SCENESETTER FOR DEPUTY ASSISTANT SECRETARY

S E C R E T SECTION 01 OF 04 ALMATY 002905 SIPDIS SIPDIS 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. -------------- The Political Context -------------- ¶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. ALMATY 00002905 002 OF 004 ¶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 SIPDIS 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. -------------- The Macroeconomic Situation -------------- ¶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 ALMATY 00002905 003 OF 004 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. -------------- The Security Relationship -------------- ¶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 ALMATY 00002905 004 OF 004 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