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