U.S.-JAPAN CENTRAL ASIA DIALOGUE: PART TWO,

C O N F I D E N T I A L SECTION 01 OF 07 TOKYO 007164

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/28/2016
TAGS: PREL PGOV CH RU ZK JA
SUBJECT: U.S.-JAPAN CENTRAL ASIA DIALOGUE: PART TWO,
FOREIGN ASSISTANCE AND PROJECT FINANCE

Classified By: CDA Joseph R. Donovan. Reasons 1.4 (b,d)


1. (SBU) SUMMARY: Deputy Assistant Secretary for South and
Central Asian Affairs Evan Feigenbaum and a team of State and
USAID officials continued their full-day U.S.-Japan
consultations on Central Asia with interagency meetings on
foreign assistance and project finance. MOFA International
Cooperation Bureau Deputy Director-General Hiroshi Fukada
hosted a session attended by four other agencies to discuss
assistance programs to the countries of Central Asia.
Following this meeting, DAS Feigenbaum and the USG team met
separately with officials from the Japan Bank for
International Cooperation (JBIC) and the Japan International
Cooperation Agency (JICA) to further discuss assistance
programs and project finance opportunities in Central Asia.
DDG Fukada told Feigenbaum the United States and Japan should
increase information sharing as a first step in coordinating
their development programs in Central Asia. Feigenbaum
stressed that development assistance strategies must focus on
broad capacity-building, to support a spectrum of interests,
including enhanced security, the expansion of markets,
business development, and the spread of political and
economic openness in the region. The two sides also
discussed specific strategies and underlying assumptions of
their assistance to Central Asia, with an eye toward
enhancing cooperation between the U.S. and Japan. END
SUMMARY.


2. (SBU) SCA DAS Evan Feigenbaum led a U.S. team to Tokyo on
December 9 for discussion of how the United States and Japan
can work together to advance shared goals in Central Asia.
He was accompanied by SCA Senior Advisor for Regional
Economic Integration Robert Deutsch, USAID Europe and Eurasia
Bureau Senior Program Officer Timothy Alexander, and USAID
Central Asia Mission Director in Almaty, Kazakhstan,
Christopher Crowley. In addition to discussing assistance
programs, DAS Feigenbaum,s consultations also covered U.S.
and Japanese strategic priorities in the region, policies
toward each Central Asian country, the roles of Russia,
China, and Iran, and the climate for private investment in
the region, reported septels.

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ASSISTANCE IN CENTRAL ASIA
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3. (SBU) MOFA International Cooperation Bureau Deputy
Director-General Hiroshi Fukada began the interagency session
on assistance priorities by introducing a Japanese team from
various MOFA bureaus, as well as JBIC, JICA, the Ministry of
Economy, Trade, and Industry (METI),and the Ministry of
Finance.


4. (SBU) Japan believes, said Fukada, that Central Asian
countries lack the ability to manage existing infrastructure,
so donors must concentrate on building management capacity by
training personnel and providing technical assistance. The
collapse of the Soviet Union left a legacy of problems that
continue to plague border control, water/energy management,
transportation, and business development in Central Asian
countries. Central Asian governments must improve their
cooperation with each other, international organizations, and
the private sector if Japan and the United States are to
conduct successful programs.

Borders and Customs
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5. (SBU) The United States, said Feigenbaum, focuses heavily
on &wedge8 issues. For instance, improving border security

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and modernizing customs help to improve security but also
facilitate trade. Senior Advisor Deutsch noted that the U.S.
is engaged with all of the countries of the region on border
issues, usually in an effort to stop illicit trade in
narcotics or products of proliferation concern. In a number
of cases, notably Tajikistan and Afghanistan, there is a
complete lack of border facilities and countries seek to
manage their borders well inside of the border. The
unpredictable nature of border controls, as well as other
obstacles to the movement of goods such as corruption and
random checkpoints, are identified by shippers as the biggest
barrier to trade. Deutsch noted that we hope to work with
the International Financial Insititutions, other donors, and
the countries of the region, based on our enforcement border
control work, to try to facilitate trade. In addition to
physical resources, creating central databases and training
personnel are key aspects of improving border security. The
Japanese side indicated that a trade facilitation mission
will shortly be looking at these issues in Central Asia, and
Deutsch requested that Japan coordinate its program ideas
with U.S. embassies in the region so that the two countries
could develop complementary strategies.


6. (SBU) Border control is closely linked to improving the
business environment, noted MOFA Aid Policy Planning Division
Director Naoki Ito. To improve security and enhance regional
trade, the government of Japan is conducting project
formulation studies in all countries of Central Asia except
Turkmenistan. Japan is currently evaluating a project
proposal for Tajikistan and is looking for opportunities on
the Afghanistan side of the border as well, said DDG Fukada.
The next step for U.S.-Japan cooperation is to increase
information sharing on programs already being implemented as
well as proposals for future programs. DDG Fukada suggested
the United States and Japan exchange papers with information
on new programs in February 2007.


7. (SBU) Supporting the full implementation of international
customs codes is a critical aspect of this initiative,
explained USAID,s Alexander, emphasizing the need for
private sector access to information and documentation
requirements.

Transportation Links Key to Regional Prosperity
-------------- --


8. (SBU) Developing transportation links in the Central Asia
region is a priority for Japan, said DDG Fukada. When the
former Soviet Union collapsed, it left behind a network of
railways that repeatedly crossed national borders. Japan has
been assisting Central Asian countries, especially Uzbekistan
and Tajikistan, to rebuild the railways to respect national
sovereignty. Fukuda again stressed the need to develop
infrastructure management capabilities, noting that the
Central Asians were still unprepared to manage existing
railways or border crossings.

Water and Energy Trade Integration
--------------


9. (SBU) Improving the distribution of electricity and water
is a clear way to increase stability in the region, the U.S.
team told DDG Fukada. The United States, said Deutsch, is
working at three-levels to develop the region,s energy
trade: targeting domestic markets, bilateral markets, and
regional markets. Domestic programs focus on fixing pricing
problems, fighting corruption, enacting legal reforms,
increasing private sector involvement, and developing
institutions, explained USAID,s Crowley. The United States,
Deutsch added, is also working with its international

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partners to improve availability of electricity in
Afghanistan, notably through bilateral trade with its Central
Asian neighbors. Afghanistan is negotiating supply
arrangements with Turkmenistan, Uzbekistan and Tajikistan.
The Asian Development Bank is heavily engaged in developing
the facilites for transmission of this electricity in the
northern part of the country. It will approve a loan for the
inteconnection with Tajikistan in mid-December. Deutsch
indicated that the U.S. is also working closely with the
International Financial Institutions, led by the World Bank
to develop a model project that will deliver 1000 megawatts
of electricity to Pakistan from Tajikistan and Kyrgyzstan
across Afghanistan by 2010.


10. (SBU) Japan is currently conducting six different
projects in Central Asia to develop the region,s water and
energy resources. In addition to two thermal power plants
and three water resource projects in Uzbekistan, Japan
supports the Astana Water Supply and Sewerage project in
Kazakhstan. METI Middle East and Africa Division Director
Toshikazu Masuyama noted that lack of a legal framework for
transportation of energy and gas was a significant impediment
to development of the regional market. He noted that
improving energy efficiency in Uzbekistan, as signatory to
the Kyoto treaty, created emissions credits which benefited
Japan. Japan and the United States should encourage progress
in the creation of such a framework.


11. (SBU) The stalled delimitation of the Caspian Sea
remains a barrier to regional trade in hydrocarbons, said DAS
Feigenbaum. The United States hopes that the border
countries will be able to set aside their political
differences to move ahead with pipeline development. Noting
that the situation was especially sensitive for the
Kazakhstanis, Deutsch told DDG Fukada that the United States
Trade and Development Agency (TDA) is going to do a
feasibility study on trans-Caspian pipelines and alternatives
including liquefied and compressed gas.

Business Development: Dependent on Local Conditions
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12. (SBU) Establishing the rule of law is crucial in
promoting business development, said DDG Fukada. In addition
to pushing for legal reforms, Japan has established Centers
for Human Development in Kazakhstan and Kyrgyzstan. These
centers are a great tool for supporting Small and Medium
Enterprises (SMEs),which need micro-financing and are
essential to overall progress. Japan International
Cooperation Agency (JICA) Second Regional Department Director
Hiroshi Niino explained that last year JICA conducted a large
survey of the region,s business environment. Niino said the
survey results, which should come out in 2007, will concur
with concerns about Uzbekistan cooperation or lack thereof.


Getting the Right Mix of Donors and Projects
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13. (SBU) The Central Asia Regional Economic Corporation
(CAREC) and the Asian Development Bank (ADB) have been
important partners in regional development, agreed DAS
Feigenbaum and DDG Fukuda. The United States is interested
in increased cooperation with CAREC, and is supportive of an
ADB proposal to create a CAREC plus 3 framework to do so
(CAREC plus the United States, European Union, and Japan).
CAREC interaction with the major market economies would
provide added weight to the one regional organization that is
most likely to promote market approaches to development.
We would welcome thoughts on how we might structure such

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interaction.


14. (SBU) Japan also likes CAREC, stated DDG Fukada. It is
a geographically balanced organization, and well structured
to administer financial assistance, infrastructure
development, and technical assistance. The government of
Japan wants to increase coordination with the United States
and the European Union, and sees the CAREC plus 3 format as
an effective way to enhance regional cooperation. CAREC is
the most promising framework, agreed MOFA Central Asia and
Caucasus Division Director Hideki Uyama, who had attended a
recent CAREC meeting in Urumqi, China. In addition to using
CAREC as an aid coordination body, it provides a venue for
bilateral meetings on the margins to compare strategies.


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JBIC'S VIEWS ON CENTRAL ASIA
--------------


16. (SBU) Following the morning session, DAS Feigenbaum and
his delegation met separately at JBIC headquarters with Hara
Shohei, Director of the Program Division and Division 2 of
Development Assistance Department IV, and Tankanori
Shiraishi, Country Officer for Central Asia and the Caucasus
from Shohei's office. In addition, Kiyoshi Ishii, Team
Director of JICA's Central Asia and the Caucasus Team of
Regional Department II was also present.


17. (U) Hara opened by noting JBIC has been providing
assistance to Central Asian countries for fourteen years.
JBIC has identified six key development challenges in the
region as follows: improving the business environment,
reducing poverty, developing human resources, modernizing the
economic and social infrastructure, diversifying industry,
and accelerating intra-regional cooperation. Of these, JBIC
has chosen to focus on three:

-- modernizing the economic and social infrastructure,
including efforts to achieve economic reform, emphasizing
effective use of water and energy resources, and greater
efficiency in the transportation network;

-- human resource development and institutional reform
through the provision of technical assistance to build
capacity;

-- accelerating intra-regional cooperation by emphasizing
effective use of energy and water resources and by assisting
the development of transportation infrastructure.


18. (SBU) Of the Central Asian countries, JBIC's major
program is with Uzbekistan, where six projects are being
financed by Japanese ODA loans. Five projects are being
financed in Kazakhstan, two in Kyrgyzstan, and one in
Turmkenistan. Hara explained that JBIC plans to focus future
programs mainly on Uzbekistan and Tajikistan. Kazahkstan has
become so wealthy that they no longer need ODA funding.
Kyrgyzstan is so highly indebted that JBIC cannot make
further loans. And the political situation in Turkmenistan
makes it impractical to plan any projects there at this time.

Tajikistan
--------------


19. (SBU) Hara noted that although JBIC currently does not
have any projects in Tajikistan, it was been working with the
World Bank and ADB and believes the situation in that country
is likely to improve quickly. A team from JBIC will visit
Dushanbe the week of December 11 to evaluate what can be done

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there and characterized Japan's approach at this time as one
of "cautious entry." He noted there is no way Japan will
even try to match China's recent loan of USD 637 million and
said that an initial commitment of USD 20M to USD 30M will
be more realistic. JBIC is aware of the efforts to develop
Tajikistan's potential to be a major exporter of hydropower,
but Hara cautioned that Japan does not have the resources or
the intention at this time to engage in massive hydroelectric
or transmission grid projects. More than likely, Japan will
elect to co-finance other projects with the World Bank or
ADB, where the Japanese contribution can achieve a higher
profile.


20. (SBU) DAS Feigenbaum counseled the Japanese not to let
the Tajiks distract them with multibillion-dollar projects
and said the World Bank is willing to focus on smaller
things. Senior Advisor Deutsch added that Japanese
contributions as a small participant in larger projects -)
such as the model transmission project -- would be more than
welcome. Hara agreed that whatever JBIC decides to do in
Tajikistan, it will be working closely with the World Bank.

Uzbekistan
--------------


21. (SBU) Hara started out by referring to Uzbekistan as
"our biggest headache." He explained how JBIC's largest
program in the region is with Uzbekistan and that it includes
railway, power, airport modernization, and secondary
education projects. He said Uzbekistan is keen to get yen
loans from Japan, but the slow progress of the projects
started to date have given the Japanese pause. No new JBIC
commitments will be made to Uzbekistan at this time.
Instead, Japan will focus its assistance on smaller, more
discrete projects run by JICA. These include sending
technical assistance teams to train the Uzbeks how to better
manage their existing power facilities, one plant at a time.
Their hope is that as one plant becomes more efficient, it
will serve as a model for the others. JICA also conducted a
brief study last year of possible regional cooperation in the
water and energy sectors.

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JICA'S STRATEGY
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22. (U) Following Hara's presentation, Ishii briefed on
JICA's approach to the region. JICA's highest priorities for
the region are:

-- institution-building and human resources development for
the introduction of market economies;

-- restructuring the social sector, primarily the medical
sector which has collapsed due to the lack of financial
resources and access to modern technology;

-- rehabilitating existing infrastructure;

-- promoting regional cooperation.


23. (SBU) JICA's approach to these goals is different in
each country based on local conditions. In Kazakhstan, where
the Japanese assess the transition is comparatively
progressive, emphasis will be on programs that support WTO
accession and that rehabilitate transportation
infrastructure. In Kyrgyzstan and Tajikistan, where
transition is comparatively progressive but where there is
risk due to high levels of poverty and debt, attention will
be paid to rehabilitating the social infrastructure,

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including community-based regional development and poverty
alleviation programs that foster entrepreneurship. In
Uzbekistan, where the Japanese view transition as stagnant,
JICA will concentrate on capacity building in government
organizations, rehabilitating transportation infrastructure,
and improving the Customs function in order to facilitate
increased regional cooperation. In order to carry out its
policies, JICA maintains offices in Tashkent, Bishkek, and
Dushanbe. Ishii concluded by noting that JICA hopes to begin
a trade facilitation program in Central Asia sometime soon
and would be interested in learning more about U.S. programs
in this field.

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USAID APPROACH
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24. (SBU) Following the presentations by Hara and Ishii,
USAID Central Asia Mission Director Crowley provided a
briefing on AID's approach to the region. He explained that
AID deals with the region on a country by country basis and
that the types of programs in which AID engages are grouped
into three categories: economic growth, which includes trade,
energy, agriculture, business development, water resources;
investing in people, mainly through programs in the health
and education fields; and governance/democratization, which
includes rule of law and media development programs. He
noted that the only commonality shared by the five countries
of the region appears to be their lack of interest in the
governance/democracy-building programs. Uzbekistan has been
very difficult to work with lately, as the government has
moved to restrict civil society groups and has made operating
conditions for us very difficult, including placing
restrictions on visa issuances for our personnel. We face
similar problems in Turkmenistan, but not to the same degree.
Accordingly, we currently hold out more hope for our
programs in Kazakhstan, Kyrgyzstan, and Tajikistan, even
though each continues to have some negative factors. With
regard to Kazakhstan, as noted by Hara, the country has
become very wealthy to the point where it no longer requires
financial assistance and is, in fact, beginning to co-fund
our programs there and to help with the selection of local
grantees. This is the first time such a thing has taken
place in an AID program. And despite the problems
encountered in Uzbekistan and Turkmenistan, we will continue
to attempt to work with both countries.

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COMMENT
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25. (C) As was the case in several sessions on U.S. and
Japanese strategic priorities, the opportunity to discuss
development assistance programs in Central Asia with
representatives of MOFA, METI, JBIC and JICA was extremely
beneficial. All participants agreed there is much to be
gained by further such engagements and that efforts should be
made to enhance cooperation among donors. DAS Feigenbaum
stressed throughout that, while there inevitably will be some
competition among outside powers, the primary strategic
purpose of U.S.-Japan cooperation is not to "compete" with
Russia or China for its own sake, but rather to give the
countries of the region more than one choice about who they
can do business with, to where and by what means they can
transport their exports, and to whom they can look to for
assistance. In short, U.S. policy is not "anti-Russia" or,
for that matter, anti-anyone. Rather, we offer an
affirmative, not negative, vision to the countries of the
region, and in this sense are simply "anti-monopoly." Our
primary goal is to bolster their sovereignty and independence

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by broadening their range of choice. It is unclear whether
the Japanese, who still tend to view the region through a
traditional "Great Game" prism, focused on both Russia and
China, fully agree. But what was agreed at these sessions
was the need to work in closer concert to advance our mutual
interests in the region, as well as a more globally-oriented
U.S.-Japan alliance.


26. (U) Deputy Assistant Secretary Feigenbaum cleared this
cable.
DONOVAN