KAZAKHSTAN: PRESIDENT NAZARBAYEV CONVENES FOREIGN

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SUBJECT: KAZAKHSTAN: PRESIDENT NAZARBAYEV CONVENES FOREIGN
INVESTORS COUNCIL

REF: (A) ASTANA 1868 (B) SECSTATE 134459

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


2. (SBU) SUMMARY: On December 5, President Nazarbayev chaired the
biannual Foreign Investors Council in Almaty, which was attended by
the entire Cabinet and the top 15 foreign investors in Kazakhstan.
The meeting was notable for its exclusive focus on local-content,
concern about the global financial crisis, and Nazarbayev's sharp,
public criticism of both foreign and domestic companies, including
national oil company KazMunaiGaz. Several Western company attendees
said they had never before seen Nazarbayev so determined to take
action to solve a problem. He ordered that an independent committee
be established immediately to increase local-content and warned that
even existing contracts could be revised to increase local-content
requirements. END SUMMARY.

THE FOREIGN INVESTORS COUNCIL


3. (SBU) The Foreign Investors Council (FIC) meets twice annually
in different cities of Kazakhstan and provides an open forum for the
country's largest foreign investors, as well as international
financial institutions such as the European Bank for Reconstruction
and Development (EBRD),to discuss the investment climate with the
President and his Cabinet. Usually, 15 foreign investors and 15
government officials attend the FIC forum.


4. (SBU) U.S. companies Philip Morris, Chevron, ExxonMobil,
ConocoPhillips, AES, and General Electric regularly attend, as do
other major foreign investors, primarily from the oil and gas,
mining, and transportation sectors. President Nazarbayev chairs the
meeting, which is dedicated to a single topic of general interest.
On December 5, the government delegation read like a Who's Who of
Kazakhstan's political elite: Prime Minister Masimov, Minister of
Finance Korzhova, Minister of Energy Mynbayev, Central Bank Chairman
Saidenov, Samruk-Kazyna Chairman Kelimbetov and Deputy Chairmen
Kulibayev and Dunayev, and KazMunaiGas (KMG) President Kabyldin,
among others.


5. (SBU) According to Stephen Wermert, Kazakhstan Country Director
for the Asian Development Bank, which co-chairs the FIC together
with the EBRD, some companies simply use the FIC to brag about their
latest accomplishments. "They spend the whole time banging their
chests, talking about how good their programs are," he said.
Wermert attended the December 5 meeting and said the foreign
investors missed an opportunity to build trust with the government.
"They would have made a more favorable impression on the
government," he said, "if they had talked about Kazakhstan's needs
and future development, rather than their own company's parochial
plans."

THE LOCAL-CONTENT ISSUE


6. (SBU) The issue before the Foreign Investors Council on December
5 was local content, i.e., the percentage and value of Kazakhstani
participation in foreign investment projects, including staffing and
subcontracts for goods and services. All ma${d6FH{el A). Nevertheless, the December 5 FIC meeting
made it clear that the government expects more to be done to promote
local companies, build local capacity, and develop local expertise.

PRESIDENT LASHES OUT


7. (SBU) According to ConocoPhillips's Nick Olds, who attended the
FIC on December 5 with ConocoPhillips CEO Jim Mulva, President
Nazarbayev was more active, directive, and critical than during any
of the previous six meetings. Olds said that Nazarbayev lamented
the low level of local content in Kazakhstan's mega-projects, then
he went around the table, looked his ministers in the eye, and

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pointed his finger in turn, saying, "This is what I want you to do:
boom, boom, boom."


8. (SBU) President Nazarbayev claimed that from January through
September, Kazakhstani content in foreign purchases of goods and
service did not exceed 15% of the total procurement value. Nick
Olds and Shell's Country Director Campbell Keir, who also attended
the meeting, said Nazarbayev was outraged and called the situation
unacceptable: "Obviously," he said, "this state of affairs does not
satisfy the state, the oil companies, or Kazakhstani producers."
(NOTE: Unfortunately, the data provided to President Nazarbayev
were incomplete and therefore inaccurate. For example, the three
largest investors in Kazakhstan -- Tengizchevroil, Agip KCO
(Kashagan),and Karachaganak KPO -- were not included in the list of
companies that use local subcontractors and employ local staff,
despite the fact that, combined, they purchase 43% of all goods and
services in Kazakhstan. END NOTE).


9. (SBU) According to Olds and Keir, Nazarbayev pointedly reminded
the foreign investors present that they have a contractual
obligation to hire Kazakhstanis, invest in social projects, and
promote the development of new industries, such as petrochemicals.
Nazarbayev said that increasing Kazakhstan's share in foreign
investment projects should become the government's number one
priority, although he did acknowledge that Kazakhstani producers
must provide competitive, quality services and products to meet the
demand of foreign companies.


10. (SBU) Nazarbayev said that oil and mining companies in
Kazakhstan purchase $18 billion in goods and services annually,
including $10 billion in services. He complained, however, that
Kazakhstani companies are often unable to participate in the bidding
processes. "Kazakhstani producers do not have information about the
dates, terms, and conditions of tenders for the purchase of goods
and services," said Nazarbayev. "If we knew what a foreign investor
plans for the next year, or second or third year, we could prepare
our companies for it. Besides," he added, "some tenders are
conducted, say, in London. It's an absolute disgrace!"

KMG SINGLED OUT FOR CRITICISM


11. (SBU) Foreign investors were not surprised to find themselves
criticized for not meeting the government's local content
expectations, but they were surprised to see national oil company
KazMunayGas singled out by Nazarbayev for "poor promotion of local
interests in joint ventures with foreign investors." Every year,
the government reviews and approves KMG's plans for procurement,
capital expenditures, and exploration and production, to ensure that
they meet local content requirements. According to Nazarbayev,
however, "KazMunayGas has done nothing, or has just worked very
poorly, and does not do enough to increase Kazakhstani interests in
joint projects." He ended emphatically, "The situation must be
rectified immediately."

FOREIGN INVESTORS RESPOND


12. (SBU) The reaction of foreign investors to the government's
criticism was muted, partly because the data cited by the president
were incomplete and partly because the companies themselves agree
with the president on the need to increase investment in local staff
and subcontracts. Shell's Keir said, "Increasing local content in
the purchasing of goods and services is a priority for us." He
added that local suppliers often know the domestic market better and
can offer more beneficial contract terms and supply deals. "It's
just good business," he said. Keir noted, however, that it is not
always easy to meet the government's local content requirements,
simply because there is no single, uniformly-applied formula for
calculating the value and percentage of local content in a given
procurement.


13. (SBU) Alexander Mashkevich of the Eurasian Natural Resources
Corporation noted that domestic suppliers must be competitive and

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able to meet international standards on quality and timeliness if
they expect to provide goods and services to Kazakhstan's major
investment projects. Mashkevich called for a new government program
to coordinate the quality, quantity, cost, and diversity of local
suppliers, a proposal that was not immediately endorsed by other
foreign investors.

IMPLICATIONS AND NEXT STEPS


14. (SBU) Nazarbayev ordered that an independent committee be
established immediately to increase the local content of products
and services in Kazakhstan. He signaled the government's
determination to enforce local content provisions, saying, "The
government should monitor the fulfillment of obligations on local
content, increase responsibility for noncompliance with contract
terms, and set up a system of government control over the subsoil
users' activities on this issue."


15. (SBU) Ominously, Nazarbayev also ordered the government's new
committee to review all existing subsoil contracts in order to
establish or increase local-content quotas and identify local
Kazakhstani producers and suppliers. According to press reports,
Nazarbayev instructed the Ministry of Labor and Social Protection to
arrange a system of assigning and distributing quotas to regions
(oblasts) in order to monitor the extent that regions meet their
quotas.


16. (SBU) The next meeting of the Foreign Investors Council will be
held on June 12, 2009, in the city of Kostanai. The theme will be
"Alternative Sources of Financing for the Continued Economic
Development of Kazakhstan in the Context of Global Changes."


17. (SBU) COMMENT: American investors who attended the December 5
meeting were pleasantly surprised by Nazarbayev's balanced,
businesslike approach to promoting local content and his direct,
personal engagement with the companies and his Cabinet. Many
observers commented that Nazarbayev was much more active and
involved in this meeting than in previous sessions of the Foreign
Investors Council. In particular, investors who attended the
meeting appreciated Nazarbayev's statement that Kazakhstani
suppliers must become more competitive and produce quality products
that meet international standards. The president's passion for
local content is partly a result of the financial crisis, which has
hit local suppliers hard and forced even large, diverse,
state-supported companies such as KMG to lay off as much as 10% of
their workforce. Although he criticized foreign companies for their
allegedly low local content, Nazarbayev also appealed for their
support during these troubling times: "I do hope that your
companies will support Kazakhstan's economy during this difficult
period," he said. "I have asked you before and I am asking you
again to provide social protection for the people during this period
and preserve and create jobs."


18. (SBU) COMMENT CONTINUED: American investors were not alarmed
by Nazarbayev's call to review and revise the local content
provisions of existing contracts, mainly because the companies can
in fact demonstrate a high level of local content, the president's
claims notwithstanding. They do, however, expect increased
government scrutiny and closer monitoring of future procurement and
hiring decisions. Ultimately, government poking and prodding will
not be necessary or even useful. The companies themselves
understand the economic and political business case for increased
local content, but they believe the best way to achieve that is
through improving the competitiveness of local suppliers, not
through government mandates and quotas. END COMMENT.

HOAGLAND