KAZAKHSTAN: INVESTING IN ATYRAU

UNCLAS SECTION 01 OF 03 ASTANA 002027 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA STATE PLEASE PASS TO USTDA E.O. 12958: N/A TAGS: PGOV PREL ECON EINV EPET KZ SUBJECT: KAZAKHSTAN: INVESTING IN ATYRAU REF: (A) ASTANA 2026 (B) ASTANA 2005 (C) 08 ASTANA 2252 ASTANA 00002027 001.3 OF 003 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: During two trips to Atyrau November 5-10, Energy Officer met with U.S. and international companies doing business in the region to discuss their opinion of Atyrau's investment climate. They said the region is led by a strong governor who expects foreign investors to follow the letter of the law and support his ambitious plans to improve the region's social infrastructure. In general, they gave the governor high marks for creating a stable investment climate that offers attractive opportunities and the possibility of lucrative returns. However, they accused the financial police -- who report to Astana, not Atyrau -- of using threats and intimidation to extract maximum rent from Western investors. END SUMMARY. DCM MEETS DEPUTY AKIM ¶3. (SBU) The DCM met First Deputy Akim Bolat Daukenov, a former federal prosecutor, on her first visit to Atyrau on November 5 (ref A). Daukenov began the meeting by praising the production and performance of Tengizchevroil (TCO),in which Chevron (50%) and ExxonMobil (25%) have large stakes. He said that the local government (Akimat) would like TCO to increase its local content and investment in other areas of the economy, including technology (ref B). Daukenov said that U.S. companies are careful to follow Kazakhstani law and the terms of their contract. "To the best of my knowledge," he said, "we have no issues, problems, or complaints with U.S. companies in Atyrau." COMPANIES COMMENT ON THE ATYRAU AKIMAT ¶4. (SBU) Mark Peck is an Australian national and General Director of YKK Kazakhstan, which provides fire-safety and emergency-rescue training to oil companies operating in Kazakhstan (ref A). He told the DCM on November 5 that it is easier doing business in Kazakhstan than in any other country he has worked, including Indonesia and Brazil. In particular, he cited his company's ability to move products and cash in and out of the country. "It's reasonably straightforward," he said, "once you understand the rules." Peck said it helps to have a strong local partner and a legitimate local presence, and he attributed much of his company's success to the fact that YKK is a Kazakhstani company. ¶5. (SBU) On November 10, during lunch with Brent Woolfork, professional staff member of the House Foreign Affairs Committee, representatives of international oil service companies expressed their appreciation, if not admiration, for the work that Akim Ryskaliyev has done to develop Atyrau Oblast. Colin Lind, a British citizen (and permanent resident of Kazakhstan, who owns property in Atyrau),is General Director of an engineering support services company called KIS/Orion LLP. ¶6. (SBU) Lind praised Ryskaliyev's emphasis on developing Atyrau's physical infrastructure, especially roads, bridges, water, and gas lines. He even said he would vote for Ryskaliyev if he were allowed to. When asked about the financial police, however, Lind gave a rueful laugh and joked, "You mean the evil guys in the big hats? When other officials call us, we try to put them off, reschedule the meeting. But when they call, we come running. We'll crawl backwards on all fours if we have to. They have the power to come after you and shut you down." SECRETS OF SUCCESS AT TENGIZCHEVROIL ¶7. (SBU) Mariya Karazhigitova, TCO's Director of Local Government and Public Affairs, told the DCM on November 6 that TCO has a strong relationship with Atyrau Oblast Akim Bergey Ryskaliyev and a good reputation among the citizens of Atyrau oblast (ref A). ASTANA 00002027 002.3 OF 003 Karazhigitova attributed this to TCO's ability to understand and empathize with the local government. "We respect the Akim, we understand where he is coming from," she said. "He always has a reason for everything he does. We cannot pretend that we are here by ourselves." Nevertheless, she admitted that the local government does not have sufficient funds to finance its ambitious development plans, and often relies on TCO to fund social projects. "The Akim will get his money one way or another," she said. "There are many ways he can make your life miserable. And if you think they'll cut you a special deal because you're TCO, you're wrong." BAKER HUGHES AND THE FINANCIAL POLICE ¶8. (SBU) On October 29, Baker Hughes (BH) Vice President for the Caspian Don McKelvie reported to Energy Officer that the company is having tax trouble with Atyrau Oblast. He said that the situation has escalated since early October, and requested Embassy assistance. According to McKelvie, the Atyrau tax authority recently audited BH tax records for 2004-07 and found minor reporting violations. The case was reviewed by an Atyrau court, which ruled in favor of the tax authority. BH does not believe it is in violation of the law and is preparing an appeal. ¶9. (SBU) In the meantime, according to McKelvie, the financial police began a criminal investigation of the company's country manager and chief accountant. On August 28, he said, the financial police entered Baker Hughes' office in Atyrau and demanded it turn over all tax records. A company attorney refused to turn over the records without a court order, which McKelvie said irritated the financial police, who nevertheless left the office. McKelvie said the financial police then used an active case against one of their customers to demand the documents via court order. ¶10. (SBU) With this order in hand, the financial police visited Baker Hughes in Aktau and demanded the records. The Baker Hughes office there also declined to provide the files so the financial police travelled to Almaty and made the same demand. A BH corporate attorney from Moscow arrived that night to meet with the tax authorities and negotiated a release of some documents not critical to the appeal. The authorities sealed the documents, stamped the packages, and returned to Atyrau. According to McKelvie, the case is still pending. ¶11. (SBU) The DCM raised this issue with Daukenov on November 5 (ref A),who said the Ministry of Finance, not the Akimat, had the lead on the matter and was merely trying to follow Kazakhstani law. Daukenov said, "We have had similar issues with other companies in the past and have always been able to resolve them. Moreover, we have worked very hard to bring our laws in line with international standards." Daukenov emphasized that the Akimat wants to continue to attract foreign investment. "Foreign investors pay taxes, build social infrastructure, and employ Kazakhstani citizens. As a local resident of Atyrau oblast," he said, "I can tell you that this region has benefitted from foreign investment." DIFFICULTIES WITH DIVERSIFICATION ¶12. (SBU) Daukenov said the local government would like to diversify its economy away from oil and gas, but he acknowledged that it will not be easy. "Atyrau is the oil and gas capital of Kazakhstan," he admitted. "Investors come here primarily to explore for oil." Nevertheless, the Akimat is promoting investment in sectors such as fishing, agriculture, construction, metallurgy, and petrochemicals. ¶13. (SBU) COMMENT: In general, international businesses expressed a high opinion of the local government of Atyrau oblast. Akim Ryskaliyev received high marks for investing in the city and in the region and is perceived as a tough, but fair administrator. He is firmly in charge of governing Kazakhstan's most economically-dynamic oblast, and companies doing business in Atyrau would be ill-advised to cross or contradict him. Most companies said their biggest ASTANA 00002027 003.3 OF 003 problems have been with the central government -- particularly the tax police, who report to the Ministry of Finance -- not with the Akim. Although Ryskaliyev is a powerful local boss, even he has to answer to The Boss in Astana. END COMMENT. SPRATLEN