KAZAKHSTAN: WORLD BANK COUNTRY MANAGER DISCUSSES

UNCLAS SECTION 01 OF 03 ASTANA 002095

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB
JUSTICE FOR DANIEL CLAMAN

E.O. 12958: N/A
TAGS: PGOV ECON EINV EFIN EAID KZ
SUBJECT: KAZAKHSTAN: WORLD BANK COUNTRY MANAGER DISCUSSES
ECONOMIC SITUATION, BOTA FOUNDATION

REF: ASTANA 2070


1. (U) Sensitive but unclassified. Not for Internet
distribution.


2. (SBU) SUMMARY. During an October 15 introductory meeting
with the Ambassador, World Bank Country Manager for
Kazakhstan Sergei Shatalov provided his views on the state of
the Kazakhstani economy, discussed the government's efforts
to deal with the global financial crisis, and gave an update
on the activities of the Bota Foundation. END SUMMARY.

ECONOMIC OVERVIEW


3. (SBU) Shatalov told the Ambassador that economic growth
in Kazakhstan has been down for the last three quarters.
With the exceptions of the Atyrau and Aktau regions -- the
heart of Kazakhstan's hydrocarbons sector -- growth has
actually been flat in the country as a whole. According to
Shatalov, Chinese demand for raw materials is shrinking as
China switches to domestic producers, which is having a
significant impact on steel production in Kazakhstan. (NOTE:
This was evidenced by the October 3 layoffs of over 4000
steel workers from the Temirtau steelworks owned by
ArcelorMittal. END NOTE.)


4. (SBU) Shatalov explained that the grain harvest is down
significantly this year, and maintained that grain exports
will not exceed 3 million tons, as a result of which
Kazakhstan will not reach the ranks of one of the world's top
five wheat exporters. (NOTE: The government maintains that
overall grain exports will be between 5.5 and 6 million tons.
END NOTE.) The construction sector has visibly declined
throughout Kazakhstan, particularly in Astana, where most of
what is currently under development is driven by government
spending. There remains almost no foreign direct investment
in the construction sector. On a more positive note,
Shatalov said that Shymkent appears to be benefiting from
significant private sector investments in various sectors of
its economy.

BANKING SECTOR NOT YET IN THE CLEAR


5. (SBU) Shatalov painted a picture of the banking sector
not nearly as rosy as that presented to the public by
Kazakhstani financial authorities. According to Shatalov,
the credit crisis in the construction sector has been
accompanied by a significant drop in real estate values -- by
up to 50% in Almaty -- leaving many banks with a very
significant burden of debt, and very little collateral.
Forty percent of the balance sheet of the Kazakhstani banking
sector is comprised of debt and mortgages. This ratio holds
true for Kazakhstan's two largest banks, Bank Turan Alem and
KazKommertsBank.

RECOVERY EFFORTS QUESTIONABLE


6. (SBU) When asked about the prospects for Kazakhstan's
recovery from the global financial crisis, Shatalov noted
that the government had allocated $10 billion from the
National (Oil) Fund on October 13 as part of a stabilization
package. This allocation is in addition to the $4 billion
made available last year from other reserves to support the
construction sector, of which $2 billion has been transferred
to banks under very strict lending conditions. Shatalov
questioned the government's decision to merge the Samruk

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state assets holding company and the Kazyna Sustainable
Development Fund into the Samruk-Kazyna National Welfare
Fund. He termed Samruk-Kazyna a "super monster" and said the
relevance of the merger to dealing with the financial crisis
was unclear (see reftel). He did, however, praise the recent
creation of a stressed assets fund to buy up bad loans from
banks, noting that after consultations with the World Bank,
Kazakhstani financial authorities seem to be closely studying
the case of the Resolution Trust Corporation (RTC),which
liquidated the assets of failed savings and loan institutions
in the United States in the late 1980s and early 1990s.
Shatalov maintained that overall, there needs to be greater
transparency with respect to the assets of Kazakhstan's
banking sector -- which are estimated to be $120 billion,
roughly the equivalent of the country's Gross Domestic
Product.

BOTA FOUNDATION OPEN FOR BUSINESS


7. (SBU) Shatalov gave the Ambassador a detailed update on
the Bota Foundation, which was established by the United
States, Kazakhstan, and Switzerland to disburse for
humanitarian purposes $84 million in frozen bank funds linked
to the James Giffen bribery case. He described Bota as "at a
turning point." After three months of intensive work,
Kazakhstan's Ministry of Justice (MOJ) and the U.S.
Department of Justice (DOJ) finally reached agreement on
changes to several of Bota's statutory documents. The Bota
MOU between the three country partners was also renegotiated.
Shatalov called the MOJ's work exemplary, specifically
praising Deputy Justice Minister Marat Beketayev, who managed
to get the foundation registered in just one day. He
half-jokingly noted that making such speedy registration
routine would do "worlds of good" for Kazakhstan's ranking in
the World Bank's annual "Doing Business" report.


8. (SBU) Shatalov explained that at an October 7 meeting,
Bota's Board of Trustees selected IREX/Save the Children as
the winning bidder to be the foundation's program manager.
This decision is subject to approval by the three
governments, as well as the successful conclusion of contract
negotiations with IREX/Save the Children by October 31.
Shatalov praised the work to date of the Board (of which
former U.S. Ambassador to Kazakhstan John Ordway is a
member). He said that the Kazakhstani trustees have been
diligent, independent, and proactive, and "dead set" on the
efficient use of Bota's funds.


9. (SBU) Shatalov said that Bota anticipates launching its
programmatic activities in November. Assistance will be
targeted to specific regions, which will be selected based on
rural poverty rates. Shatalov noted, however, that existing
Kazakhstani data on poverty has proven unreliable. To better
address this issue, the Kazakhstani government recently
commissioned the World Bank to conduct a standardized poverty
study that will greatly assist in the identification of the
regions most in need of assistance, as well as provide a
basis for the comparison of poverty statistics across the
Central Asia region. In the meantime, a World Bank
specialist is "roving the countryside" to identify at risk
groups in need of Bota Foundation attention.


10. (SBU) Shatalov emphasized that the World Bank's primary
work on Bota is to define an efficient delivery mechanism for
the assistance. The role of the Kazakhstani government
will, of course, be limited to the provision of material

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support, such as office space, not to exceed the mandated
5-year program period. The World Bank hopes, however, that
many of the expected Bota Foundation regional offices will
remain open after the 5-year period via private and corporate
contributions, thereby fulfilling the second mandate of the
foundation: to nurture a philanthropic culture in
Kazakhstan. According to Shatalov, the Bota Foundation will
serve as a model for similar opportunities identified in Chad
and Cameroon.
HOAGLAND