GE SEEKS TO BUILD ON SUCCESSES IN KAZAKHSTAN

UNCLAS SECTION 01 OF 02 ASTANA 000856 SIPDIS SENSITIVE SIPDIS DEPT FOR SCA/CEN - O'MARA E.O. 12958: N/A TAGS: ECON PGOV ENRG EAIR ETRD EPET KZ SUBJECT: GE SEEKS TO BUILD ON SUCCESSES IN KAZAKHSTAN REF: A) Astana 753 B) 06 Astana 899, C) 04 Almaty 483, D) 06 Astana 17 ¶1. (SBU) Summary. On March 13 and 29, high-ranking GE executives discussed with Ambassador Ordway the company's plans for Kazakhstan. Six months after signing a contract, valued at about $700 million, with Kazakhstan Temir Zholy (KTZ, Kazakhstan's national railroad company),the company held in Astana a "GE Day" and is seeking to broaden the range and depth of its involvement in Kazakhstan. End summary. EYING THE FUTURE... -------------- ¶2. (SBU) Astana's GE Day, held on March 31, attracted high-level GE Executives (including Vice Chairman John Rice and President & CEO of GE Russia/CIS Ronald Pollett),as well as top representatives of Kazakhstan's economic elite (including KTZ President Yerlan Atamkulov and KazMunaiGas President Uzakbay Karabalin). (Separately, Rice met with Kazakhstan's Prime Minister, Karim Masimov, with a number of other ministers present.) GE's presentation focused on the breadth of the company's reach, featuring its products and services in transport, industry, healthcare, finance (corporate and retail),and media. ¶3. (SBU) GE's ambitions in Kazakhstan are, indeed, broad. Discussing with the Ambassador their plans to enter the healthcare market, the GE executives said that they are currently holding discussions with the city of Astana but noted their concerns about corruption. In an earlier conversation, Pollett had noted that dealing through intermediaries cost the end-user as much as a 100 percent markup; GE wanted to sell directly to the customer. The Ambassador acknowledged corruption as a factor but remarked that the combination of a superior product and persistence is capable of overcoming it. The Kazakhstanis, he said, admire U.S. technology in the medical field. ...AND BUILDING ON THE PRESENT -------------- ¶4. (SBU) GE executives told the Ambassador that the company's operations in Kazakhstan currently focus on three areas: energy, railroads, and aviation. ENERGY -------------- ¶5. (SBU) In the energy sector, GE is not involved in exploration and production, but supplies the oil majors with machinery. In regard to their interest in entering Kazakhstan's electricity-generation market, the executives stated that they see the GOK's penchant for nuclear power as politically motivated, since it does not make sense economically. (Note: Although the GOK's nuclear power vision may have recently suffered a setback, it appears to remain alive. Ref ¶A. End note.) The low price of electricity in Kazakhstan at the wholesale level - currently 1" per kilowatt - is, they said, a result of the country's abundance of coal. Generating electricity using clean-coal technology, they stated, is 25% more expensive than using pulverized coal. GE is working on reducing the gap but "hitting some speed bumps." The Ambassador noted that the future economics of power generation in Kazakhstan partly depends on the path of Kazakhstan's environmental regulation. RAILROADS -------------- ¶6. (SBU) On the railroad front, GE is modernizing KTZ's 400 Russian-built locomotives. The contract signed in September 2006 calls for GE to supply to KTZ 310 new, state-of-the-art locomotives, of which 10 will be built in the U.S. and 300 will be assembled from U.S.-built "kits" at a plant near Astana. ¶7. (SBU) GE executives expressed a slight concern about the repercussions of Samruk's takeover of KTZ. (Note: Kazakhstan Temir Zholy is one of the national companies included under the umbrella of the National State Holding Company "Samruk." Ref B. End note.) KTZ, they said, had been making timely payments to GE in accordance with their agreement until about four months ago. KTZ has assured GE that the problem is temporary, and that Samruk is merely reviewing contracts entered into by its component institutions "to ensure that they are good for Kazakhstan." (Note: Samruk's takeover of national companies has not been entirely smooth. Resistance from KTZ, whose president Atamkulov is known as a political force in his own right, has been particularly strong and apparent. End note.) AVIATION -------------- ¶8. (SBU) In regard to aviation, the GE executives noted that the company supplies 70% of the world's airplane engines. They remarked ASTANA 00000856 002 OF 002 that GE had a "terrible experience" with Air Kazakhstan but expressed a cautious interest in working with Air Astana. (Note: Air Kazakhstan was Kazakhstan's national air carrier until it went bankrupt in 2003. Air Astana, in which BAE has a 49 percent share, is now the national carrier. See Ref C. End note.) The Ambassador noted two factors working in Air Astana's favor: on domestic routes, the airline has a monopoly that the government seems committed to defending, while international routes to Kazakhstan are underserved by foreign carriers. ¶9. (SBU) GE is strongly skeptical of the GOK's vision of establishing in Astana a regional hub for airplane maintenance (Ref D). The executives said they have told the GOK that they see the maintenance facility - which envisions attracting planes from Russia, the Caucasus, Central Asia, and South Asia - as economically unsound. The Ministry of Transport, however, appears to persist with this plan. GE's concern is that "selling the government what it does not need" may adversely affect the company's potential to make future deals. The Ambassador noted the political dimension of this plan, comparing it to the GOK's previous vision of constructing a standard-gauge "railroad to nowhere" from western China to western Kazakhstan (Ref D). (In a separate conversation on the margins of GE Day, a Deputy Minister of Transportation told the Ambassador that the ministry now realized they needed a firm market of 100 engines to make the project economically feasible, and that they are now researching this aspect.) COMMENT -------------- ¶10. (SBU) Comment: GE presents an interesting case study of a U.S. investor making big strides into Kazakhstan's non-extractive sector. Their success is based on having a long-term view of the country, clearly superior projects, and building relationships. How the company fares may serve as an indicator of Kazakhstan's investment climate for non-energy investors. So far, the signs appear generally positive. Still, GE's example may be somewhat atypical in that its size and profile will likely provide partial insulation from the potential obstacles, particularly corruption, that smaller entrants into the non-extractive sector may face. End comment. ORDWAY