KAZAKHSTAN: NO GRAND BARGAIN IN THE WORKS

S E C R E T SECTION 01 OF 03 ASTANA 000420

SIPDIS

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

E.O. 12958: DECL: 03/06/2059
TAGS: PGOV ECON EINV EPET RS CH KZ
SUBJECT: KAZAKHSTAN: NO GRAND BARGAIN IN THE WORKS

REF: A. (A) EEB DAS HENGEL EMAIL OF 03/05/09 (NOTAL)

B. (B) ASTANA 0386

C. (C) ASTANA 0382

D. (D) ASTANA 0344

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


1. (S) SUMMARY: As EEB DAS Hengel conveyed to the
Ambassador (ref A),a Shell oil executive expressed concern
on March 4 that economic problems in Kazakhstan increase the
likelihood that the government will turn to Russia or China
for financial assistance. If that were to happen, Shell is
concerned that Kazakhstan would reorient its foreign policy
away from the West and would seek to renegotiate yet again
the terms of the Kashagan project, in which Shell and other
international oil companies have invested billions of
dollars. We have no credible evidence that suggests that the
Russian or Chinese governments are preparing to offer
significant financial assistance to Kazakhstan, and no
evidence that Kazakhstan needs such outside assistance --
yet. The government still has deep pockets, and is
implementing a broad program to mitigate the effects of the
global financial crisis which has received praise from
international financial institutions. END SUMMARY.

KAZAKHSTAN OFFICIALS DETERMINED TO MANAGE ECONOMIC CRISIS


2. (S) Ref A reports that a Shell executive told EEB DAS
Hengel on March 4 that the Kazakhstani economy is
experiencing serious problems. He expressed concerns that
Kazakhstan might turn to Russia or China, rather than the
IMF, for financial help, and said there are rumors that the
Russians have offered Kazakhstan significant assistance in
return for reorienting their foreign policy away from the
West and more toward Russia. The executive also implied that
a Kazakhstani shift toward Russia could lead to new
Kazakhstani efforts to renegotiate the contract terms for the
Kashagan oil and gas field, in which Shell and several other
western companies have major ownership stakes.


3. (SBU) We have reported in detail on the effects of the
global economic crisis in Kazakhstan (refs B, C, D). The
Kazakhstani economy does face serious problems, as the Shell
executive asserted, particularly in the banking sector.
However the Kazakhstani government has deep pockets -- well
over $40 billion in reserves -- and has openly acknowledged
the need to take extraordinary measures to manage the
situation and preserve social stability. As previously
reported, these measures have included a 22 percent
devaluation of the currency, nationalization of two of the
country's largest private banks, and plans to invest up to
2.7 trillion tenge (approximately $18 billion),nearly 18
percent of GDP, in projects to support the financial-services
industry, agriculture, infrastructure and innovation, housing
construction and mortgage lending, and small- and
medium-sized enterprise development. As Shigeo Katsu, World
Bank regional vice president for Europe and Central Asia,
said after meeting Prime Minister Masimov on February 23,
Kazakhstan's anti-crisis program "contains strong policy
measures designed to improve the resilience to crisis of all
segments of Kazakhstan's society.... The government has
taken the right track with crisis mitigation and demonstrates
strong leadership."

NO EVIDENCE OF A GRAND BARGAIN WITH RUSSIA OR CHINA


4. (C) We have seen no evidence that Russia -- or China --
has offered Kazakhstan an assistance package in exchange for
reorienting its foreign policy or granting access to or
ownership of Kazakhstan's natural resources. Furthermore, we
have no evidence or indication that the Kashagan project has
experienced further delays that would give the government
cause to renegotiate Kashagan,s terms yet again,
particularly something as drastic as changes to the

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consortium's ownership structure. Several international oil
company representatives in Kazakhstan share that view. For
example, on March 5, Patty Graham, Government Relations
Director for ExxonMobil Kazakhstan, told Energy Officer that
Kazakhstan has resisted overtures from China to trade loans
for oil or infrastructure. "The Chinese National Petroleum
Company submitted a proposal to acquire 49 percent of
MangistauMunaiGas," she said, "but the Kazakhstanis appear to
have rejected it. They are very reluctant to give the
Chinese ownership of any significant oil production assets,
even though they desperately need the cash." (NOTE: India's
Oil and Natural Gas Corporation is now believed to have an
inside track on this attractive asset, following President
Nazarbayev's visit to India on January 26. END NOTE).


5. (SBU) On March 4, Dan Worrall, Shell's Corporate Affairs
Manager in Kazakhstan, told Energy Officer that Russian
investment in Kazakhstan's oil and gas sector has been
severely restricted in recent months. He cited, for example,
Lukoil's decision to cut global expenditures by 20 percent,
and said Lukoil's investments in Kazakhstan have been cut
even more drastically, to the point where Lukoil canceled a
lease on new office space in a prominent building in central
Astana. We also understand from sources at the Karachaganak
Petroleum Operating Company (KPO) that Gazprom backed out of
plans to invest millions of dollars in a new gas processing
plant in Orenburg, ostensibly because KPO decided to delay
Phase III of the project, but we suspect that cost was a
factor in the decision.

KAZAKHSTAN TO USE ENERGY REVENUE FOR PRIORITY PROJECTS


6. (C) Although Kazakhstan does not appear poised to accept
outside financial assistance to help manage the effects of
the global crisis, President Nazarbayev is keen to cut costs,
save jobs, and invest in infrastructure. On March 6, in his
annual address to the nation, Nazarbayev indicated that
revenue from oil and gas would finance priority projects.
"We need fresh funds," he said. "I deem it expedient to use
the revenues generated by the mineral resource sector, which
we have traditionally accumulated in the National Fund, to
finance the new plan," which he said will cost 600 billion
tenge (approximately $4 billion),in addition to money
already transferred from the National Fund.

NO PLANS TO BORROW FROM THE IMF


7. (SBU) On October 20, 2008, Prime Minister Masimov told
Bloomberg, "We have our own specific plan to survive without
any external support. I don't think we need support from the
International Monetary Fund (IMF) or overseas." On March 6,
the IMF's local representative Olga Bisekeeva told Energy
Officer that the Fund has "no plans" to offer a loan package
to Kazakhstan, although she said that the IMF mission head
for Kazakhstan would visit the country in May to meet with
government officials and assess the impact of the economic
crisis.


8. (C) COMMENT: We doubt that even if Kazakhstan did need
assistance, Russia could come up with a figure large enough
to entice the Kazakhstanis. We would be talking about tens
of billions of dollars, not the $2 billion or so in grants
and loans the Russians apparently offered the Kyrgyz to close
Manas. Some believe the Russians can,t even afford to
follow through the Kyrgyz package. It would appear that only
an international financial institution like the IMF has
sufficient funds for a Kazakhstan bailout, if it ever came to
that. In addition, in his March 6 speech to Parliament,
President Nazarbayev said he is looking forward to
celebrating the 20th anniversary of Kazakhstan's independence
in 2011: "The dreams of our ancestors are coming true," he
said. Kazakhstan clearly values its independence and
sovereignty too much to make a grand bargain with Russia or
China that would limit its foreign policy flexibility. END

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COMMENT.
HOAGLAND