KAZAKHSTAN'S "BONUS SCANDAL": PUBLIC COMPANIES IN THE

UNCLAS SECTION 01 OF 02 ASTANA 000147

SIPDIS

SENSITIVE

SIPDIS, SCA/CEN - O'MARA

E.O. 12958: N/A
TAGS: PGOV ECON ENRG KZ
SUBJECT: KAZAKHSTAN'S "BONUS SCANDAL": PUBLIC COMPANIES IN THE
PUBLIC EYE

REF: REF A. ALMATY 3278, REF B. ALMATY 2888, REF C. ALMATY 3274

ASTANA 00000147 001.2 OF 002



1. (SBU) Summary: The so-called "bonus scandal," in which
President Nazarbayev lashed out against the exorbitant level of
salaries paid to top executives at state-owned companies, has
added to the mounting criticism of the government. The media
has portrayed the affair as part of Nazarbayev's effort to
correct the government's errant ways. Although nominally
tainted by the scandal, the newly created state holding
companies Samruk and Kazyna are unlikely to be weakened. In all
likelihood, the developments represent a carefully stage-managed
anti-corruption move, a shift of spoils between competing
elites, and flexing of presidential muscle over the control of
state-owned enterprises. End summary.


NAZARBAYEV BREAKS THE STORY


2. (U) At the September 20 Security Council meeting, President
Nazarbayev sharply criticized top management salaries at
Kazakhstan's national companies. The session, parts of which
were televised, saw an outpouring of what the media widely
described as the President's "indignation" at the level of
compensation enjoyed by top executives of some prominent
national companies. Nazarbayev specifically mentioned the state
holding company Samruk, Samruk's constituent company
KazakhTelecom, the development fund umbrella organization
Kazyna, and Kazyna's constituent Kazakhstan Development Bank.


3. (U) The brunt of Nazarbayev's anger fell on Khayrat
Karibzhanov, president of the telecommunications monopoly
KazakhTelecom. Addressing Prime Minister Daniyal Akhmetov,
Nazarbayev demanded the dismissal of Karibzhanov, whose salary,
he said, was $364,000 a month. Among others, Nazarbayev also
mentioned the former President of the Kazakhstan Development
Bank Kambar Shalgimbayev ($100,000 a month),and the head and
deputy heads of Samruk (respectively, $34,000 and $32,500 a
month). (Note: one of the two deputy heads of Samruk is
Nazarbayev' son-in-law Timur Kulibayev. End note.) Karibzhanov
has since been fired.


4. (SBU) "All who have lost their shame," said Nazarbayev, "must
return the money to the state." Those who fail to do so, he
continued, are to be put on a "special list to be published,
followed by an investigation in accordance with the law."
Nazarbayev gave the General Procuracy a month to investigate the
issue of remuneration in national companies. Some officials,
including Karibzhanov, have returned their bonuses. A Samruk
insider told Econoff that at least one official of the holding
company has "voluntarily" reduced his salary. Defending his
organization to members of the Mazhilis (lower house of
Parliament) on September 21, Samruk Acting Executive Director
Sauat Mynbayev clarified that Karibzhanov's base salary last
year was, in fact, $6,500 a month. With bonuses, it amounted to
$140,000 a month, still "incredibly high," Mynbayev said, but
not as high as the monthly sum of $365,000 announced by
Nazarbayev.

SAMRUK AFFECTED...


5. (SBU) According to the Samruk insider, Karibzhanov's 2005
compensation was determined by a long-standing mechanism which
set aside a bonus pool based on the company's profitability. By
"effectively taking advantage of its monopoly power," he said,
KazakhTelecom has, indeed, been very profitable. According to
press reports, KazakhTelecom and KazMunaiGas, the state oil &
gas company, together accounted for 99% of Samruk's 2005 income.
(Note: Established in January 2006, Samruk currently holds the
assets of KazakhTelecom, KazMunaiGas, the post office KazPost,
the railroad Kazakhstan TemirZholy, and the Kazakhstan
Electrical Grid Operating Company, KEGOC. See Ref A. End note.)


6. (SBU) The Samruk insider further told Econoff that the
scandal reflects Samruk's failure to date to establish effective
reporting channels with constituent companies. The companies
under the Samruk umbrella did not inform the Samruk management
of incoming official inquiries on executive salaries, he said.
Samruk, the insider added, had intended to review the salary
issue but was upstaged by the scandal. He expressed some
concern that, in the short term, the scandal represents a public
relations blow to the still-young Samruk.

...BUT NOT DAMAGED...


7. (SBU) Observers, however, have not blamed Samruk and Kazyna
for the salary debacle. Media coverage has portrayed the
emergence of the salary issue as part of President Nazarbayev's
drive to fight corruption and clean up the government,
particularly in the wake of the HIV infection scandal in South
Kazakhstan (Ref B). In both scandals, much blame has been

ASTANA 00000147 002.2 OF 002


directed at the government but not at the Presidential Palace.
Nazarbayev's decision to raise the issue in a very public forum
has further fueled media speculation that the government's days
may be numbered. In power for three years as of June 2006,
Daniyal Akhmetov is the longest-serving prime minister in the
history of independent Kazakhstan.

...AS BIGGER CHANGES MAY BE AFOOT


8. (U) Talgat Mukashev, an observer writing for a Russian-based
website centrasia.org, views the bonus scandal through the prism
of an emerging "new hierarchy of economic power in the country."
Citing ample talk of creating additional state holding
companies, he sees a drive toward consolidation of key economic
assets. (Note: A new agricultural state holding company,
KazAgro, is in the works, per Ref C. There is also discussion
of forming a metallurgical state holding company. End note.)
The bonus scandal, according to this view, is a shift in the
balance of power between various elite groups competing for
control of the assets. In particular, Mukashev sees PM
Akhmetov's government losing control over state-owned companies.
(Comment: Post sees a possible connection between this
development and reported plans to strengthen the power of
Parliament and the government. It is too early, however, to
definitively judge the cause-and-effect relationships, if any.
End comment.)


9. (SBU) Karibzhanov's ouster comes amid other changes at
KazakhTelecom. In the wake of Samruk's creation, the company's
entire board of directors was replaced in June, with the
exception of Karibzhanov himself. Furthermore, there is much
discussion of a staged privatization of KazakhTelecom through
initial public offerings, both on the Kazakhstani Stock Exchange
(KASE) and abroad.


10. (SBU) Comment: Although the bonus scandal has nominally
impacted Samruk and Kazyna, it is unlikely to weaken these
institutions. Only recently created, Samruk and Kazyna are
currently at the core of the GOK's key economic policies, the
former for bringing efficiency and transparency to state-owned
enterprises, the latter for diversifying the economy away from
energy. With plans underway to bring more state-owned companies
into Samruk and direct more government resources toward economic
development in the non-energy sector (presumably through
Kazyna),it is likely that both institutions will continue to
grow in importance. The current shake-up may continue the trend
of more Samruk insiders being appointed to key positions at
Samruk's constituent companies. This should strengthen the
holding company's ability to implement changes within its
components and help prevent reporting breakdowns such as the
constituent companies' recent failure to inform Samruk of the
government's salary inquiries. End comment.
MILAS