KAZAKHSTAN: KULIBAYEV ON THE STATE OF THE ECONOMY,

UNCLAS SECTION 01 OF 03 ASTANA 002291

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SUBJECT: KAZAKHSTAN: KULIBAYEV ON THE STATE OF THE ECONOMY,
HYDROCARBON TRANSPORTATION


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


2. (SBU) SUMMARY: On November 20, Timur Kulibayev, newly-appointed
Deputy Chairman of the Samruk-Kazyna Sovereign Wealth Fund, gave the
Ambassador his assessment of the domestic impact of the global
financial crisis and an update on new oil and gas transportation
projects. He said that on November 25, the Government of Kazakhstan
would announce new details of its bailout plan, including $3.5
billion in assistance to the banking sector, $1 billion for the
agricultural sector, reduced interest rates for small and medium
enterprises seeking loans, and fixed tariffs for power generation.
Kulibayev said both the Prikaspiskii and trans-Caspian gas pipelines
projects were essentially political projects and were not commercial
priorities for Kazakhstan. When asked about Kazakhstan's plans to
ship crude to Iran, Kulibayev said he was well aware of the U.S.
embargo and said the government of Kazakhstan is not actively
pursuing that option. END SUMMARY.

SAMRUK-KAZYNA CONSOLIDATES RESOURCES


3. (SBU) Timur Kulibayev is the billionaire son-in-law of President
Nazarbayev and was appointed to be Deputy Chairman of the
Samruk-Kazyna National Welfare Fund on October 17. He is
simultaneously head of the business association KazEnergy, which
includes all major oil companies doing business in Kazakhstan.
Kulibayev told the Ambassador that the government merged the Samruk
state assets holding company with the Kazyna Sustainable Development
Fund in October to focus government resources on mitigating the
effects of the global financial crisis. According to Kulibayev,
Samruk-Kazyna will take over additional government-owned companies,
including several in the mining and mortgage-banking sector, and is
being provided with $10 billion from the National (Oil) Fund to
finance various stabilization measures, which reportedly will
include its purchase of large stakes in key Kazakhstani banks.
(NOTE: An additional $5 billion in capital is being made available
directly to banks through a reduction of their reserve requirements.
END NOTE). Samruk-Kazyna will also manage an "asset stabilization
fund," financed with $433 million from the state budget, to buy up
bad loans from banks.

OUTLINE OF A BAILOUT PLAN


4. (SBU) On November 25, the government will announce additional
measures to respond to the global financial crisis. For example,
Kulibayev indicated that the National Fund would:

-- invest $3.5 billion to take equity positions in Kazcommertsbank,
BankTuranAlem, Halyk Bank, and Alliance Bank;

-- lower the interest rate for small and medium enterprises to
access credit from 18% to 12.5%;

-- for the first time since independence, create a strategic reserve
of agricultural staples such as wheat, meat, vegetable oil, and
sugar;

-- invest an additional $1 billion in food security, including
upgrades to food storage and transportation infrastructure; and

-- provide $3 billion to the construction sector.

THE GENESIS OF THE CRISIS


5. (SBU) Kulibayev told the Ambassador that the financial crisis in
Kazakhstan began with the banking crisis in August 2007. According
to Kulibayev, local banks borrowed externally and refinanced
repeatedly until they faced a severe liquidity shortage with the
collapse of external lending. "Fortunately," he remarked
ironically, "one advantage we have over the United States is that
our stock exchange is not well developed," so the credit crunch was

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not exacerbated by a dramatic drop in share values. According to
Kulibayev, Kazakhstani banks carry a total of $40 billion in
commercial debt, 50% of which is in construction, housing and other
mortgage loans, but he was confident that the banks could meet all
outstanding debts and even predicted that they would resume lending
within six months. (NOTE: Timur and Dinara Kulibayev reportedly
each own 50% of the Almex holding group, which in turn owns Halyk
Bank, one of the four banks in which the government will take a 25%
equity stake. END NOTE).

INFLUENCE OF THE RUSSIAN MEDIA


6. (SBU) Kulibayev calmly informed the Ambassador of the
government's plans to manage the crisis and explained that the top
priority now is to preserve stability and prevent panic. He noted
that most Kazakhstanis get their news from Russian television and
tend to follow the example of Russia. "If they see Russians on TV
buying food in a panic, they'll do the same. We want to avoid
that," he explained.

RETURN TO A COMMAND ECONOMY?


7. (SBU) When the Ambassador asked if the government's sizeable
investments in private industry and its consolidation of state-owned
assets could lead to a return to a command economy, Kulibayev
paused, then turned the tables by saying, "The United States used to
set the standard for all free-market economies. Now, the U.S.
government is directly involved in the U.S. economy and has a huge
influence over the private sector." He then turned philosophical,
noting that it will take several years to determine the proper role
for the government in the national economy. "It is clear that we
need to make some changes to the regulatory institutions in order to
get the balance right," he said. Kulibayev candidly admitted that
the government could not do any long-range planning in the current
environment, even with the help of world-class advisors from JP
Morgan, Citigroup, McKinsey & Company, and the Boston Consulting
Group. He estimated it would take one to two years before things
settled down. He did say that under the government's most
pessimistic scenario, they will draw down on the country's oil fund
and hard currency reserves, while under their optimistic scenario,
the government planned to use the revenue from the oil and gas to
diversify the economy away from the extractive industries.

NEW ENERGY INITIATIVES UNDER REVIEW


8. (SBU) Kulibayev indicated that several major initiatives in the
energy sector might have to be postponed, including development of a
new national petrochemical industry, an agricultural fertilizer
industry, and a state-owned mining holding company. He said that
existing projects for the Batumi oil terminal in Georgia and the
downstream assets of Rompetrol in Europe would be unaffected, but
said future expansion projects would likely be put on hold.

TRANSPORTATION PRIORITIES


9. (SBU) Kulibayev said the government has three main options for
transporting its oil and gas: Russia, China, and Azerbaijan. He
said Russia has "always been a reliable partner" and is "our first
priority." Next, he listed China, with which Kazakhstan shares a
long border and is constructing gas and oil pipelines. He then
referred to the recent trans-Caspian transportation agreement signed
between Kazakhstan and Azerbaijan on November 14 and noted that
shipment of oil from Baku onward, including the Baku-Supsa pipeline,
is also an important transportation option for Kazakhstan.
Kulibayev said KazMunaiGas and the international oil companies were
content to ship oil westward via tanker rather than raise the
difficult issues of Caspian Sea delimitation with construction of a
pipeline. "It's funny," he said. "These projects all have undersea
pipelines and they can get very close to each other, but cannot
connect."

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PRIKASPISKII PIPELINE "POLITICAL"


10. (SBU) Kulibayev was openly skeptical of the proposed
Prikaspiskii gas pipeline, calling it a political, not commercial,
project that exists only on paper. He was equally dismissive of the
proposed trans-Caspian pipeline, calling it a "virtual project" that
would not move forward without the agreement of all littoral states,
particularly Iran and Russia, on the delimitation of the Caspian
Sea. Kulibayev further doubted whether Turkmenistan would have gas
resources sufficient to supply the pipeline after meeting current
obligations to China, Russia, and Iran. He noted that Kazakhstan
already has existing gas pipelines with a capacity of 10 billion
cubic meters (bcm),waiting to be filled. "A new pipeline with a 30
bcm capacity does not make sense," he said.

THE SHORTEST ROAD


11. (SBU) When asked about Kazakhstan's plans to ship crude to
Iran, Kulibayev responded quietly, "The route through Iran is the
fastest way to reach the Asian market. And Iran is more politically
stable than, say, Afghanistan. But we are well aware that the
United States is opposed to shipments through Iran, so we are not
actively pursuing that option." He then added, "We will wait and
see, maybe there will be a change in this policy with the new
administration in Washington."


12. (SBU) COMMENT: Kulibayev was calm, cool and collected
throughout the meeting, pausing thoughtfully to ponder difficult
questions and switching from Russian to English with ease. During
the meeting, he eagerly went to a wall map to show the Ambassador
the location of planned gas pipelines and when the meeting
adjourned, he invited the Ambassador, with genuine pride for his
capital city, to view Astana from his office on the 16th floor of
the KazMunaiGas building. He clearly welcomed the opportunity to
establish a strong and open relationship with the Ambassador and
stressed the importance of U.S. investors and the U.S. government to
Kazakhstan's continued development. Noting that a crisis often
brings opportunities as well as challenges, he said, "Perhaps now
the euphoria will die down and we will be more realistic and better
prepared for the difficult decisions that lie ahead." END COMMENT.

HOAGLAND