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07ASTANA2511 2007-09-13 09:26:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana
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DE RUEHTA #2511/01 2560926
R 130926Z SEP 07
					  UNCLAS SECTION 01 OF 04 ASTANA 002511 




E.O. 12958: N/A

Ref: Astana 1243

ASTANA 00002511 001.2 OF 004

1. (SBU) Summary. In September 3-5 meetings with leaders of
Kazakhstan's government and business, Special Representative for
Commercial and Business Affairs J. Frank Mermoud discussed the
planned October 22 Washington inauguration of the bilateral
U.S.-Kazakhstani Public Private Partnership Initiative (PPPI) and
the direction the Initiative should take. S/R Mermoud's
interlocutors reacted favorably to the proposed Initiative, hailing
its focus on improving Kazakhstan's investment climate as well as
its potential role in strengthening business, investment, economic,
and educational links between the U.S. and Kazakhstan. In
particular, Prime Minister Masimov welcomed the idea of discussing
"tough issues" that negatively impact Kazakhstan's business
environment. Masimov also assured S/R Mermoud that he will assist
in achieving speedy resolution of two current hurdles on the
bilateral economic front: the double-taxation Parker Drilling
dispute and the Kazakhstani Customs Committee's newly introduced
requirement for export declarations, an unintended consequence of
which is prevention of entry of U.S. goods into Kazakhstan. End

2. (SBU) S/R Mermoud met with the following representatives of the
Kazakhstani government and business sector:

September 3 (Almaty):
-- Raimbek Batalov, President of the Forum of Entrepreneurs
-- Nurlan Kapparov, President of KazInvest Bank

September 4 (Almaty):
-- Dennis Price, General Director of "Sayran" (a subsidiary of
Kazakhstani construction conglomerate "Kuat"), and former head of
Kazakhstan's Foreign Investors' Council (representing Access
-- Gregory Vojack, Managing Partner - Bracewell & Giuliani, Central
-- Kenneth Mack, President of the American Chamber of Commerce,
Partner - Chadbourne & Parke
-- Mukhtar Ablyazov, Chairman of the Board - Bank Turan Alem
-- Alexander Deriglazov, CEO - Meloman Ltd.

September 5 (Astana):
-- Azat Peruashev, Chairman - National Economic Chamber "Union
-- Serik Akhmetov, Minister of Transport and Communications
-- Natalya Korzhova, Minister of Finance (with Nurlan Rakhmetov,
Chairman of the Tax Committee)
-- Karim Masimov, Prime Minister
-- Kayrat Kelimbetov, Chairman - Kazyna Sustainable Development

The Initiative - the Government Perspective...


3. (SBU) S/R Mermoud's discussions on the focus of the
soon-to-be-inaugurated bilateral U.S.-Kazakhstani Public-Private
Partnership Initiative followed his meetings in April (reftel). The
Initiative's stated focus on addressing the key problems in the
Kazakhstani business environment (particularly corruption),
facilitating the Kazakhstani government's (GOK) goals of increasing
economic competitiveness and diversifying away from energy, and
strengthening links (including educational) between the two
countries' private sectors was broadly welcomed by GOK officials, as
well as by executives of Kazakhstani companies and U.S. companies
operating in Kazakhstan. Prime Minister Masimov said he plans to
attend the October 22 PPPI inauguration in Washington and was
receptive to the idea of an open discussion of the problems plaguing
Kazakhstan's business environment. "It is important to address the
tough issues," stated Masimov, adding that the discussion "should
not be sweet." Masimov added that he would like to make his October
trip to the U.S., his first as a prime minister, a strong
demonstration of the importance of U.S.-Kazakhstani relations and of
Kazakhstan's affinity for western standards. Transport Minister
Akhmetov drew links between the PPPI and Kazakhstan's domestic
public-private partnership program, "the Thirty Corporate Leaders"
(announced earlier this year, see reftel), stating, "we do need
feedback from the private sector" and adding that he would be
"grateful for the invitation" to the PPPI inauguration.

...And the Private Sector View


4. (SBU) Raimbek Batalov, President of the Almaty-based Forum of
Entrepreneurs (as well as a prominent businessman, heading the
"Raimbek Group," a large retail chain), was strongly supportive of
the Initiative. He outlined three prerequisites for the
Initiative's success:

ASTANA 00002511 002.2 OF 004

-- The idea should be embodied into a program ("we are ready to work
on this," Batalov added);
-- Relevant business associations should be brought in (citing the
Forum and Atameken [see below])
-- Financing needs to be arranged (calling this issue "a sore
point," since Kazakhstani associations and the business sector are
"still young" and suggesting a combination of government support,
self-financing, and corporate financing).

5. (SBU) Batalov also drew parallels between the thrust of the
Initiative and his Forum's priorities. The Forum, he said,
currently focuses (i.e. produces research and analysis) on the
following issues:
-- Struggle with corruption
-- Social responsibility of small- and medium-sized enterprises
-- Mini-MBA (training for small business)
-- Transit corridors
-- Trans-border trade
-- Tax & customs
Batalov added that Kazakhstan is currently facing a "crisis" in the
lack of skilled labor: there are "lots of lawyers and economists but
very few welders and machine operators."

6. (SBU) Batalov cited a number of examples of the government's
"clumsiness," particularly the recent (and ongoing) aftermath of the
Customs Committee's introduction of an export declaration
requirement for goods entering Kazakhstan (see paragraph 15). He
also mentioned the implementation, by the Ministry of Industry and
Trade, of the "made in Kazakhstan" stamp. Each stamp, according to
Batalov, costs KZT 3-4 (2.5-3.5 cents) to produce; the Ministry,
however, has failed to print enough stamps, leading to 2.5 month
delays for importation of some products, such as alcohol beverages.
Another recent example, Batalov continued, is the Environment
Ministry's new requirement for all automobile owners to fill out a
declaration form on the condition of his vehicle. As a result,
Batalov said, "huge queues can be expected."

7. (SBU) Batalov clearly saw a strong nexus between the Forum's work
and the PPPI's priorities. He expressed genuine regret about being
unable to attend the October 22 inauguration due to a long-standing
personal commitment and proposed sending to the event his deputy,
the Forum's Executive Director, instead. Finally, he sounded a
cautiously optimistic, if mixed, note about his Forum's coexistence
with the "Union Atameken" (recently rechristened from a "Union of
Entrepreneurs" into a "National Economic Chamber"). Although,
Batalov said, Atameken is still using "uncompetitive" means to
secure for itself the official status of a national trade chamber, a
"division of labor" of sorts is emerging between the Forum and the
Atameken. The former, Batalov said, focuses on small- and
medium-sized enterprises; the latter is an umbrella organization for
various business associations and large companies.

8. (SBU) Atameken's Chairman Peruashev expressed a very strong
interest in developing links with the U.S. business community in
general and participating in the PPPI specifically. Although
Atameken is often seen as a semi-official, instinctively
pro-government association (talking to Atameken, said Bank Turan
Alem's (BTA's) Ablyazov, is "like talking to a government
official"), Peruashev did express criticism toward some of the
government's economic policies. The bulk of this criticism fell on
development institutions: "There is a growing view in the business
community that development institutions are crowding out the real
private business, because they are doing business themselves."
Peruashev made it clear that his intended target was Kazyna, as he
went on to bemoan some of Kazyna's development institutions'
excessive focus on short-term profitability at the expense of
innovation. "We know," he said, "how development institutions
operate in Russia and eastern Europe. We would like to learn how
they operate in western Europe and the U.S." Peruashev welcomed S/R
Mermoud's suggestion to facilitate Kazakhstani-U.S. private sector
discussions by engaging Atameken with AmCham. (Comment: While
Atameken still appears to be a bloated, government-affiliated
organization, there is a discernible and welcome shift in its
willingness to offer criticism of Kazyna's (i.e. the government's)
investment policy. End comment.)

9. (SBU) Peruashev portrayed Atameken as a liaison of sorts between
business and the government. The organization, he explained, makes
legislative proposals, particularly in the tax, customs, and
agricultural arenas. Other concerns include corruption;
"raidership;" government interference in business; and
administrative burdens for opening, running, and closing a business.
Peruashev also said that Atameken helps support actual projects by
Kazakhstani entrepreneurs by "bringing" such projects to development
institutions. Finally, while he never actually acknowledged the
Forum of Entrepreneurs, Peruashev echoed Batalov by stating that

ASTANA 00002511 003.2 OF 004

Atameken's focus is on medium-sized and large business.

10. (SBU) Ken Mack of the (Kazakhstan-based) American Chamber of
Commerce expressed great enthusiasm for the PPPI as a vehicle for
addressing the problems of the Kazakhstani business climate. He
stated his opinion that corruption is "the number one problem, the
root of all the other ones." Mack told S/R Mermoud that he has been
pursuing with Batalov the idea of a joint AmCham-Forum of
Entrepreneurs paper, which he hopes to have ready by the October
22nd PPPI inauguration. This paper, Mack said, will go into detail
on how corruption is damaging the economy and provide ideas on how
it can be stemmed.

11. (SBU) Other representatives of the private sector also welcomed
the PPPI's goal of raising the difficult issues and shedding light
on the obstacles to business development in Kazakhstan. "Another
voice would be helpful; in this culture persistence pays off,"
stated Dennis Price (of Kuat). Ablyazov of BTA bemoaned the lack of
democratic institutions, particularly of a vibrant media, of
regional officials' accountability (via elections), and of a strong
judiciary. He identified these deficits as the root causes of
corruption and portrayed the government's efforts against corruption
as window dressing. Ablyazov endorsed the PPPI's focus on
corruption, stating, "the more comments like these, the more they
affect our government... But the real change will come when
business penetration is such that people have something to lose and
something to defend." He added, however, that as the governing
elite acquires its own businesses, its interests are becoming more
similar to those of business, leading to an "evolutionary change."

The "Thirty Corporate Leaders:" Kazakhstan's Domestic PPP



12. (SBU) Private sector representatives expressed some optimism
about the GOK's recently launched domestic public-private
partnership program, known as "the Thirty Corporate Leaders."
Batalov called it "not a bad idea." The plan, he explained, is to
quickly launch large projects, which would then "pull up"
medium-sized companies. "Of course," Batalov mused, "a lot of our
ideas start out well," strongly implying that implementation tends
to be the problematic part. Ablyazov sounded decidedly positive on
the program, which he described as a mechanism that forces
bureaucrats ("from above") to assist business development (in lieu
of democratic pressure acting "from below"). Ablyazov stated that
even if only ten successful projects emerge from the program, it
will still be a major success. "I believe that in ten years," he
stated, "this will be a diversifed economy." Nurlan Kapparov of
KazInvest Bank sounded equally positive. The program, he said,
facilitates close interaction between business and the president on
a group basis (instead of on individual basis "like before").
Although the program does not focus on solving problems for all
businesses (beyond the chosen thirty or so), it at least initiates
the conversation in that direction. "You do thirty half-billion
dollar projects," summed up Kapparov, "and you've diversified the

East-West: The Way Ahead?


13. (SBU) A theme featuring in several of S/R Mermoud's discussions
was the prospect of establishing an East-West corridor across
Kazakhstan for transportation of goods from China to Europe.
Kapparov stated that such a corridor must bypass Russia, which has
its own shared border with China and is, therefore, a "competitor."
The corridor, he explained, would rely on four terminals: in western
China, on Kazakhstan's Chinese border, on Kazakhstan's Caspian
coast, and on Georgia's Black Sea coast. The total cost of the
project, Kapparov said, would be $1.5-2.0 billion. Ablyazov
trumpeted the same idea which, he said, makes sense both politically
and economically due to Russia's "inflexibility." The corridor, he
said, would reduce the transportation time of Chinese goods to
Europe by 5-6 days (compared to the current sea route) as well as
lower the cost. According to Ablyazov, the GOK has already included
the transport corridor project into its "Thirty Corporate Leaders"

14. (SBU) Although Transport Minister Akhmetov did not mention the
East-West corridor, he spoke extensively about transportation
infrastructure development plans, which appeared consistent with
building such a corridor. He mentioned the development of Caspian
ports, holding tenders for construction of railroads, and building
toll highways (pointing out that these would likely be the first
such highways in the CIS). "We have huge territory and are
landlocked. Development of railroads and highways is very important
to us," said Akhmetov, adding that he sees opportunities for
involvement by U.S. companies in the development of various
infrastructure and logistical projects. S/R Mermoud suggested

ASTANA 00002511 004.2 OF 004

consideration of north-south transportation links, particularly to
Afghanistan, in addition to the East-West corridor.

15. (SBU) Kazyna's Chairman Kelimbetov did provide an indication of
some Kazakhstani interest in developing regional north-south
economic links. Kazyna, Kelimbetov said, is looking at creation of
joint investment funds with Kyrgyzstan and Tajikistan (each with the
starting capital of about $100 million). He added that Kazyna is
also considering setting up a joint equity fund with Afghanistan but
called this project "terribly difficult." At the same time,
Kelimbetov noted, Kazyna is looking to create a joint investment
fund with Russia, with a starting capital of $1 billion.

Customs and Taxes: the Latest Sagas


16. (SBU) Prime Minister Masimov assured S/R Mermoud that the two
issues currently affecting U.S. commercial interests in the areas of
customs and taxation are "within [his] competence]" and should soon
be resolved. Commenting on the long-standing Parker Drilling
dispute under the bilateral U.S.-Kazakhstani tax treaty, Finance
Minister Korzhova appeared to portray this as an isolated case and
not a negative signal about Kazakhstan investment climate. The more
recent customs problem emerged on August 26, when the Customs
Committee (which operates under the aegis of the Ministry of
Finance) abruptly introduced a requirement for submission of export
declarations for goods entering Kazakhstan. Since U.S. regulations
prohibit submission of such declarations, the inflow of U.S. goods
into Kazakhstan abruptly stopped. Moreover, new customs regulations
appear to have briefly prevented entry of hard currency into the
country, leading to a momentary, panicky sell-off of the tenge.
Ablyazov called the episode "an example of state institutions
malfunctioning." Batalov commented wryly, "in 'normal' countries,
such measures - if enacted - are well-announced." S/R Mermoud noted
to Prime Minister Masimov the importance of resolving both of these
issues prior to the October 22 inauguration of the bilateral

Additional Engagement and Advocacy


17. (SBU) S/R Mermoud encouraged further U.S.-Kazakhstani
public-private engagement on several fronts. He suggested to Prime
Minister Masimov the possibility, schedule permitting, of arranging
a New York Stock Exchange "bell-ringing" during the latter's October
visit to New York; Masimov responded favorably. S/R Mermoud also
recommended that Tax Committee Chairman Rakhmetov engage in dialogue
with AmCham to facilitate a direct exchange of views and help ensure
that foreign investors' concerns on taxation are addressed by the
policymakers. Rakhmetov accepted the idea. Further, S/R Mermoud
encouraged the CEO of Meloman, a pioneer Kazakhstani conglomerate
importing licensed DVDs and CDs from the U.S. to Kazakhstan, to
engage with AmCham.

18. (SBU) S/R Mermoud advocated on behalf of Boeing in his
discussions with Prime Minister Masimov and Transport Minister
Akhmetov. (Note: Air Astana, Kazakhstan's de facto domestic
airline, is considering purchasing wide-body aircraft. End note.)
Masimov and Akhmetov praised Boeing but were non-committal in their
responses. S/R Mermoud suggested to Masimov the possibility of
having a signing ceremony with Boeing during his October trip to the



19. (SBU) Comment. Some of S/R Mermoud's more outspoken
interlocutors astutely pointed out that the development of
democratic institutions is the surest means of stemming corruption
that is poisoning Kazakhstan's otherwise attractive business
environment. At the same time, there was a broad consensus that the
proposed bilateral Public-Private Partnership Initiative can serve
as an effective mechanism for addressing the difficult issues and
promoting reform. Combining the tough discussions with appropriate
"sweeteners" - such as business and educational exchanges and,
particularly, face time with potential U.S. investors - is likely to
pique Kazakhstani interest and make the GOK more receptive to
constructive criticism. End comment.

20. (U) This cable has been cleared by Special Representative