CORRUPTION, ENERGY AND RULE OF LAW HEADLINE KYRGYZ

C O N F I D E N T I A L SECTION 01 OF 03 BISHKEK 000724 SIPDIS SIPDIS DEPT FOR SCA/CEN (GEHRENBECK),SCA/FO (DEUTSCH) E.O. 12958: DECL: 06/14/2017 TAGS: EAID ECIN ECON EFIN EINV ENRG PREL PHUM KG SUBJECT: CORRUPTION, ENERGY AND RULE OF LAW HEADLINE KYRGYZ DEVELOPMENT FORUM BISHKEK 00000724 001.2 OF 003 Classified By: Ambassador Marie Yovanovitch for Reasons 1.4 (b) and (d) ¶1. (SBU) Summary: President Bakiyev and Prime Minister Atambayev emphasized the rule of law, the battle against corruption and enhancing the business environment in a day-long discussion of the Kyrgyz Country Development Strategy (CDS) with the international donor community May 31. Bakiyev also pledged substantial reform of the energy sector, and proclaimed that parliamentary action to nationalize the Kumtor gold mine "would go nowhere." The recently adopted CDS incorporates many of the benchmarks and goals of the Kyrgyz Millennium Challenge Threshold Country Proposal. Russia acknowledged its "beginner" donor status before criticizing previous international assistance to Kyrgyzstan and announcing its planned emphasis on poverty reduction, health care and education. Chinese diplomats also attended the Forum and the donor dinner the night before but spoke not a word, even when invited to do so by the World Bank at the latter event. End summary. ¶2. (U) Kyrgyz President Kurmanbek Bakiyev, accompanied by Prime Minister Almaz Atambayev, Minister of Finance Akylbek Japarov, Minister of Economic Development and Trade Sabyrbek Moldokulov, Supreme Court Chairman Kurmanbek Osmonov and numerous other officials, attended the full day-long World Bank-organized "Development Forum for the Kyrgyz Republic" May 31. Representatives from 15 other countries and 12 donor organizations participated in the event. EUR/ACE Coordinator Tom Adams led the U.S. delegation, which included Ambassador Yovanovitch, Deborah Klepp from EUR/ACE, and Jeffrey Baker from U.S. Treasury. President Bakiyev Identifies Priorities -------------- ¶3. (C) In his prepared remarks, Bakiyev outlined the four components of Kyrgyzstan's recently adopted Country Development Strategy (CDS): 1) enhancing the economy, 2) combating corruption, 3) human and social development, and 4) environmental sustainability. He stressed the importance of the rule of law, the battle against corruption, the protection of property and improving the business environment. He added that private investment, cuts in the value added tax, a revamp in regulation, and an automated taxation system would help Kyrgyzstan trim its external debt. Somewhat surprisingly, Bakiyev and his team followed World Bank advice and avoided calling for total debt forgiveness, as had been foreshadowed in pre-forum meetings and media coverage. However, in a private meeting with Adams, PM Atambayev requested U.S. assistance with debt forgiveness. Atambayev pledged that the Kyrgyz government will meet all Heavily Indebted Poor Countries (HIPC) initiative triggers, and asked that in return the Multilateral Debt Relief Initiative be made available to Kyrgyzstan. Adams responded that it was his understanding from discussions with U.S. Treasury and the international financial institutions (IFIs) that there was no way that this was technically possible. Donor Concerns Generate Rebukes from Bakiyev -------------- ¶4. (SBU) In his remarks, International Monetary Fund Assistant Director for the Middle East and Central Asia Paulo Neuhaus cautioned against "indiscriminate" state intervention BISHKEK 00000724 002.2 OF 003 in the economy, highlighted "dilapidation" in electricity sector infrastructure and expressed concern about the impact of the recent lowering of the retirement age on pension obligations. ¶5. (SBU) Bakiyev, in response, pledged that pending legislation would transform the energy sector and stated that parliamentary consideration of the nationalization of the Kumtor gold mine "would go nowhere." (Note: We understand the energy legislation, which would allow private sector involvement in the Kambarata hydroelectric projects, may receive parliamentary approval sometime in June. End note.) He added that negotiations with the Canadian operator of Kumtor were a government responsibility and would conform with the rule of law. Bakiyev bristled when Kumtor was raised again later, and repeated his assurances that Kumtor would not be nationalized. He defended the government's recent decision to reduce the retirement age. Bakiyev was also upset by Neuhaus's reference to the Kyrgyz government not following through on certain "understandings" reached with the IFIs. When challenged to explain, Neuhaus cited as one example promises to raise the costs of energy to stem the largest single drain on the state budget. Prime Minister Speaks His Mind -------------- ¶6. (SBU) Prime Minister Atambayev revealed his views on a wide range of topics in a 10-minute speech late in the forum. He endorsed the export of electricity to Pakistan, called for the construction of an alternate natural gas line into Kyrgyzstan, said that non-governmental organizations would be members of the new public television oversight board, and requested donor assistance in establishing "independent economic courts." In addition, referring to the stoning of his entourage during a visit to the disputed Jerooy gold mine in western Kyrgyzstan, Atambayev announced he had ordered the release of protestors who had been detained at Jerooy, and also denounced the blockading of roads and bridges (measures recently employed by protestors at the Kumtor gold mine). Highlighting Kyrgyzstan's Millennium Challenge Program -------------- -------------- ¶7. (SBU) The Kyrgyz CDS, developed in consultation with the donor community, contains significant references to efforts to combat corruption and implement legal reforms as previously outlined in the Kyrgyz Millennium Challenge Threshold Program. The CDS repeats many of the Threshold Program benchmarks. Interestingly, several donors have approached Embassy personnel to report that their programs to enhance the rule of law and implement related reforms will track with the goals of the Kyrgyz Threshold Program. ¶8. (SBU) In concluding remarks, Coordinator Adams noted how U.S. government assistance supports the many positive elements in the CDS, noting that the United States looks forward to seeing benchmarks that will allow U.S. assistance programs to support CDS implementation even more effectively. Adams commended the CDS's emphasis on reforms in the energy sector, particularly the proposed tariff structure, planned privatization of electricity distribution companies, and the creation of an independent regulatory system. Adams concluded by speaking about four areas in which the United BISHKEK 00000724 003.2 OF 003 States also looks forward to working with the Kyrgyz Republic: consolidating improvements in local government administration; tapping into the power of a strong and well informed civil society; making the judiciary truly independent; and continuing to improve the electoral process. In each area, he praised progress to date and highlighted priority areas for future efforts. Russians Pledge a New Path for Assistance -------------- ¶9. (SBU) The Russian delegation, headed by Deputy Minister of Finance Sergei Storchak, acknowledged Russia's "beginner" status as a donor and announced that Russia had committed $600 million globally in assistance last year. While seeking to "harmonize" Russian aid with other donors, Storchak said previous international assistance to Kyrgyzstan had produced "worrisome" results that were "not satisfactory." He added that Russian assistance to Kyrgyzstan would focus on 1) poverty reduction, 2) health care and 3) education. The Russian intervention contrasted with the decision by Chinese diplomats to avoid making any statements during the forum. Comment -------------- ¶10. (C) Remaining engaged throughout the forum, both President Bakiyev and Prime Minister Atambayev seemed focused on allaying donor concerns as well as demonstrating a commitment for responsible actions. Overall, both the President and his Prime Minister accepted donor criticism with better grace than their predecessors at the prior Consultative Group Meeting two years earlier. While the discussions were not groundbreaking, the forum provided a useful overview of economic and business issues. Bakiyev's participation in this event reinforces his recent emphasis on improving business conditions in Kyrgyzstan. He has since trumpeted a new executive order ("ukaz"),which has been welcomed by business representatives, that restricts inspectors from interfering with business. While Bakiyev's prepared remarks emphasized needed reforms (and cited USAID for the transparency of its operations),Bakiyev reverted to form in his off-the-cuff concluding remarks, exhorting donors to build roads and factories. ¶11. (C) The focus on improved business conditions combined with Atambayev's previous pledges to implement energy sector reforms outlined in the rejected HIPC initiative will be scrutinized in the coming weeks as the government's energy proposals face parliamentary consideration. A key indicator will be if the energy legislation solely benefits certain Kazakh and Russian firms that have been eyeing the Kambarata project, or opens Kambarata and the sector to broader private sector participation. ¶12. (U) This cable has been cleared by Tom Adams' delegation. LITZENBERGER