KAZAKHSTAN: WORLD BANK OFFICIALS DISCUSS ECONOMIC

UNCLAS SECTION 01 OF 02 ASTANA 000344

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E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EFIN EAID KZ
SUBJECT: KAZAKHSTAN: WORLD BANK OFFICIALS DISCUSS ECONOMIC
SITUATION, EFFECTS OF CURRENCY DEVALUATION


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


2. (SBU) SUMMARY: The Ambassador had an introductory meeting with
incoming World Bank Country Director for Central Asia Motoo Konishi
on February 24. Konishi and World Bank Country Manager for
Kazakhstan Sergei Shatalov explained that the February 4 devaluation
of the tenge should have a positive impact on Kazakhstan's balance
of payments. Shatalov said that foreign direct investment in
Kazakhstan is likely to decline as a result of the global economic
crisis. The World Bank officials expected a one-time spike in
consumer prices as a result of the tenge's devaluation and said it
is too early to tell whether there will have to be a further
devaluation. Konishi said that Prime Minister Masimov needs to take
on entrenched interests in dealing with the financial crisis. The
World Bank officials argued that Kazakhstan has to focus in the
long-run on developing its human capital. Shatalov explained that
the Bota Foundation should be ready to disburse money this summer.
He asked for our assistance in obtaining the U.S. Department of
Justice's concurrence that Kazakhstan's progress on certain
transparency-related initiatives is sufficient to enable Bota to
move forward. END SUMMARY.

CURRENCY DEVALUATION IMPROVES BALANCE OF PAYMENTS


3. (SBU) The Ambassador had an introductory meeting on February 24
with incoming World Bank Country Manager for Central Asia Motoo
Konishi, who is replacing Annette Dixon. Konishi and World Bank
Country Manager for Kazakhstan Sergei Shatalov told the Ambassador
that the February 4 devaluation of the tenge would likely have a
positive impact on Kazakhstan's balance of payments. Shatalov
explained that according to models run by the Bank, with a $40 per
barrel price for crude, Kazakhstan's balance of payments deficit at
the new exchange of around 150 tenge per dollar should be in the
range of $4 billion. By comparison, at the old exchange rate of
around 120 tenge per dollar, the deficit would have been in the $15
billion range. The $4 billion deficit could be further reduced by
constraining imports, with any remainder handled through management
of currency reserves.

FDI LIKELY TO DECLINE


4. (SBU) Shatalov said that foreign direct investment (FDI) in
Kazakhstan, especially in the energy sector, is likely to decline as
a result of the global financial crisis. He said specifically that
Lukoil is planning to scale back its investments, which could impact
expansion of the Karachaganak project. Shatalov further claimed
that there are rumors that first oil from Kashagan might be pushed
out yet again, perhaps to 2015. (NOTE: We have not heard anything
from U.S. companies -- ExxonMobil, Chevron, and ConocoPhilips --
about any plans that they might have to scale back their own
investments, nor have we heard anything concrete about a new
Kashagan delay. END NOTE.) In any event, reduced FDI might help
the country's balance of payments situation further, because FDI,
particularly in the energy sector, leads to imports of machinery and
other goods, Shatalov pointed out.

ONE-TIME SPIKE IN INFLATION


5. (SBU) Shatalov said that the World Bank expects a one-time spike
in Kazakhstan's consumer price index as a result of the tenge's
devaluation, but they do not believe the devaluation will have a
continuing impact on the inflation rate. The World Bank officials
indicated it is too early to tell whether there will have to be a
further devaluation of the tenge. The National Bank releases only
monthly -- rather than weekly -- figures on its currency reserves,
and is slow to release even those figures, so we will not know until
several days into March whether the National Bank stemmed its losses
of reserves with the devaluation. Shatalov noted that 12-month
tenge futures are trading at 240 tenge to the dollar, but the World
Bank officials indicated that this futures' market is open to
speculation and manipulation, and thus we should not make too much

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of this figure. The World Bank officials confirmed that despite
budget pressures, the government is trying to maintain spending on
social programs. They noted that the Kazakhstanis had not been able
to implement a distressed assets fund to buy up bad assets from
commercial banks because, after discussions with the World Bank, the
Kazakhstanis realized how difficult it would be to properly value
such assets. As Konishi put it, "How do you value these assets when
there is no market for them?" According to Shatalov, significant
increases in credit default swap (CDS) rates indicate that the
markets believe that both Halyk Bank and KazKommertsBank are in
trouble.

MASIMOV WOULD BE DIFFICULT TO REPLACE


6. (SBU) Noting rumors that Prime Minister Masimov might be removed
and made a scapegoat for the economic situation, Shatalov said
Masimov has proven himself a skilled economist, diplomat, and
interlocutor with international institutions who would be difficult
to replace. (NOTE: Rumors about Masimov's impending demise
essentially date from the first day he was appointed prime minister.
We agree with Shatalov that it doesn't make sense to replace him
given how adept he is at dealing with complex economic and financial
issues -- but that doesn't make his position invulnerable. END
NOTE.) Konishi said that to tackle the financial crisis, Masimov
needs to take on entrenched interests and limit the flow of
resources directed toward favored insiders, which might lead to
growing pressures against him. He pointed to the recent criminal
proceedings launched against the prominent KUAT construction company
as indicative of the government's desire to preserve resources, and
where possible, recoup losses.

HUMAN CAPITAL SHOULD BE LONG-TERM FOCUS


7. (SBU) The World Bank officials explained that Kazakhstan should
be focusing not only on the immediate financial crisis, but also on
developing policies to ensure Kazakhstan's economic success in a
post-crisis world. Konishi said that over the long-run, Kazakhstan
must broadly develop its human capital, including through
investments in education and health care. Shatalov noted that the
World Bank is providing assistance to the Ministry of Education in
its effort to open a world-class, showcase university in Astana,
which is currently under construction.

NEXT STEPS ON THE BOTA FOUNDATION


8. (SBU) Shatalov also provided an update on the progress of the
Bota Foundation. He said the initiative enjoys the full support of
the Kazakhstani government. Bota has set up its team, and now has a
representational office in Almaty with twelve program officers. The
Foundation would like to start disbursing money during the summer,
but according to the 2006 MOU, the World Bank first needs the U.S.
Department of Justice's concurrence that Kazakhstan has made
sufficient progress on certain transparency-related initiatives,
including the Extractive Industries Transparency Initiative (EITI)
and the Public Finance Management Review. Shatalov explained that
during a recent meeting, State Secretary Kanat Saudabayev criticized
the World Bank for dragging its feet on Bota. He asked for our
assistance in getting the green light from the Department of
Justice. Shatalov said that he would be in Washington March 22-29,
and requested a meeting with the State Department to discuss a way
forward.

HOAGLAND