AMBASSADOR REVIEWS RAMP AND ENERGY ISSUES WITH

C O N F I D E N T I A L SECTION 01 OF 03 BISHKEK 000712 SIPDIS DEPT FOR SCA (GEHRENBECK/DEUTSCH) E.O. 12958: DECL: 07/08/2018 TAGS: PREL MARR ENRG ECON SOCI KG SUBJECT: AMBASSADOR REVIEWS RAMP AND ENERGY ISSUES WITH KYRGYZ PM REF: A. BISHKEK 709 ¶B. BISHKEK 699 ¶C. BISHKEK 680 ¶D. BISHKEK 501 BISHKEK 00000712 001.2 OF 003 Classified By: Amb. Marie L. Yovanovitch, Reason 1.4 (b) and (d). ¶1. (C) Summary: During the Ambassador's July 7 farewell call, Prime Minister Chudinov expressed surprise to learn that President Bakiyev had delegated the Manas Airbase ramp project decision to him. After digesting this news, Chudinov surmised that the ramp project was no longer just a proposal, but a "real project" -- which we interpret as a positive development. Chudinov acknowledged a "slowdown" in energy sector privatization prospects, outlined scenarios that would allow for tariff increases while maintaining government control of the assets, and said he would be meeting with U.S. energy firm AES July 8. He expressed concern that the opposition would use the privatization issue against the government in protests this autumn. Chudinov also feared that the Uzbeks would more than double natural gas prices to $306 per thousand cubic meters, a step which would force the government to increase subsidies to Kyrgyzgaz up to $250 million. He confirmed Kyrgyz participation in a new International Monetary Fund program. End summary. Spreading News about the Ramp Project -------------- ¶2. (C) The Ambassador paid a farewell call on Prime Minister Igor Chudinov July 7. After the initial pleasantries, a very relaxed Chudinov asked the Ambassador about her July 3 meeting with President Bakiyev. (Note: See reftel A for details of the Bakiyev meeting. End note.) When the Ambassador mentioned that she discussed the proposed ramp project at Manas Airbase with Bakiyev, Chudinov asked, "What did he say?" After expressing some surprise at learning that Bakiyev had delegated the issue to him, Chudinov said that Bakiyev had been in Astana over the weekend, and that after his return to Bishkek late on July 7 he hoped to meet with him and discuss the issue. ¶3. (C) The Ambassador reviewed the tight timeline for a Kyrgyz decision on the ramp project in order to secure the available funding. Chudinov asked the Ambassador whether Bakiyev had actually meant to delegate the issue instead to the Kyrgyz Security Council Secretary. The Ambassador assured Chudinov that Bakiyev had mentioned Chudinov's name several times regarding this tasking. When the Ambassador mentioned that Manas Airbase leadership would be available to show Chudinov the area proposed for the project, Chudinov remarked he had already been there. Chudinov explained that at a previous time he had visited the base on an unrelated issue. To clarify his understanding of the proposed project, the Ambassador subsequently outlined the location and scale of the ramp project and left him additional documentation for review. ¶4. (C) In an apparent positive development, Chudinov concluded that "if the president delegated this issue to me, then it is a 'realni proekt.'" (Comment: Previous government references to the ramp termed the project a "proposal." The "realni proekt" reference gives the project much more weight. End comment.) However, Chudinov speculated that Bakiyev may have delayed action on the ramp project decision due to the discomfort of having to address the issue at Commonwealth of Independent States and Shanghai Cooperation Organization summits later this year. He then noted that "the president doesn't discuss this with me," referring to the political sensitivities involved. ¶5. (C) Chudinov then inquired about money Manas airport would "lose" in parking fees not being collected from BISHKEK 00000712 002.2 OF 003 Coalition aircraft. The Ambassador responded that if this is a real issue to let the Embassy know so that the issue can be forwarded for consideration by officials at CENTCOM and in Washington. Chudinov said he was merely raising all possible issues. Energy Troubles -------------- ¶6. (C) Turning to domestic economic and energy concerns, Chudinov noted that the energy sector privatization process had "slowed down." "Personally," Chudinov commented, he was not sure if he wanted the Bishkek thermal power plant privatized. (Note: See reftel B for the Energy Minister's recent comments on privatization and related matters. End note.) He noted that he would be meeting with representatives of U.S. energy firm AES July 8. (See paragraph 11.) ¶7. (C) Recognizing the need to either raise electricity tariffs or provide higher subsidies to whatever company might purchase energy sector assets, Chudinov previewed some other options for the Ambassador. One option included the creation of a new company, "Bishkekelectro," that might incorporate the Bishkek thermal plant and Teplosets (the hot water and heating system). This company, he explained, could be transferred to the Bishkek local government, which could then raise tariffs. The government, he further suggested, could then step in to offer financial assistance to disadvantaged communities. Chudinov rationalized this arrangement as a "market-based" solution to the sector's financial problems. Chudinov questioned why privatization should proceed now, when "we know privatization will be used against us in the autumn" (presumably by the opposition). ¶8. (C) In another scenario, Chudinov said that World Bank representatives had offered $100 million in assistance for the Bishkek thermal plant over a 10-year period. He noted that this money could fund two new turbines annually, permit gradual increase of tariffs annually and keep the Bishkek thermal plant in government hands. ¶9. (C) Chudinov acknowledged upcoming winter challenges, and said that current negotiations with the Uzbeks over natural gas supplies revealed that the Uzbeks wanted to raise prices from $145 to $306 per thousand cubic meters of natural gas. Chudinov calculated that such a price increase would increase the annual government subsidy to Kyrgyzgaz to $200-$250 million. ¶10. (C) On a separate note, Chudinov lauded Kyrgyz participation in the Central Asia South Asia Regional Energy Market (CASAREM). However, he was concerned that the World Bank was not inclined to include the Kyrgyz Republic in the first phase of the project. The Ambassador suggested that the upcoming visit by Kyrgyz Energy Minister Balkibekov to the United States and Pakistan would provide the opportunity to express Kyrgyz views on inclusion in the initial phase of CASAREM electricity trade. Enter AES (Again) -------------- ¶11. (C) Later on July 7, Emboff met AES representatives who had been "urgently" summoned to Bishkek by Energy Minister Balkibekov. In contrast to their last meeting (reftel D), when their conversations steered AES towards rural electricity distribution companies, Balkibekov this time reportedly only wanted to discuss the Bishkek thermal plant and related assets. The AES team told Emboff that the intended Kazakh investor in the Bishkek assets, Alexander Mashkeyevich, no longer had the capital necessary to inject into the facilities, and that this development precipitated BISHKEK 00000712 003.2 OF 003 the Kyrgyz interest in discussing the Bishkek energy assets with AES. The AES team leader outlined for Emboff a potential proposal which would generate immediate capital investment in the Bishkek thermal plant, leave the Kyrgyz government with a majority stake in the assets, and provide AES with a long-term management contract. AES confirmed plans to meet PM Chudinov July 8, and promised to brief Emboff regarding the results. Economic Affairs of State -------------- ¶12. (C) Chudinov confirmed that the Kyrgyz Republic would "definitely" participate in a new, three-year International Monetary Fund (IMF) Poverty Reduction Growth Facility (PRGF). (Note: The IMF concluded its last Kyrgyz PRGF program in May. End note.) He claimed credit for convincing Bakiyev to agree to the new program, but added that the new program would be on "Kyrgyz terms." However, Chudinov said the Kyrgyz expected the first draft of the program from the IMF July 8. ¶13. (C) Chudinov acknowledged that worsening economic conditions in Kazakhstan had caused construction activity in the Kyrgyz Republic to halt and decreased the number of Kazakh tourists in the country. He confirmed that three working groups, tasked with studying the country's economic problems arising from inflation and other ailments (reftel C),had presented him with recommendations that day, which he had not yet reviewed. Chudinov also lamented recent information that Kyrgyz tax authorities were seeking advance tax payments from companies. Comment -------------- ¶14. (C) Chudinov was engaging and relatively unguarded in his comments. His response to ramp project developments reveal some of the communication shortcomings of the Kyrgyz White House administration, but also indicate that there is room for this project to proceed. We will continue to engage with the Kyrgyz administration with an emphasis on the infrastructure improvements, airport security and contract benefits this project would generate. His views about the state of the energy sector reflect his previous work as energy minister and at Kyrgyzgaz, but also more likely illustrate the government's concerns about the upcoming winter. His comment about the opposition using energy sector privatization against the government in the autumn echo other comments we have been hearing about the potential for demonstrations later this year. His concerns may also reflect a waning interest in energy sector privatization, particularly if associated with significant tariff increases for the general public. YOVANOVITCH