KAZAKHSTAN: SCENESETTER FOR CODEL CORKER'S NOVEMBER 13-14

UNCLAS SECTION 01 OF 05 ASTANA 002166 SENSITIVE SIPDIS H PLEASE PASS TO CODEL CORKER E.O. 12958: N/A TAGS: PREL PGOV PHUM ECON EPET OREP KDEM KZ SUBJECT: KAZAKHSTAN: SCENESETTER FOR CODEL CORKER'S NOVEMBER 13-14 VISIT TO ASTANA ASTANA 00002166 001.2 OF 005 ¶1. (SBU) SUMMARY: Your visit to Kazakhstan will be most useful to reinforce the importance we place on the U.S.-Kazakhstan strategic partnership. Both Secretary of State Rice and U.S. Ambassador to the United Nations Zalmay Khalilzad visited Astana in October. With its selection as 2010 OSCE chairman and thriving energy sector, Kazakhstan is showing increasing confidence on the international stage. The country is rightly proud of its achievements: sustained economic growth, a largely harmonious multi-ethnic society, and a rapidly expanding national capital. Kazakhstan has proven to be a reliable security partner and a steady influence in a turbulent region. The pace of democratic reform, however, has been slow, with political institutions, civil society, and the independent media still underdeveloped. Our fundamental strategic objective is a secure, democratic, and prosperous Kazakhstan that embraces market competition and the rule of law; continues to be a partner with us on the global threats of terrorism, WMD proliferation, and narco-trafficking; and develops its energy resources in a manner that bolsters global energy security. We recommend that you underline to your Kazakhstani interlocutors the importance of: -- continuing Kazakhstan's policy of diversifying energy export routes; -- enhancing Kazakhstan's support for Afghan stabilization and reconstruction; -- following through on the democratic reform commitments Kazakhstan made when selected as 2010 OSCE chairman. END SUMMARY. REGIONAL ECONOMIC POWERHOUSE ¶2. (SBU) Kazakhstan is the region's economic powerhouse, with an economy larger than that of all the other Central Asian states combined. Economic growth averaged 9.2% a year during 2005-07, and the percentage of the population living below the subsistence level dropped from 28% in 2001 to under 10% at present. Economic growth has slowed as a result the global financial crisis, and will likely be in the 5% range for 2008. While the country's economic success is partly due to its fortuitous natural resource deposits, astute macroeconomic policies and extensive economic reforms have also played important roles. Kazakhstan has a modern banking system, well-endowed pension fund, and a sovereign wealth fund with over $27 billion in assets -- which serves double duty as a prophylactic against Dutch disease and a cushion against hard economic times. In October, the government announced that it would use up to $10 billion from the sovereign wealth fund for a bailout plan to mitigate the domestic impact of the global financial crisis. Over the long run, Kazakhstan must focus on diversifying its economy, building up non-extractive industries, agriculture, and the service sector. Kazakhstan is a major wheat producer, with a goal of ranking consistently among the world's top five wheat exporters. AN EMERGING ENERGY POWER ¶3. (SBU) U.S. and Kazakhstani strategic interests are largely in alignment regarding Kazakhstan's vast energy resources. The Kazakhstanis agree with us that U.S. and other Western companies should continue playing a leading role in energy exploration and production in Kazakhstan. They also recognize that diversifying energy transport routes is the best way for them to capture the maximum benefits of Kazakhstan's energy riches. Kazakhstan exported just over 60 million tons (approximately 450 million barrels) of crude oil in 2007 and is expected to be one of the world's top ten oil producers soon after 2015. While the country also has significant natural gas reserves (1.8 trillion cubic meters is a low-end estimate),gas exports are very limited for now, largely because gas is being reinjected to maximize crude production. ¶4. (SBU) U.S. companies -- Chevron, ExxonMobil, and ConocoPhilips -- have significant ownership stake in Kazakhstan's three major ASTANA 00002166 002.2 OF 005 hydrocarbon projects: Kashagan, Tengiz, and Karachaganak. Kashagan, the largest oil field discovery since Alaska's North Slope and perhaps the world's most technically complex oil development project, has experienced tens of billion of dollars in cost overruns and is years behind schedule, with first oil now expected no earlier than 2013. On October 31, the Kazakhstani government and the Kashagan consortium's international partners signed several agreements on revised terms for the Kashagan contract which will result in a new operatorship model, financial compensation to Kazakhstan for the cost overruns and production delays, and an increased ownership stake and management role for Kazakhstan's state oil and gas company, KazMunaiGas (KMG). Tengiz is the world's deepest operating "super-giant" oil field, with the top of the reservoir at about 12,000 feet deep. With a recent second generation expansion, crude production at Tengiz is increasing this year from 400,000 barrels per day to 540,000. Karachaganak is one of the world's largest oil and gas condensate fields, producing 10.4 million tons of oil and 12 billion cubic meters of gas in 2007. ¶5. (SBU) With major production increases on the horizon, Kazakhstan must develop additional transport routes to bring its crude to market. Currently, the bulk of Kazakhstan's oil is exported through Russia. Near-term production increases are likely to be transported through Russia's Caspian Pipeline Consortium (CPC) pipeline, should an agreement be finalized on CPC expansion; by rail through Russia; and via the Kazakhstan-Caspian Transportation System (KCTS),which envisions moving crude to Kazakhstan's Caspian coast by pipeline, from where it will be sent by tanker to Baku. Crude from KCTS would flow onward from Baku through Georgia, including through the Baku-Tbilisi-Ceyhan (BTC) pipeline, which the Kazakhstani government publicly recommitted to utilize following the Georgia conflict. Kazakhstan is expanding the capacity of a crude pipeline to China. Kazakhstan exports a limited amount of crude to Iran, though the Iranians have been lobbying hard for the Kazakhstanis to commit to sending much larger volumes in their direction in the future. While a trans-Caspian oil pipeline from Kazakhstan to Azerbaijan would be a much cheaper long-term option than shipment by tanker, the Kazakhstanis maintain that an agreement on delimitation of the Caspian Sea among all five Caspian littoral states is a prerequisite -- politically, if not legally -- for moving forward on building one. ¶6. (SBU) While Kazakhstan and the international oil companies appear committed to an enduring relationship, and the country continues to welcome foreign investment in energy exploration and production, the Kazakhstani government has grown increasingly assertive in the energy sector in recent years. The Kazakhstanis are trying to capture a greater percentage of the profits from hydrocarbon projects through higher taxes, are driving a harder bargain on new projects, and are aggressively pursuing environmental and tax claims against international companies. (NOTE: For example, the Tengiz consortium is currently fighting a $300 million environmental fine for on-site storage of several million tons of sulfur. The consortium maintains that it received all the proper permits for sulfur production, and that no permits are necessary -- or available -- for sulfur storage. END NOTE.) That all said, the country's senior leaders have offered public and private reassurances that sanctity of contracts will be respected for all existing projects. MULTI-VECTOR FOREIGN POLICY ¶7. (SBU) President Nazarbayev carefully balances Kazakhstan's relations with Russia, China, the United States, and European Union. In his view, this "multi-vector" foreign policy is the best way to bolster Kazakhstan's sovereignty and independence and enable it to resist excessive pressures coming from any one direction. The United States, in fact, serves as a critical counterweight to Kazakhstan's powerful Russian and Chinese neighbors. Social, cultural, and personal links help provide Russia with unmatched influence in Kazakhstan. Kazakhstan's population is approximately ASTANA 00002166 003.2 OF 005 one-third ethnic Russian, Russian remains the country's dominant language, and the vast majority of Kazakhstanis get their news from the Russian media. Russian President Medvedev has already visited Kazakhstan three times since taking office in May. Relations with China have strengthened as fears of Chinese encroachment have largely disappeared. Kazakhstan has recently increased its focus with Europe, launching a "Road to Europe" program which envisions everything from greater cooperation with the Europeans in energy and technology to bringing Kazakhstani legislation in line with European norms. WALKING A FINE LINE ON GEORGIA ¶8. (SBU) Kazakhstan continues to walk a fine line on the Georgia conflict. On the one hand, Nazarbayev publicly endorsed the Russian view that the Georgians started the South Ossetian war -- and that Russia had a right to intervene to stop the bloodshed. On the other hand, he reiterated Kazakhstan's support for the principal of territorial integrity. In addition, Kazakhstan has given no indication that it will consider recognizing the independence of Abkhazia and South Ossetia. Kazakhstan, in fact, is the largest foreign investor in Georgia, and Georgia remains a lynchpin in Kazakhstan's strategy to diversify its energy transport routes. PARTNER IN AFGHANISTAN AND IRAQ ¶9. (SBU) Kazakhstan is an important partner in Afghanistan, and appears poised to do even more there. Separate bilateral agreements allow U.S. military aircraft supporting Operation Enduring Freedom to transit Kazakhstani airspace cost-free and to make emergency landings in Kazakhstan when conditions do not permit landing at Kyrgyzstan's Manas Air Base. The Kazakhstani government is providing almost $3 million in humanitarian assistance to Afghanistan in 2008 for food and seed aid to build a hospital, school, and road. The government has also tried to promote private Kazakhstani investment in Afghanistan, though thus far without much success. The Kazakhstanis have announced their intentions to make Afghanistan a focal point of their 2010 OSCE chairmanship. Kazakhstan was the sole Central Asian country that participated in Operation Iraqi Freedom (OIF). In October, in full coordination with the Iraqi and U.S. governments, Kazakhstan withdrew from Iraq a military engineering unit which had disposed of over 4.5 million pieces of unexploded ordnance since 2003. DEMOCRATIC DEVELOPMENT LAGS ¶10. (SBU) While the Kazakhstani government articulates a strategic vision of a democratic society, it has lagged on the implementation front. The government is resistant to fully competitive political processes, and the situation is complicated by the fact that President Nazarbayev is extremely popular, while the opposition is weak, fractured, and comprised principally of former Nazarbayev loyalists. In May 2007, significant amendments were adopted to Kazakhstan's constitution which were touted as strengthening parliament, but also removed terms limits on Nazarbayev. In parliamentary elections held in August 2007, Nazarbayev's Nur Otan party officially received 88 percent of the vote and took all the seats in parliament. An OSCE election observation mission concluded that the elections did not meet OSCE standards. FOLLOW THROUGH NEEDED ON MADRID COMMITMENTS ¶11. (SBU) When Kazakhstan was selected as 2010 OSCE chairman at the November 2007 OSCE Madrid ministerial meeting, Foreign Minister Tazhin publicly committed that his country would undertake several democratic reforms -- specifically, that by the end of 2008, Kazakhstan would amend its election, political party, and media laws taking into account the OSCE's recommendations. (NOTE: Tazhin also promised that Kazakhstan would support the OSCE's "human dimension" and preserve the mandate of the OSCE's Office of Democratic Institutions and Human Rights (ODIHR),including its critical role ASTANA 00002166 004.2 OF 005 in election observation. END NOTE.) The government has not yet presented the necessary legislation to parliament, but the Kazakhstani leadership has reassured us that this will happen very soon. We have stressed that we expect timely follow on through the "Madrid commitments," explaining that this will further enhance President Nazarbayev's image as an international statesman. CONCERNS ON RELIGIOUS FREEDOM ¶12. (SBU) While Kazakhstan prides itself on its religious tolerance, religious groups not traditional to the country -- such as some evangelical Protestants, Jehovah's Witnesses, and Hare Krishnas -- have faced difficulties. There has recently been a significant increase in negative media coverage of "non-traditional" religions which appears to have been orchestrated in part by the government. The Kazakhstani parliament is currently considering a package of amendments to the country's religion law which would assert greater government control over non-traditional groups. While the latest draft text represents an improvement over the original version, it retains several problematic provisions, including ones that would create a distinction between large and small religious groups, limiting the rights of the latter. We want to ensure that Kazakhstan takes into account ODIHR's recommendations in the final version -- as senior Kazakhstani officials have told us they will do. BROAD RANGE OF ASSISTANCE PROGRAMS ¶13. (SBU) We are implementing a broad range of assistance programs in Kazakhstan to advance U.S. national interests and strengthen the U.S.-Kazakhstan strategic partnership. Non-proliferation cooperation has been a hallmark of our bilateral relationship since Kazakhstan became independent and agreed to give up the nuclear arsenal it inherited from the USSR. Our bilateral Nunn-Lugar Cooperative Threat Reduction (CTR) program has facilitated the dismantlement of Kazakhstan's intercontinental ballistic missile launchers, closure of test tunnels and boreholes at the former Soviet nuclear test site in Semipalatinsk, and elimination of an anthrax weapons production facility. Major ongoing programs include an effort to secure and store spent fuel from a closed plutonium production reactor in western Kazakhstan, and a biological threat reduction program aimed at ensuring effective Kazakhstani control of dangerous pathogens. ¶14. (U) USAID, which is expected to receive approximately $12.5 million in Kazakhstan funding for FY 2009, is implementing programs in three areas: democracy, health, and economic development. The democracy program includes activities to strengthen civil society and independent media and to enhance the dialogue between the government and the public on important policy issues. Funding for health is aimed at promoting reform of the health care system, improving maternal and child health, and controlling tuberculosis and HIV. The economic development program, which is largely being phased out after FY 2009, receives co-financing from the Kazakhstani government. It has focused, in part, on strengthening the government's economic-policymaking capabilities, promoting fiscal transparency, and fostering economic diversification and the development of small- and medium-sized enterprises. ¶15. (SBU) Our military assistance aims to increase Kazakhstan's interoperability with U.S. and NATO forces, enhance Kazakhstan's participation in the Partnership for Peace, and increase Kazakhstan's capacity to serve in global peacekeeping operations. With an estimated $2 million in FMF funding for FY 2009 plus a $10 million Section 1206 allocation for FY 2008, we are providing boats and refurbished Huey-II helicopters for a Caspian Sea counter-terrorism rapid reaction force. Other U.S security assistance programs are enhancing Kazakhstan's effectiveness in combating drug trafficking, promoting law enforcement reform, and bolstering Kazakhstan's efforts to prevent trafficking in persons. ASTANA 00002166 005.2 OF 005 ¶16. (U) Approximately 200 Kazakhstanis -- including high school, undergraduate, and graduate students, as well as government officials and private sector leaders -- will be sent to the United States during FY 2009 on public diplomacy-funded exchange programs, such as the Future Leaders Exchange (FLEX),Muskie, and International Visitors Leadership programs. (NOTE: Overall, approximately 2000 Kazakhstanis are studying full time in the United States, including 700 funded by the Kazakhstani government's Bolashak scholar program. In addition, almost 4000 Kazakhstani students participate annually in the private sector-sponsored Summer Work/Travel Program, which affords foreign students an opportunity to temporarily work in and travel throughout the United States during their summer vacations. END NOTE.) The first Peace Corps volunteers arrived in Kazakhstan in July 1993. Our Peace Corps program currently averages over 120 volunteers in country at any time, with two-thirds involved in educational activities and the remainder engaged in organizational and community development. HOAGLAND