KAZAKHSTAN: PRIME MINISTER BRIEFS SPECIAL ENVOY

C O N F I D E N T I A L SECTION 01 OF 03 ASTANA 001445

SIPDIS

STATE FOR SCA/CEN, EEB/ESC
STATE PLEASE PASS TO USTDA AND USTR

E.O. 12958: DECL: 03/06/2059
TAGS: PGOV PREL PINR ECON EINV EPET CH RS TX KZ
SUBJECT: KAZAKHSTAN: PRIME MINISTER BRIEFS SPECIAL ENVOY
MORNINGSTAR ON ENERGY, ECONOMY

REF: A. ASTANA 1365

B. ASTANA 1438

Classified By: Ambassador Richard E. Hoagland, 1.4 (b),(d)


1. (C) SUMMARY: On August 26, Special Envoy for Eurasian
Energy Richard M. Morningstar met with Prime Minister Karim
Masimov to discuss economic and energy security issues,
including oil and gas export routes from Central Asia, the
September 14 Caspian Sea Summit in Aktau, the influence of
Russia and China in the region, and early signs of
Kazakhstan,s economic recovery. Masimov said Russian
President Dmitry Medvedev,s August 17 speech on Caspian
energy issues &helped Medvedev solve some internal issues
and was not aimed at an external audience.8 Masimov also
mentioned that former Vice President Cheney has been invited
to Kazakhstan,s Energy Forum on September 24, but he has not
yet confirmed his participation. END SUMMARY.


2. (SBU) Meeting participants: Prime Minister Masimov,
Deputy Foreign Minister Konstantin Zhigalov, Arman
Sapargaliyev from the Ministry of Foreign Affairs, and a note
taker represented Kazakhstan. Special Envoy Morningstar was
joined by the Ambassador, Senior Advisor Dan Stein, and
Energy Officer (note taker).

WELCOME BACK


3. (SBU) Masimov greeted SE Morningstar with a broad smile
and a hearty handshake. He recalled that SE Morningstar had
accompanied Under Secretary Burns to Astana on July 10 and
said, &Welcome back! You should visit us every five or six
weeks.8 An official photographer and video cameraman
recorded the first five minutes of the meeting. When SE
Morningstar reported that he had had a series of excellent
meetings with government officials on energy issues, Masimov
replied, &I,m very pleased. I told them that they should
be very open with you.8

EXPORT DIVERSIFICATION CRITICAL TO KAZAKHSTAN


4. (C) Masimov began by stressing the importance of energy
exports to Kazakhstan. &Without free transportation (of
hydrocarbons) out of Kazakhstan,8 he said, &it would be
very difficult for us to survive.8 Masimov stressed the
importance to Kazakhstan of secure, diverse, and sustainable
sources of transportation, especially during difficult
economic times.

CASPIAN SEA SUMMIT AIMED AT INTERNAL AUDIENCE


5. (C) Masimov confirmed that the Caspian Sea Summit will
take place in Aktau on September 14 with the expected
participation of the presidents of Turkmenistan, Azerbaijan,
the Russian Federation, and Kazakhstan. He does not expect
any breaking news to come from the gathering, which will
focus on energy issues, including transportation. &This is
not a major event, and I do not expect a major announcement
to come from it,8 he said. &What is important is that
people start to talk to each other8 about common problems in
the Caspian. When asked how one should read Medvedev,s
August 17 speech in Astrakhan on Caspian issues, Masimov
replied, &I think with that speech, he solved an internal
issue, not external issues.8 When SE Morningstar asked,
&Do you mean vis--vis Putin?,8 Masimov smiled and replied,
&You said it, I didn,t!8 Masimov added that he believed
Medvedev was &marking the Caspian Sea as an issue within his
portfolio,8 rather than Putin,s.

PRIME MINISTER SUPPORTS CNG SHIPMENTS ACROSS CASPIAN


6. (C) Masimov drew a deep breath and took a long pause
while he considered whether Turkmen gas would ever be

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exported to Europe. &My feeling,8 he said, &is that this
is doable, but I don,t think the trans-Caspian pipeline has
a future.8 Instead, he suggested that tanker shipments of
compressed natural gas (CNG) would be more politically
feasible than a trans-Caspian pipeline, and he cited a
Department of State study that proposed cross-Caspian CNG
shipments. Stein interjected that the technology is still
unproven, the costs would be extremely high, and no CNG
vessel has yet been built. Still, Masimov seemed undeterred.
&These are technical issues that we can solve,8 he said.
He asserted that oil tanker shipments from Aktau to Baku have
stimulated development of the Kazakhstan Caspian
Transportation System and suggested a similar dynamic could
occur between Turkmenistan and Azerbaijan on gas exports.

RUSSIAN BUY-IN CRITICAL TO TRANS-CASPIAN GAS EXPORTS


7. (C) Masimov admitted that Russian buy-in would be
critical to sending gas from Central Asia westward. &If
someone at a very high level,8 he said, &such as President
Obama, were to offer Putin a deal, invite him in, and say,
Let,s find a way to make this work,, then I believe
(trans-Caspian gas exports) would be possible. Putin is in
charge of this issue.8 Putin is the decision maker.8
Masimov observed that Russia currently is not buying Turkmen
gas, which has had a serious, adverse impact on
Turkmenistan,s budget. &This is a huge issue for
Turkmenistan,8 he said. &They will have a huge budget
deficit by the end of the year.8

CHINESE INVESTMENT ALREADY AT &OPTIMAL LEVEL8


8. (C) On China, Masimov delivered a message similar to the
one he gave CODEL Boehner (reftel A): &When the economic
crisis started,8 he said, &China was suddenly more active
and aggressive. We faced serious liquidity problems, and
their assistance was welcome.8 Masimov then struck a
cautious note, commenting that China,s involvement in
Kazakhstan is a &matter of national security for us.8 He
added that the current level of Chinese investment in
Kazakhstan has reached an &optimal level. We do not want to
see it increase.8 However, Masimov said the government
would not oppose partnerships between U.S. energy companies
and Chinese companies. He even offered to raise the issue
with Chinese officials when he visits China in October. U.S.
energy companies have told Masimov that they are not opposed
to sending their oil production to China, but &they have no
intention of doing so8 at the moment.

OPTIMISTIC ABOUT THE ECONOMY


9. (C) On broader economic issues, Masimov acknowledged that
Kazakhstan,s economy had been in dire straits earlier this
year. &We had a huge problem,8 he said, &in our banking
sector. We have only now discovered the degree of fraud and
mismanagement that was taking place, and we are now suing the
shareholders of one of our largest commercial banks.8
(NOTE: Masimov was referring to BTA Bank. See reftel A.
END NOTE). He said the situation in the financial sector has
greatly improved since the beginning of the year. He
elaborated that the government has successfully restructured
the external debt of one large bank (most likely Alliance
Bank) and plans to restructure the debt of another large bank
most likely BTA Bank) in September. &We have kept the World
Bank and IMF fully informed every step of the way,8 he said,
&and in October, once we have completed the debt
restructuring, we will be more active in our public
relations.8 Masimov reported positive GDP growth of three
percent in the second quarter of 2009, compared to the same
period last year, and said he expects overall positive growth
in 2009, compared to 2008.

LOCAL CONTENT NOT AN ISSUE IN PRACTICE

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10. (SBU) Special Envoy Morningstar expressed the concerns
of U.S. energy companies regarding Kazakhstan,s new
regulations on local content and hope that the new standards
would not adversely affect Kazakhstan,s investment climate.
Masimov quickly dismissed the issue, shaking his head. &All
of these concerns are theoretical,8 he said. &In practice,
there are no problems.8

WTO OR CUSTOMS UNION?


11. (C) When asked to clarify whether Kazakhstan will join
the World Trade Organization (WTO) or a Customs Union with
Russia and Belarus, the Prime Minister did not answer
directly. He said that a single negotiating group has now
been established, with one representative from each of the
three countries, and confirmed that Vice Minister of Industry
and Trade Zhanar Aitzhanova will represent Kazakhstan in the
negotiations. However, he declined to comment on whether
Kazakhstan has officially suspended its WTO bid. (NOTE:
During a private dinner at the Ambassador,s residence on
August 26, Vice Minister of Trade and Industry Zhanar
Aitzhanova (protect) was asked about the proposed Customs
Union. She rolled her eyes, shook her head, and said, &We
are under a constant barrage of Russian press releases,8
pushing Kazakhstan to move forward. Aitzhanova curtailed
vacation plans to fly to Moscow on short notice, and appeared
frustrated by pressure from Russia to accelerate progress on
the Customs Union. END NOTE).

VICE PRESIDENT CHENEY TO VISIT ASTANA?


12. (SBU) As the meeting came to a close, Masimov mentioned
in passing that he has invited former Vice President Richard
Cheney to attend Kazakhstan,s Energy Forum on September 24,
but he has not yet confirmed his participation. Masimov also
asked SE Morningstar to pass along his best regards to SE
Holbrooke and said he would be pleased to host him in Astana
in the near future.


13. (C) COMMENT: Several times during the meeting, the
Prime Minister stressed that he was "only expressing his
personal opinion," particularly when discussing relations
with Russia and China. As the head of the government,
President Nazarbayev's trusted economic counselor, and a
respected leader in his own right, his opinion certainly
matters a great deal. Masimov's observation that Medvedev's
speech on Caspian issues might have been designed
to shore up his own political portfolio, rather than assert a
new Russian foreign policy in the region, was particularly
intriguing. It was also interesting to hear an ethnic Uighur
and fluent Mandarin speaker like Masimov insist without a
trace of irony that Chinese investment in Kazakhstan had
reached an "optimum level" and that a larger Chinese presence
in Kazakhstan would be unwelcome. END COMMENT.


14. (SBU) Special Envoy Morningstar has not cleared this
cable, but he has approved its release.
HOAGLAND