KAZAKHSTAN: CEO UPDATES AMBASSADOR ON STATE

UNCLAS SECTION 01 OF 02 ALMATY 003278 SIPDIS SENSITIVE SIPDIS DEPT FOR SCA/CEN - O'MARA E.O. 12958: N/A TAGS: PGOV ENRG EPET KZ SUBJECT: KAZAKHSTAN: CEO UPDATES AMBASSADOR ON STATE HOLDING COMPANY PLANS Ref: ALMATY 3178 ALMATY 00003278 001.2 OF 002 ¶1. (SBU) Summary: Sauat Mynbayev, Acting CEO of Samruk, Kazakhstan's Holding Company for State Assets, told Ambassador on September 12 that Samruk had completed its "organizational phase" and was now concentrating on improving corporate management. Mynbayev confirmed the anticipated privatization of a KazMunaiGas subsidiary (reftel),and suggested that KazakhTelecom might offer a limited (4.5%) placement in the future. According to Mynbayev, Samruk-held companies will be managed independently of one another, with no cross-subsidization of unprofitable companies by profitable ones. While Samruk makes much of its plan to appoint "independent" directors, the example of KMG's board suggests little intention to relinquish substantial control to outsiders. End Summary. Samruk Progress Report -------------- ¶2. (SBU) Mynbayev informed Ambassador Ordway that Samruk had recently concluded its "organizational stage," during which Parliament passed enabling legislation; shares of the first five state companies -- KazMunaiGas (KMG), Kazakhstan Temir Zholy (KTZ),KazPost, Kazakhstan Electrical Grid Operating Company (KEGOC),and KazakhTelecom -- were transferred to Samruk, and changes were made to the companies' charters, boards of directors, and audit procedures; and Samruk's internal staffing and budget were defined. With those tasks accomplished, Mynbayev said, Samruk would now focus on implementing uniform corporate management practices and developing mid- term strategic and budgetary plans for each company. Independent Board Directors -------------- ¶3. (SBU) Mynbayev explained that, in an effort to ensure professional corporate management, two "independent" directors would be appointed to Samruk's Board, and to the (six member) boards of each constituent company. (Note: To date, only Alexander Pavlov - Deputy Chairman of the Asar political party - has been named an "independent" Samruk Board member. One position is still vacant. End note.) Additional expatriates, Mynbayev added, would be recruited as needed. Samruk, he said, had already hired a German CFO, Ulf Wokurka (see par. 4),and a Russian Human Resources Director. ¶4. (SBU) Note: Theoretically, Samruk will influence the operations of its constituent companies only via the latters' boards of directors. In addition to two "independent" directors, each company board (composed of six total members) also includes two Samruk representatives. Thus, for example, KMG's board is chaired by Timur Kulibayev (Mynbayev's Deputy at Samruk) and also counts Galiausat Keshubayev (Director of the Samruk office which oversees KMG, and an old KMG hand) as a member. The only "independent" KMG director named to date is Guglielmo Moscato, a former AGIP Chairman and Eni President with extensive Kazakhstan experience. The two remaining KMG directors are KMG President Uzakbay Karabalin and Bolat Akchulakov, Vice-Minister of Energy & Mineral Resources. End note. Privatization Plans -------------- ¶5. (SBU) Asked about the forthcoming partial privatization of KMG's exploration and production subsidiary, Mynbayev responded that the offering would likely occur in December. Mynbayev identified KazakhTelecom as the only other Samruk company likely to be offered on the international market, telling the Ambassador that "there is a chance" that 4.6% of the company would be privatized. (Note: In an August 18 meeting with the DCM, Samruk CFO Ulf Wokurka described the divestiture of five percent of KazakhTelecom as a "first step," with later reduction of the State share to "25% plus one share" likely. Mynbayev alluded to the fact that the GOK had not yet formed a consensus on KazakhTelecom's fate. End note.) ¶6. (SBU) Turning to KTZ, the national rail company, Mynbayev suggested that segments of the company, such as its rolling stock, might eventually be privatized, but added that internal reforms would have to be undertaken first. No plans existed for privatizing either KEGOC or ALMATY 00003278 002.2 OF 002 KazPost, he added. (Wokurka told DCM of other plans afoot at KazPost, explaining that company might undertake a "social role" by offering banking and insurance services to its clients in the most remote regions of the country.) ¶7. (SBU) Asked by the Ambassador which other state-owned companies might be transferred to Samruk, Mynbayev replied that there were "many" under consideration, including Air Astana, KazAtomProm, and "the airports." How the Money Flows -------------- ¶8. (SBU) Mynbayev told the Ambassador that, of the five Samruk companies, all but Kazakhstan Temir Zholy were "profitable." As the State shareholder, Samruk received dividend payments from each company, which it passed on to the national budget after paying its own administrative costs. Samruk's payments to the budget would not be particularly significant to the State, Mynbayev noted - KMG, for example, would pay far more to the State in taxes and other direct payments than would be transferred as dividends via Samruk. Mynbayev underscored that the financial affairs of each Samruk company would be managed separately - there would be no reallocation of money from one (more profitable) company to another. ¶9. (SBU) Comment: "Professionalizing" the management of Kazakhstan's state-owned companies does not necessarily mean changing the cast of influential characters, if the KMG example is any guide. Still, Samruk puts some welcome distance between the government and the operation of the state-owned companies. Prior to Samruk's creation, the ministries were responsible for both the regulation and the operational oversight of state-owned enterprises. Samruk, as a non-ministerial entity seeking its best practices from the business world, should improve the corporate governance of its constituent companies. End comment. ORDWAY