KAZAKHSTAN: DEPUTY PRIME MINISTER SAYS FUNDING APPROVED

UNCLAS SECTION 01 OF 03 ASTANA 001517 SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/CARC, EEB/ESC, ECA/AEP STATE PLEASE PASS TO USTDA, USAID E.O. 12958: N/A TAGS: PGOV PREL ECON ENRG EINV KNNP KPAO KZ SUBJECT: KAZAKHSTAN: DEPUTY PRIME MINISTER SAYS FUNDING APPROVED FOR BN-350 SPENT FUEL PROGRAM, OFFERS IDEAS ABOUT PUBLIC-PRIVATE ECONOMIC PARTNERSHIP INITIATIVE ASTANA 00001517 001.2 OF 003 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On September 10, Deputy Prime Minister Yerbol Orenbayev told the Ambassador that the Cabinet approved VAT exemption for all goods and services procured with Cooperative Threat Reduction funds on September 7, and the Prime Minister signed the decree on September 9. He also said that the Cabinet will vote to approve emergency reserve funding for the BN-350 Spent Fuel Program on September 11, and expected the Prime Minister to sign the relevant decree by September 16. He expressed a positive view of the Public Private Economic Partnership Initiative (PPEPI),and said he expected to comment on the policy papers by the end of September. He also suggested to the Ambassador that PPEPI could help develop partnerships between U.S. universities and a new research university in Astana, and promote economic diversification by attracting new foreign investment in sectors other than energy. END SUMMARY. PLEASED WITH PPEPI ¶3. (SBU) Deputy Prime Minister Orenbayev told the Ambassador on September 10 that he was generally pleased with progress made by the Public-Private Economic Partnership Initiative -- notwithstanding certain administrative challenges -- and had both short-term suggestions and a long-term vision for the Initiative. He also told the Ambassador that the government set aside $150,000 in the 2010 budget to fund activities under PPEPI. According to Orenbayev, these funds would come out of Kazakhstan's contribution to the joint U.S.-Kazakhstan Program for Economic Development and cover contributions originally expected from Kazakhstan's private sector. ¶4. (SBU) Orenbayev said he will deliver the government's consolidated response to the policy papers by the end of September. Commenting on the policy papers submitted to the PPEPI Coordinating Committee on July 16, he said that "some were really good, some were not." Orenbayev seemed genuinely committed to developing sound policy recommendations, telling the Ambassador that he would send specialists to Almaty to work with USAID and the American Chamber of Commerce (AmCham) to bring the papers up to an "acceptable level of quality." He said that he has also discussed the issue with AmCham Executive Director Doris Bradbury. ¶5. (SBU) At the outset of the meeting, Orenbayev acknowledged that the Kazakhstani private-sector participants in PPEPI -- the Atameken business association and Kazakhstan's Union of Entrepreneurs -- were not actively involved in preparing the policy papers, because "they were not sufficiently interested" in the Initiative. He said they had their own policy reform agenda, and implied they were too occupied with that to devote the necessary time and attention to PPEPI. When the Ambassador suggested that the PPEPI Secretariat could be strengthened and the role of the AmCham further defined, Orenbayev nodded in agreement, but did not comment. ¶6. (SBU) Orenbayev suggested three ways to enhance the effectiveness of PPEPI over the long-term. First, he said, the working groups should develop an action plan by the end of the year to implement the policy papers' recommendations. He said the action plan, "which both governments would have to approve," should be specific and detailed, and could entail legislative changes, such as an amended public-procurement law, or technical assistance, such as capacity-building seminars. Orenbayev told the Ambassador that Prime Minister Masimov has already approved this approach, "so we can move forward quickly." ¶7. (SBU) Second, Orenbayev suggested that PPEPI could promote partnerships between a new research university established by (and named after) President Nazarbayev in Astana, and universities in the United States. Orenbayev, who has a Master's degree in international development from Duke University, explained that the government would pay for visiting professors, curriculum development, and other related costs to establish joint degree ASTANA 00001517 002.2 OF 003 programs with U.S. universities, such as Duke University. He suggested, for example, that students could spend three years in Kazakhstan and two years at a university in the United States. "The programs, the diplomas, the teachers, the books, everything would be the same," he said. "And we'll pay for it." Orenbayev asked for the Ambassador's advice and assistance to establish such a program. The Ambassador agreed to study the proposal, and recommended that the government publicize the concept through professional journals such as the "Chronicle of Higher Education." ¶8. (SBU) Third, Orenbayev observed that one key objective of PPEPI is to promote economic diversification and attract investors in sectors other than energy. He told the Ambassador that he will head the government's delegation to the U.S.-Kazakhstan Investment Forum in New York City on November 23-24, but added, "this event will only raise the general level of awareness of investment opportunities in Kazakhstan." Orenbayev said he would also like to bring five or six medium- or large-sized U.S. companies to Kazakhstan, and said General Electric's locomotive assembly factory in Astana exemplified the type of investment project the government was seeking. "We are ready," he said, "to give investors the best treatment, whatever they need, to invest in Kazakhstan." Orenbayev said the President has made him personally responsible for implementing these initiatives, "so I have a personal interest in their success," he said with a smile. PARKER DRILLING - "OVER-REACTION" FROM LOCAL AUTHORITIES ¶9. (SBU) Without prompting, Orenbayev referred to the tax evasion charges against U.S. oil-services company Parker Drilling, calling the case an "unfortunate over-reaction" on the part of the local government. He said local authorities were merely following federal regulations when they referred the matter directly to the tax police, and told the Ambassador that the government was working to amend procedures to avoid similar incidents in the future. Orenbayev said he believed that "both sides misread the ambiguous tax treaty" between the United States and Kazakhstan, and said that the government and Parker Drilling were working "in a friendly way" to resolve the issue. (NOTE: In April, local authorities in Mangistau oblast accused Parker Drilling of claiming tax exemptions for headquarters' expenses without proper justification or documentation. END NOTE). "NEW ECONOMIC CONCEPT" ¶10. (SBU) Orenbayev was adamant that Prime Minister Masimov's "New Economic Concept" would not adversely affect the investment climate. He told the Ambassador that the proposed requirement for international investors to retain a minimum amount of operating capital in domestic banks was targeted at large mining companies owned by Kazakhstani businessmen, such as Kazakhmys (controlled by Vladimir Kim),Eurasian Natural Resources Corporation (Alexander Mashkevich),and KazZinc (Gennadiy Zilberberg). Orenbayev said he would consider ways to improve public understanding of the purpose of the proposed regulation. BN-350 PROGRESS ¶11. (SBU) The Ambassador delivered a non-paper in Russian to Orenbayev, asking the government to honor its commitment to fund the transportation of spent nuclear fuel from the decommissioned BN-350 breeder reactor, and to grant VAT exemption for all goods and services procured with Cooperative Threat Reduction funds. Orenbayev promised to review the non-paper carefully, but said, "I believe we have resolved all of these issues." He told the Ambassador that the Cabinet voted to approve VAT exemption for all goods and services procured with Cooperative Threat Reduction funds and expected the Cabinet to vote next week to approve emergency reserve funding for the BN-350 Spent Fuel Program. He promised to have his staff provide an update on these issues immediately. ASTANA 00001517 003.2 OF 003 (NOTE: Within hours, the Embassy received a call from the Office of the Prime Minister, informing us that the Prime Minister signed the decree on VAT exemption on September 9, the Cabinet will vote to approve emergency reserve funding for the BN-350 Spent Fuel Program on September 11, and the Prime Minister would sign a decree authorizing the release of funds by September 16. END NOTE). ¶12. (SBU) COMMENT: While issues still remain with Kazakhstan's implementation of the BN-350 program, we consider it a positive sign of the government's commitment that the Cabinet approved emergency reserve funding for the transportation of spent fuel, despite the current economic difficulties in the country. We are also very encouraged by the government's technical and financial support for PPEPI, and Orenbayev's personal commitment to the success of the Initiative. The Ambassador will discuss the implementation of PPEPI, including ways to strengthen the Secretariat, with the AmCham leadership and Board of Directors when he visits Almaty next week. END COMMENT. HOAGLAND