KAZAKHSTAN: PRIME MINISTER TELLS SCA A/S BLAKE ECONOMY

UNCLAS SECTION 01 OF 03 ASTANA 002200

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV ETRD EFIN KZ
SUBJECT: KAZAKHSTAN: PRIME MINISTER TELLS SCA A/S BLAKE ECONOMY
RECOVERING

REF: A. ASTANA 1762

B. ASTANA 2157

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1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: After briefly noting the government of
Kazakhstan's obligatory talking points on the need for a 2010 OSCE
summit and a bilateral meeting between Presidents Obama and
Nazarbayev during the April Global Nuclear Security Summit, Prime
Minister Karim Masimov told Assistant Secretary for South and
Central Asian Affairs Robert Blake that 2009 economic growth will
hover around zero, but will probably reach 2-3% in 2010. He
asserted that worldwide economic difficulties will cause oil prices
to fall again in 2010 and continue to limit Kazakhstan's growth.
Therefore, he is looking to 2011 for a full recovery and a return of
international capital. For long-term growth, he emphasized
government investments in diversification, competitiveness,
education, and health care. In 2010, the Kazakhstani government
also hopes to establish clear rules for its exit from the economy.
Masimov also mentioned Kazakhstan's New University, which is slated
to open in 2010. END SUMMARY.


3. (SBU) Prime Minister Karim Masimov welcomed Assistant Secretary
for South and Central Asian Affairs Robert Blake by reiterating his
government's request for the United States to support a 2010 summit
of the Organization for Security and Cooperation in Europe (OSCE)
and a bilateral meeting between Presidents Obama and Nazarbayev in
Washington during the April Global Nuclear Security Summit.

CONSTRUCTION, FINANCIAL SECTOR PROBLEMS "MORE OR LESS MANAGED"


4. (SBU) Turning to his clear area of expertise, economics, Masimov
told Blake that Kazakhstan's economy from 2000 to 2007 was
"overheated," especially in the financial, banking, and construction
sectors. He asserted that problems in Kazakhstan's construction and
financial sectors "are now more or less managed." According to
Masimov, the Kazakhstani government focused on completing more than
300 buildings whose construction had stopped. Connected to problems
of financing, he said the government used internal resources to
increase banks' liquidity. By mid-2010, he claimed the resolution
of construction sector problems will be "fully visible."


5. (SBU) The Kazakhstani government faced difficult decisions at
the beginning of 2009, Masimov claimed, because some banks teetered
on the verge of bankruptcy. "We had to decide whether to do a
Lehman Brothers or a Citibank or some other mechanism," he said.
"So we hired a series of different international consultants,"
including JP Morgan, Credit Suisse, and Goldman Sachs. According to
Masimov, this program, which supported four major banks, is nearing
completion. He told Blake that two banks, in which the government
invested 25% -- "like Bank of America, Citibank" -- are now
negotiating to buy back these shares. "Two others [i.e., Alliance
and BTA Bank] are more difficult because of alleged massive fraud in
the case of BTA. Our 'Madoff case' [i.e., Mukhtar Ablyazov, former
CEO of BTA] is in London. We are suing each other. He committed
fraud, but is blaming politics. We trust UK justice," Masimov
asserted (ref A). He confidently told Blake that Alliance bank
would announce the conclusion of its restructuring that evening, and
he expressed his opinion that BTA will finish by the end of March.
"The full picture in April or May will show that we managed to
stabilize the economy and that the financial and construction
sectors will be in good shape," he said.

SLIGHTLY POSITIVE GROWTH


6. (SBU) Masimov predicted slightly positive growth in GDP for 2009.
"Some say that it will be a small minus, some a small plus, but
that does not really matter since it is a less than 1% difference.
The trend is more important," he argued. In 2009, the Kazakhstani
government invested in roads, schools, and hospitals, Masimov
boasted, creating 400,000 new jobs and decreasing unemployment to

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6.3% from 7%. Although growth in 2010 will reach 2-3%, he argued
economic difficulties will continue worldwide and oil prices will
again fall. The government is thus budgeting for oil at $50 a
barrel. "Diversification, diversification, diversification is
especially important. There is much work to be done," he
concluded.

INTERNATIONAL FINANCING NOT TO RETURN SOON


7. (SBU) In response to Blake's query about the role of financial
restructuring, Masimov said that the international financial sector
will not regain "its appetite for emerging markets until maybe the
end of 2010. We are not counting on it, but it may help." To
emphasize his expertise in this area, he mentioned his weekly
contact with the major international investment banks.

INFRASTRUCTURE FOR THE SHORT TERM, EDUCATION FOR THE LONG TERM


8. (SBU) Because Kazakhstan is not fully industrialized, Masimov
insisted it needs investment. Specifically citing the World
Bank/EBRD-financed highway from China through Kazakhstan to Russia
and Europe, he asserted investment creates new opportunities for
employment and provision of goods and services by small- and
medium-sized enterprises. For the long term, Masimov highlighted
the necessity to invest in competitiveness, education, and health
care. Because he believes that outsourcing for education and health
care will increase in the next ten years, Kazakhstani President
Nazarbayev will outline a strategy for Kazakhstan to position itself
to provide these services in his February address to the nation.

GOVERNMENT ENTRANCE IN ECONOMY TEMPORARY


9. (SBU) A/S Blake highlighted Kazakhstani entrepreneurs'
complaints about the concentration of wealth in a small number of
holding companies, which crowds out private investment and limits
the energy of entrepreneurs (ref B). Masimov responded that the
government provided assistance in light of the economic crisis.
Masimov emphasized the government's "temporary entrance into the
economy," and as part of the government's 2010 program, said it must
establish clear rules for its exit from the economy. He further
elaborated the effect of the crisis on his personal philosophy,
"Before 2007, I was too conservative. I asked why the government
should interfere in private-sector dealings. At the end of the day,
we now see that the government is always involved. From 1980 to
2008, we had Reagonomics. From 2010, there will be more social
responsibility and control. Maybe in 20 years time, the trend will
again reverse itself."

FUTURE U.S. INVESTMENT -- PROBABLY NO INTEREST IN 2010


10. (SBU) When A/S Blake offered to organize a business delegation
to accompany Secretary Clinton when she has the opportunity to
travel to Kazakhstan, Masimov highlighted his "pragmatic" opinion
about the difficulty to attract U.S. companies in 2010. "2010 will
be about building good infrastructure to attract U.S. companies and
investment in the future. Strong political will will bring results
in two to three years," he asserted. According to Masimov,
Kazakhstan's English-language New University, slated to open this
summer, is included in these plans. Masimov pointed to ongoing
consultations with U.S. universities (including Duke and the
University of Pittsburgh) as bolstering the effort to create a
"first-class regional center." He said he would provide more
information about the university to the Embassy.


11. (SBU) Deputy Chairman Timur Kulibayev of Samryk-Kazyna
(Kazakhstan's largest holding company),who joined Blake's December
15 meeting with Foreign Minister Kanat Saudabayev, said Kazakhstan
would welcome diverse U.S. investment, specifically in
machine-building, petroleum processing petrochemicals, and
agriculture. The government is drafting a strategy for broad
industrialization by 2020, Kulibayev asserted. The Kazakhstani

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government and U.S. Export-Import bank could co-finance U.S.
pilot-investment projects, he opined. In response to Kulibayev's
suggestion of regular meetings between U.S. and Kazakhstani business
leaders, Blake noted that a private-business component could be
added to the Annual Bilateral Consultations. Foreign Minister
Saudabayev said Kazakhstan's Ambassador to the United States, Erlan
Idrissov, will pursue the suggestion.


12. (SBU) COMMENT: Masimov's strong grasp of the big picture and
smallest detail, as well as his ability to adapt to changing
circumstances, always impresses, and might explain Kazakhstan's
relative success in navigating the global economic crisis. As long
as Masimov, or someone of his vision and quality, maintains a
relatively free hand in economic matters, we believe that the
government will extricate itself from the economy. For a country in
which a free market arrived less than 20 years ago, this experience
of temporary government intervention should strengthen Kazakhstanis'
faith in the future of the private sector. END COMMENT.


13. (U) A/S Blake has cleared this cable.

HOAGLAND