Identifier
Created
Classification
Origin
06ASTANA889
2006-12-20 03:58:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

Kazakhstan: Economy Minister Comments on Tengiz Brawl

Tags:  ECON PGOV ENRG EPET KZ 
pdf how-to read a cable
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RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #0889/01 3540358
ZNR UUUUU ZZH
R 200358Z DEC 06 ZFR ZFR ZFR
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 7989
INFO RUCNCIS/CIS COLLECTIVE
UNCLAS SECTION 01 OF 03 ASTANA 000889 

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E.O. 12958: N/A
TAGS: ECON PGOV ENRG EPET KZ
SUBJECT: Kazakhstan: Economy Minister Comments on Tengiz Brawl

REF: A: Astana 501; B: Astana 737

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UNCLAS SECTION 01 OF 03 ASTANA 000889

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DEPT FOR SCA/CEN - O'MARA

E.O. 12958: N/A
TAGS: ECON PGOV ENRG EPET KZ
SUBJECT: Kazakhstan: Economy Minister Comments on Tengiz Brawl

REF: A: Astana 501; B: Astana 737

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1. (SBU) Summary. In a December 6 meeting with the Ambassador,
Economy Minister Musin identified the inadequacy of Kazakh workers'
wages as a key contributor to the recent "Tengiz brawl." Even
though an oil company might allocate funds for a decent wage, Musin
explained, by the time a contractor and sub-contractor took their
cut, only a fraction of that wage reached the workers - a result the
Minister termed a "social injustice." End summary.


2. (SBU) In a December 6 meeting with the Ambassador, new Economy
Minister Aslan Musin added to our insight on the economic context of
what has become known as the "Tengiz brawl" (Ref A). A key problem,
UNCLASSIFIED

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INFO CIS COLLECTIVE

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E.O. 12958: N/A
TAGS: ECON PGOV ENRG EPET KZ
SUBJECT: KAZAKHSTAN: SAMRUK'S NEW BOARD CHAIRMAN DEALS WITH
EXPANSION, GOVERNANCE

REF: A) ALMATY 3278, B) Almaty 3178, C) Astana 147


1. (SBU) Summary: On December 8, Sir Richard Harry Evans, the newly
appointed Chairman of the Board of Directors of the Samruk State
Holding Company, discussed with the Ambassador his uphill battle in
establishing proper corporate oversight over the Samruk companies,
working with the GOK, and plans for Air Astana. End summary.


2. (SBU) Background: Samruk, the national holding company based on
Singapore's Temasek, was established in January to provide
state-owned companies with professional management (Ref A). The
appointment of Evans as Chairman of the Board in November roughly
coincided with the announcement that another 17 companies would join

the original five in Samruk's fold. Evans has a prior indirect
connection to Samruk: he is the former chairman of BAE Systems, a
British giant with a 49% stake in Air Astana. Air Astana, the de
facto national airline in which the GOK currently holds a 51% stake,
is one of Samruk's 17 "new arrivals."


3. (SBU) The seventeen "new arrivals," along with their state
ownership share, are:

In Power Generation and Distribution:
- KazKuat (100%)
- Ekibastuz Energy Center (100%)
- Kazakhstan Electrical Energy & Capacity Operator (100%)
- Mangistauskaya Electrical Distribution & Grid Company (94.25%)
- Shulbinskaya Hydro Power Station (92.13%)
- Bukhtarminskaya Hydro Power Station (90%)
- Ust-Kamenogorskaya Hydro Power Station (89.99%)
- Astana Energy Service (61.72%)
- Kazakh Scientific Research Institute of the Power Sector (50%)

In Transportation:
- Pavlodar Airport (100%)
- Aktobe International Airport (100%)
- Astana International Airport (100%)
- Air Astana (51%)
- National Sea Shipping Company "KazMorTransFlot" (50%)

In Mining and Metals:
- Akbakai Mining & Metals Combine (33%)
- Maikainezoloto (25%)

In Engineering:
- National Company "Kazakhstan Engineering (100%)


4. (SBU) The original five companies subsumed under Samruk's
authority are KEGOC (100%),KazMunayGas (100%),KazPochta (100%),
Kazakhstan TemirZholy (100%),and KazakhTelecom (55.6%). Ulf
Wokurka, Samruk's Deputy Chairman and CFO, told us that there were
originally three more candidates for inclusion in Samruk. One of
them, KazAtomProm, has been temporarily set aside due to concerns
that its Russian partners would object.

"Board Members Are Violating Their Fiduciary Duties"

ASTANA 00000889 002.2 OF 003


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5. (SBU) Evans told the Ambassador that Samruk has three strategic
objectives:
- Professional management: operating "like a real company," adopting
international accounting standards, and achieving proper corporate
governance;
- Improved performance, derived from better governance; and
- IPO flotations, private placements, etc.
Evans, whose involvement with the company will be part-time, said "I
am clear on these goals. I am not sure other people in the
organization want the same."


6. (SBU) The focus, Evans said, must be on governance, which means
"getting everyone at Samruk on the same page" and implementing a
proper accounting system. He stated that there has been no
presentation of financial data to the board, leading him to conclude
that "all the board members are violating their fiduciary duties."
Evans stressed Samruk's need to overcome the Soviet mentality that
fails to pursue minimization of inputs in relation to output. "Good
governance," he continued, requires bringing into Samruk and its
corporate components "truly independent directors."


7. (SBU) The picture painted by Evans of an almost total lack of
effective corporate oversight tracks with what we have heard from
some other westerners with insight into the inner workings of large
Kazakhstani corporations. These observers have privately expressed
reat skepticism`2%gaRDiNG dhe sestaafmfilipy"mf"Kcxbjish
copanies'`listi.'S NQthULWvtgv8Ghcoc$M~klejaa"*MPF).!for%i'ne23W ( xq&Q`'/QsMtQOR$hde0GLM%'liqegw$ve" 4(4MJ4HEQ5p8as0
Q}N _yFQIhZmqB"~xugwwu'j$h`mpjn"edboQrQ]Q:$Qry&o@ 4p9Q02QQ;Yy;kKQchdq`oc Ref B. End note.) According to these observers, the
Kazakhstani IPOs on the LSE have not been accompanied by a
significant level of disclosure. At best, this view goes, the
London IPOs have failed to force the Kazakhstani companies to
reform; at worst, the limited flotations represent little more than
a short-term vehicle for company insiders to access the prestige and
the capital provided by an LSE listing without introducing proper
business practices or significantly diluting their ownership.

Dealing with the GOK: It's a Cultural Thing
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8. (SBU) Evans stressed Samruk's need for directors who are "totally
independent but know something about these businesses," and asked
whether the Ambassador could help in this regard. Evans
acknowledged that attracting such talent will be problematic. The
government, he said, "has got itself into a corner" by orchestrating
the so-called "bonus scandal" (Ref C). As a result, Samruk finds
itself unable to provide the salaries necessary to recruit quality
management talent, foreign or domestic. The problem, Evans said, is
particularly acute in the oil and gas sector: "we provide them with
training, they go to foreign companies."


9. (SBU) Evans considers it crucial to establish a proper
relationship with the GOK. He said he asked President Nazarbayev
"to give Samruk a free hand on remuneration" and "to get rid of the
[unbearable] procurement laws." (Note: Wokurka told us earlier of
the stifling effect of the state's procurement bureaucracy, which
imposes huge administrative burdens "just to get paperclips." End
note.) GOK control over Samruk, Evans said, rests with Deputy Prime
Minister Karim Masimov, whom he called "the de facto owner." The
GOK, according to Evans, is serious about bringing about "a
transparent way of government." But this "won't sit well with the
way some of these companies are run." "There is already some
discomfort," Evans continued, "in areas like audit and debate on how
it should be done. The government has excessive expectations on how
fast the results will come. Some of this is cultural."

Samruk Becomes an "Investor"
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10. (SBU) "All of the five [original] companies have pretty
substantial growth prospects," said Evans. He acknowledged that
with the current round of expansion, Samruk is considering adopting
an investment strategy. (Note: Samruk's initial focus was only on
the management of state assets. End note.) However, he added,
Samruk already has its hands full and should limit its investment
activity to the core areas of its original five companies. Another
problematic issue here, he said, is the possibility of competing
with Kazyna, which "makes no sense." (Note: The Kazyna Fund for
Sustainable Development is the GOK's other holding company,
encompassing a number of state-owned institutions charged with
realizing the GOK's goal of economic diversification away from
energy. End note.) "My feeling," Evans continued, "is that
eventually, there needs to be some sort of co-existence with Kazyna.

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Not a merger but a superstructure."

The Plan for Air Astana: Hire Crews, Lease Planes
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11. (SBU) Addressing Air Astana, Evans said he believes the airline
should continue to lease, not buy, its aircraft. He also stated
that the decision should rest with professional managers, not the
government. Between now and fall 2007, he said, the airline needs
to hire an additional 600 to 700 crew members, adding to the current
total of 2,300. Air Astana is also considering a long-term training
program for pilots, Evans said. (Note: Another Samruk insider tells
us that there is a plan for the GOK and BAE Systems to draw down
their ownership of Air Astana in parallel; the resulting shares will
be distributed to the airline's employees. End note.)


12. (SBU) On the choice between Boeing and Airbus aircraft, Evans
said "in narrow-body aircraft, the products are very similar; what
swings the decision is advantages in maintenance. In wide bodies,
Boeing is better. The 777 is probably the best product."

Comment
--------------


13. (SBU) Comment: Samruk's current expansion, which its executives
have told us will not be the last, signals growth not only in the
company's size but also its mandate. Towering over 22 state-owned
companies, Samruk looks quite different from its original
incarnation as the holding company dedicated merely to professional
management of "strategic state assets." Notably, with the arrival
of "the new 17," Samruk already finds itself as a minority
shareholder in two companies; the number is likely to increase as
the GOK sheds shares through planned IPOs and privatizations. It is
still unclear whether Samruk will become primarily a stepping stone
for privatizing state-owned companies or a de facto investment
vehicle for the GOK. In a sign that Samruk may not be too quick to
relinquish to the market much of its newly acquired holdings, one
insider told us that a new government resolution will soon formalize
Samruk's mandate not only as a "management company" but an
"investment company" as well. End comment.

MILAS