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 -------------- ¶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 ASTANA 00000281 002 OF 003 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 ASTANA 00000281 003 OF 003 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