SCENESETTER FOR SCA ASSISTANT SECRETARY BOUCHER'S VISIT TO

UNCLAS SECTION 01 OF 03 ASTANA 000281

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR SCA/CEN - MARTY O'MARA

E.O. 12958: N/A
TAGS: PGOV PREL ECON EPET KZ

SUBJECT: SCENESETTER FOR SCA ASSISTANT SECRETARY BOUCHER'S VISIT TO
KAZAKHSTAN

Summary
--------------


1. (SBU) Summary: Your trip to Kazakhstan follows January visits
from Senator Lugar, Eurasian Energy Diplomacy Coordinator Mann, and
Acting Principal Deputy Assistant Secretary of Defense for Central
Asia Shivers. The steady traffic of high-level visitors to and from
Kazakhstan (Prime Minister Masimov is expected to travel to
Washington in March) reflects the healthy state of U.S.-Kazakhstan
relations. Kazakhstan is a reliable security partner and a steady
influence in a turbulent region. The country is proud of its
achievements -- a thriving economy, a rapidly expanding capital
city, a largely harmonious multi-ethnic society -- and is
increasingly confident on the international stage. The pace of
democratic development has been slower, with political institutions,
civic society, and the independent media still underdeveloped. End
Summary.

Political Context
--------------


2. (SBU) In Parliamentary elections held last August 19, the ruling
Nur Otan Party received 88% of the vote. No other party broke the
7% threshold necessary to win seats in Parliament. The OSCE/ODIHR
International Election Observation Mission concluded that the
elections fell short of the OSCE standards, noting "welcome progress
in the pre-election process and during the conduct of the vote" but
that "a number of OSCE commitments and Council of Europe standards
were not met, in particular with regard to elements of the new legal
framework and to the vote count." The pre-election period was
relatively good, with all parties having adequate access to the
electorate. Voting proceeded smoothly. The major problems developed
during counting and aggregation. That said, the single party
parliament is as much a result of the opposition parties' failure to
gain political traction as it was a result of vote manipulation.
The opposition has continued to struggle to enunciate a clear
message post-election.


3. (SBU) When Kazakhstan was selected as OSCE Chairman-in-Office for
2010 at the Madrid OSCE ministerial in November, Foreign Minister
Tazhin publicly committed that Kazakhstan would amend its election
and media laws to better meet international standards and liberalize
registration procedures for political parties and media outlets by
the end of 2008. He also publicly stated 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).
In January, the Central Election Committee (CEC) requested that
political parties, including opposition parties, provide
recommendations for election law amendments. The main opposition
parties, including True Ak Khol, the National Social Democracy Party
(OSDP),and the Communist Party, recently responded to the CEC with
their own proposals. The CEC is now beginning a series of working
group meetings, with invitations to the political parties, to
discuss possible amendments.

Consistent Economic Growth
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4. (SBU) Kazakhstan is the region's economic powerhouse, with an
economy larger than those of all the other Central Asian states
combined (2006 GDP: $68 billion). The economy has averaged 9.2%
real growth over the past three years, and the percentage of
Kazakhstan's population living below the level of subsistence
dropped from 28.4% in 2001 to 9.8%
in 2005. The energy sector is the dominant earner, with oil exports
accounting for roughly a third of GDP.


5. (SBU) Short-term challenges remain. In November,
year-on-year inflation hit 17.5 percent, propelled by
soaring food prices (up nearly 25 percent year-on-year). This
remains a politically sensitive issue. During the Fall of 2007, the
price of bread rose 30% in two months. According to one private
sector analyst, on average 40 percent of household expenditures are
spent on food. The government announced at the end of 2007 a $4
billion package to mitigate the domestic effects of the global
financial crisis. The money is to be disbursed via Kazyna's
Development Bank of Kazakhstan and injected into the banking system
as deposits in the accounts of participating commercial banks.

An Emerging Energy Power
--------------


6. (SBU) Kazakhstan produced 55.5 million tons of crude oil in 2007
and is expected to become a top ten oil producer soon after 2015.
The Tengiz field is expected to produce 540,000 barrels per day by
the second half of this year after its latest stage of expansion
comes on line. The huge Kashagan field has estimated reserves of 13

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billion barrels, although full production is unlikely to begin until
2015 at the very earliest. Kazakhstan also possesses substantial
proven gas reserves (3 billion cubic meters),though there is
currently very limited gas available for export. At Tengiz, for
example, most gas is reinjected into the reservoir to maximize
long-term crude production.


7. (SBU) The U.S is encouraging the Kazakhstan to diversify its oil
and gas export routes. Currently, the bulk of Kazakhstan's crude is
exported via Russia, both through the Transneft system and the
independent Caspian Pipeline Consortium (CPC). In the absence of a
CPC expansion, most of Kazakhstan's near term oil production
increases are likely to flow to market by rail through Russia, or by
tanker across the Caspian to Baku (and from there through
Baku-Tbilisi-Ceyhan or to Batumi or Supsa on the Black Sea.). All
of Kazakhstan's gas exports currently flow through Russia. In
December, Kazakhstan, Turkmenistan, and Russia signed an agreement
to build the "Prikaspiysky" gas pipeline, intended to carry gas from
Kazakhstan and Turkmenistan north through Russia. The GOK insists
trans-Caspian oil and gas pipelines will be difficult to build
without a five-country agreement on delimitation of the Caspian
Sea.


8. (SBU) Kazakhstan has grown increasingly assertive in its energy
sector, reexamining the terms of existing agreements, driving a
harder bargain with prospective investors, and aggressively pursuing
environmental and tax claims against international oil companies.
In October, President Nazarbayev signed into law an amendment to the
"Law on Subsoil and Subsoil Use" which gives the Government of
Kazakhstan the power to terminate a subsoil use contract if it
determines that the contractor's actions violate the national
economic security interests of the country. Only a "limited list of
strategic objects" will be subject to the amendment, but the GOK has
not yet made any such list public. President Nazarbayev has publicly
stated that the amendments will not be used to change existing
contracts. In January, Kazakhstan and the foreign consortium
partners reached agreement on renegotiating the terms of the
Kashagan contract, as a result of which Kazakhstan's state oil and
gas company, KazMunaiGaz (KMG),will get an increased equity stake
in the project, financial compensation for delays in project
development, and an enhanced role in project operations. (Note:
The subsoil amendments were not/not applied in the Kashagan case.
End Note.)

Security
--------------


9. (SBU) Kazakhstan has cooperated extensively with the United
States in the Global War on Terrorism. Kazakhstan has directly
supported efforts in Iraq by deploying a military engineer unit
which has disposed of over 4.5 million pieces of ordnance.
Kazakhstan has provided over 6000 cost-free overflight and emergency
landing rights for U.S. aircraft supporting Operation Enduring
Freedom. The GOK has indicated that it would like to deploy its
KAZBRIG unit for a peacekeeping operation, although no commitments
have yet been made. The GOK has also issued strong statements in
support of U.N. resolutions sanctioning Iran and North Korea.


10. (SBU) In December, the U.S. and Kazakhstan extended the
bilateral Cooperative Threat Reduction (CTR) umbrella agreement for
seven additional years. The GOK must still ratify it. The CTR
agreement has facilitated successful bilateral efforts to eliminate
the Stepnogorsk anthrax weapons production facility, dismantle
Kazakhstan's intercontinental ballistic missile launchers, and close
194 nuclear weapons test tunnels and boreholes at the former Soviet
nuclear test site in Semipalatinsk. Several important programs are
ongoing, most notably the effort to secure and store spent nuclear
fuel from the closed BN-350 plutonium production reactor in Aktau.

Regional Relations
--------------


11. (SBU) The GOK has stated its willingness to play an enhanced
role in achieving regional integration. Kazakhstan adopted an
action plan for Afghanistan under which it will provide $2.880
million in assistance in 2008. The funds are to be spent on food
and agricultural seed aid and for construction of a school,
hospital, and possibly a road. The Kazakhstanis, however, are
discouraged about prospects for private sector investment following
a failed attempt to win a tender for an Afghan copper mine, as well
as other unsuccessful commercial approaches to the Afghans.

12. (SBU) Kazakhstan continues to deftly balance relations with
Russia, China, and the U.S. Social, cultural and personal links
help provide Russia an unmatched influence in Kazakhstan.
Presidents Putin and Nazarbayev have met more than 15 times over the
last two years. Kazakhstan's population is approximately one-third
ethnic Russian. Russian remains the dominant language of the

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country, the most popular TV stations provide a heavy diet of
programming from Russia, and the most widely-read newspapers cover
events in Russia closely (and rarely unfavorably).

13. (SBU) Relations with China have strengthened as fears of Chinese
encroachment have largely disappeared. Kazakhstan-China trade grew
by 66% in 2007. China is also a major player in Kazakhstan's energy
sector. A Kazakhstan-China oil pipeline, Atasu-Alashankou, has an
annual capacity of ten million tons of crude, with capacity to
double when the second segment of the pipeline is launched. During
2008-09, a gas pipeline with an annual capacity of 40 billion cubic
meters will be laid from the Kazakh-Uzbek border to the
Kazakh-Chinese border.
ORDWAY