KAZAKHSTANI LEADERSHIP DISCUSSES ECONOMIC ISSUES,

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000341

SIPDIS

SIPDIS

E.O. 12958: DECL: 02/18/2018
TAGS: ECON EPET PREL WTO KZ
SUBJECT: KAZAKHSTANI LEADERSHIP DISCUSSES ECONOMIC ISSUES,
REGIONAL INTERGRATION, WTO ACCESSION WITH A/S BOUCHER

Classified By: Ambassador John Ordway, Reasons 1.4 (b) and (d)

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SUMMARY
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1. (C) Prime Minister Masimov told Assistant Secretary
Boucher during a February 11 meeting that he was seeking to
implement further structural economic reforms in Kazakhstan,
including tax reform. The government would also be focusing
greater attention on developing human capital. Masimov
stressed that Kazakhstan would not reopen the terms of
existing subsoil use contracts, though would seek more
favorable terms for new deals. In a separate meeting,
Foreign Minister Tazhin told Boucher that in addition to
Kazakhstan's assistance program for Afghanistan, the
Kazakhstanis would continue to seek private investment
opportunities there. Deputy Trade and Industry Minister
Aitzhanova argued to Boucher that the U.S. was pressing
Kazakhstan to agree to terms in its bilateral WTO accession
agreement that it had not demanded of Russia. (See septel
for details of Tazhin's discussion of the democratic reform
commitments Kazakhstan made at the Madrid OSCE ministerial.)
End Summary.

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FURTHER ECONOMIC REFORMS
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2. (C) During separate February 11 meetings in Astana, Prime
Minister Karim Masimov, Foreign Minister Marat Tazhin, and
Deputy Trade and Industry Minister Zhannar Aitzhanova
discussed with visiting Assistant Secretary of State Richard
Boucher a range of economic issues, regional integration, and
Kazakhstan's WTO accession. Masimov told Boucher that he
would take advantage of the domestic reverberations of the
global financial crisis to implement further structural
economic reforms. Kazakhstan's financial sector, he
contended, was the best in the region, but nevertheless still
required structural changes. Kazakhstan is getting advice
from former World Bank President James Wolfenson and his team
on the issue. Masimov added that 2008 presented a unique
opportunity for Kazakhstan to implement tax reform, which in
part would be aimed at reducing corruption. The government
is considering lowering tax rates for the non-extractive
sectors of the economy, and might increase rates on the
extractive sectors.


3. (C) Masimov explained that in the coming years, Kazakhstan
would place even greater attention on developing its human
capital. Kazakhstan had a good agreement with the World Bank
to cooperate on health, education, and other social programs.
The government would focus its efforts in particular on the
critical ages for human development -- i.e., children six and
under. Masimov said that the government was also considering
moving to a 12-year school program from the current 11-year
one, but adding the year at the beginning rather than the
end.

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NEW PIPELINE
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4. (C) Masimov stressed to Boucher that Kazakhstan would not
reopen the terms of existing subsoil use contracts. He
contended, however, that circumstances had changed and
Kazakhstan would seek more favorable terms for new contracts.
Masimov had already made this clear to ExxonMobil and
Chevron. Regarding energy transport, Masimov said
Kazakhstan is pessimistic about expansion of the Caspian
Pipeline Consortium (CPC) pipeline. As a result, Kazakhstan
had begun discussing with Chevron the construction of a
Baku-Batumi pipeline. Masimov said he had also spoken with
Azerbaijani President Aliyev and Georgian President
Saakashvili about the issue when he was in Tbilisi for
Saakashvili's recent inauguration. Masimov reminded Boucher
that as part of Kazakhstan's efforts to diversify transport
routes, the Kazakhstanis had recently purchased an oil
terminal in Batumi and a controlling stake in Rompetrol. The
Kazakhstanis are considering buying or building a terminal in
Constanza, he added.

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REGIONAL COOPERATION
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5. (C) Masimov told Boucher that President Nazarbayev had
made a decision to provide assistance, in the form of free
and discounted fuel oil (mazut),to Kyrgyzstan and Tajikistan
to help them get through the difficult winter. He stressed

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that energy and water cooperation with Kyrgyzstan, as well as
with Tajikistan, is extremely important for Kazakhstan.
Masimov explained that because of the manner in which
Kyrgyzstan is operating its hydroelectric dams, too much
water flows from Kyzgyzstan into Kazakhstan in the winter and
not enough in the summer. This can cause tensions.
Kazakhstan is discussing the issue with Kyrgyzstan
bilaterally, and is building a reservoir to try to mitigate
the problem.

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AFGHANISTAN
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6. (C) Foreign Minister Tazhin told Boucher that U.S. and
Coalition efforts in Afghanistan have been critical to the
Central Asian states, particularly in mitigating the
cross-border terrorism threat. Boucher encouraged the
Kazakhstanis to implement expeditiously their planned
assistance for Afghanistan. Tazhin admitted that the
approximately $3 million Kazakhstan allocated for its 2008
assistance program was modest, but stressed that this
nevertheless sent an important signal. Kazakhstan had
additionally offered to provide police training, but was
waiting for the Afghans to give a concrete response. Tazhin
said the Kazakhstanis would continue to explore private
investment opportunities in Afghanistan. Masimov told
Boucher that he hoped to make his first visit to Afghanistan
this year, and would bring a business delegation with him.

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WTO ACCESSION
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7. (C) Deputy Trade and Industry Minister -- and Kazakhstan's
lead WTO negotiator -- Zhannar Aitzhanova told Boucher that
Kazakhstani had finally concluded a bilateral WTO accession
agreement with Canada. (Note: The agreement was
subsequently signed on February 13. End Note.) Kazakhstan's
next priorities for accession agreements would be the EU and
Australia. She claimed Kazakhstan and the EU had reached
agreement on all but a handful of issues.


8. (C) Aitzhanova was less optimistic about negotiations with
the U.S. She contended that the U.S. was asking Kazakhstan
to agree to conditions that it was not demanding of Russia.
This presented a major political problem, because the
Kazakhstani parliament would find it difficult to approve an
accession agreement with the U.S. that had worse terms than
the agreement reached between Russia and the U.S. She
claimed, for example, that the U.S. side had agreed to
Russian GMO labeling so long as it was codified in the
country's consumer protection law, but U.S. negotiators want
Kazakhstan to completely repeal its GMO labeling provisions.
Similarly, she claimed that the U.S. had agreed to a
nine-year transition period with Russia on branching rights
for foreign financial institutions. Kazakhstan was willing
to agree to a six-year transition period, but the U.S.
insists it can only offer two or three years.


9. (C) Aitzhanova explained that Kazakhstan needed
significant expert assistance to determine the full
implications of the proposals of the U.S. and other countries
with which it is negotiating accession agreements. This is
one reason why it is difficult for Kazakhstan to accelerate
negotiations. She praised USAID for the expert advice it has
provided to Kazakhstan.

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EXPORT DUTIES
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10. (C) Boucher asked Aitzhanova about Kazakhstan's reported
plans to levy export duties on crude oil and oil products.
Aitzhanova explained that Kazakhstan expected to introduce
the duties on January 1, 2009. The aim was to increase
budget revenues so that the government could follow through
on planned assistance to the banking and construction sectors
to mitigate the effects of the global financial crisis.
Aitzhanova admitted that the export duties might raise issues
in Kazakhstan's WTO accession negotiations, but she noted
that other countries, including Russia, have similar duties.

ORDWAY