral
negotiations in pursuit of WTO membership, a status it hopes
to achieve in 2007.


9. (C) In tandem with President Nazarbayev,s desire to
assume a leadership role in the region, Kazakhstan,s strong
economy makes it the most likely candidate to serve as the
motor behind the &Central Asia Infrastructure Initiative,8
announced by Secretary Rice during her October 2005 visit.
The U.S. has proposed that Kazakhstan host a Central Asian
Regional Economic Integration Dialogue (CAREID) in order to
discuss specific steps to strengthen economic linkages
between Central and South Asia. We were unable to schedule
the first session of the CAREID before the Nazarbayev visit
as originally planned, due primarily to Kazakhstani
sensitivity to Russian concerns about the idea. Post remains
optimistic that with the proper groundwork, the process can
move forward.


10. (SBU) The Kazakhstani economy is dominated by the energy
sector, which provides more than 20% of government revenue.
Oil exports alone accounted for 31% of GDP last year.
Currently, the country produces 1.2 million barrels of oil
per day. Wary of so-called Dutch Disease, the GOK moved to
manage the risks associated with an energy-dependent economy
by creating an offshore National Fund (currently valued at
over $10 billion) to sterilize oil revenue and minimize
budgetary fluctuations. Recent changes in the fund's
procedures have strengthened its transparence and
accountability, and provided that all the government's oil
revenue will be deposited directly into the fund.
Kazakhstan,s energy sector continues to grow rapidly, and is
expected to become one of the world,s top ten oil producers
by 2015. Estimations put expected oil production in 2015 at
150 million tons annually (3 million b/pd).


11. (SBU) International competition to gain access to
Kazakhstan,s energy sector and supplies has been intense,
and has often taken a geopolitical bent. Currently, the USG
is advocating on behalf of the ConocoPhillips bid to
participate in the development of Kazakhstan,s offshore
Caspian &N Block8 in partnership with the state-owned
oil-and-gas company.


12. (SBU) The current push in the economy is for
diversification, both within the energy sector and the
economy as a whole. Regarding the former, the U.S. actively
supports the diversification of transit routes from

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Kazakhstan to the world market. In June, Kazakhstan and
Azerbaijan concluded three-year negotiations regarding access
of Kazakhstani oil to the Baku-Tbilisi-Ceyhan pipeline.
While this should be considered a success, consensus was only
reached after stripping some of the more contentious clauses
out of the agreement, thus leaving a number of issues to be
resolved in future Host Governmental Agreements.
Negotiations on expanding the throughput capacity of the CPC
pipeline (the main export pipeline for Tengiz and
Karachanganak oil) remain difficult. Russia has been
increasingly at odds with investors (including Chevron and
ExxonMobil) and the GOK. Corporate governance, taxation, and
issue-linkage have been the main sticking points. January,s
gas disruptions to Ukraine reinvigorated U.S. interest in a
possible Trans-Caspian Gas Pipeline, which is currently in
feasibility study status.


13. (SBU) Diversification in the broader economic context is
one of Kazakhstan,s main challenges. A growing influx of
petrodollars is leading to a consistent appreciation of the
tenge, giving rise to excessive liquidity and driving what
many observers see as a real estate bubble. The government
is focusing its diversification efforts on the so-called
cluster initiative, and has identified seven priority
clusters: tourism, construction materials, textiles,
metallurgy, food processing, oil and gas machinery building,
and transport and logistical services.


14. (SBU) Other causes for concern include a murky legal and
regulatory environment, especially for foreign investors.
Contractual and property rights are difficult to defend in
the present court system. Corruption, along with specious
and arbitrary harassment of some businesses by local and tax
authorities, also hinders Kazakhstan,s progress. Virtually
all foreign investors have nonetheless remained committed to
Kazakhstan, and many are making substantial additional
investments.

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The Security Relationship
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15. (SBU) Kazakhstan has been a strong partner in the War on
Terrorism. Since 2002, Kazakhstan has provided no-cost
overflight (over 4500) and emergency landing rights for U.S.
aircraft participating in Operation Enduring Freedom. The
latter of these rights has become increasingly important
since the U.S. vacated the Kharsi-Khanabad airbase at
Uzbekistan,s request in 2005. Kazakhstan has also provided
valuable support in Iraq. Since August 2003, a Kazakhstani
contingent (made up of 27 troops and two liaison officers,
who rotate every six months) has destroyed over 3.5 million
pieces of ordnance in Iraq. Recently, they began training
Iraqi forces to conduct ordnance disposal operations
themselves.


16. (C) Threat reduction and non-proliferation have been the
cornerstone of the bilateral relationship since Nazarbayev,s
landmark decision in 1992 to denuclearize the country. Under
the CTR program, DTRA was helped destroy means of delivery
and nuclear testing facilities. DTRA is currently working to
help the GOK to secure the former Soviet nuclear weapons test
site in Semipalatinsk and, through the Biological Threat
Reduction Program, to secure especially dangerous pathogens.
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.


17. (C) Given its size, geographical position, resources, and
status as a moderate, Islamic country, Kazakhstan could do
more to promote international security. One way that is
currently being explored is for Kazakhstan to participate in
a Provincial Reconstruction Team (PRT) in Afghanistan. This
was a major topic of discussion during Gen. Abizaid,s and
Lt. Gen. Eikenberry,s recent visits, and the idea appears to
be gaining traction within Kazakhstani military and political
circles.


18. (C) In 2004, Kazakhstani authorities realized they had an
indigenous terrorist problem following the July 30 terrorist
bombings in Tashkent, which included an attack on the U.S.
Embassy. Those subsequently arrested and tried included
ethnic Kazakhs who had trained for the operation in the
southern Kazakhstan. This problem was underscored in late

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2005 when Uighur terrorists linked to al-Qaida murdered
Kazakhstan,s deputy chief of mission in Islamabad. As a
result of these events, cooperation between U.S. and
Kazakhstani intelligence agencies on domestic and regional
terrorist threats improved dramatically.


19. (SBU) One of the Ministry of Defense,s (MOD) main
priorities has been to establish a helicopter unit of eight
UH-2s in support of their counterterrorism forces. The MOD
has already acquired two UH-2 helicopters, with financial
support from the FMF program. Congress has approved the
acquisition of two more. With shrinking FMF allocations, and
considering Kazakhstan,s economic strength, the USG has been
pushing for the GOK to begin using national funds to continue
this project.


20. (SBU) Post looks forward to your visit and the
opportunities it will present to engage with the Kazakhstani
government on a full range of issues.

ORDWAY