KAZAKHSTAN: ITALY REMAINS A MAJOR INVESTOR, ACTIVE IN

UNCLAS SECTION 01 OF 03 ASTANA 000442

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB

E.O. 12958: N/A
TAGS: PGOV PREL ECON EFIN EINV EPET ETRD IT KZ
SUBJECT: KAZAKHSTAN: ITALY REMAINS A MAJOR INVESTOR, ACTIVE IN
SEVERAL KEY SECTORS OF THE ECONOMY


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


2. (SBU) SUMMARY: PolOff met on February 17 with Ugo Boni, First
Secretary and DCM at the Italian Embassy in Astana, to discuss the
Kazakhstan-Italy relationship. Boni characterized the overall
Kazakhstan-Italy relationship as positive and robust, and said that
both sides looked forward to President Nazarbayev's planned visit to
Italy sometime during 2009. Boni told PolOff that the Italian
government's top priority in Kazakhstan is pursuing energy security,
followed by strengthening other commercial ties. Italy remains one
of the major sources of foreign direct investment in Kazakhstan, and
several Italian companies remain active in the construction,
property management, construction materials, fashion, and alcohol
sectors, despite the effects of the global financial crisis.
Italian companies in the construction sector complain of pressure
and delayed payments from local and central authorities, while
fashion and wine exporters complain that profits are primarily being
captured by customs and local retailers. Boni told PolOff that he
did not expect finalization in the near future of an EU-Kazakhstan
agreement on Kazakhstan's WTO accession. END SUMMARY.

NAZARBAYEV PLANS TO VISIT ITALY


3. (SBU) Boni characterized the overall Kazakhstan-Italy
relationship as very positive and robust. Italy's Prime Minister,
Silvio Berlusconi, visited Kazakhstan briefly in 2008. (NOTE: He
was supposed to make a technical refueling stop, but President
Nazarbayev invited him into town, and they had a lengthy meeting and
windshield tour of Astana. END NOTE.) Boni said that Nazarbayev
had planned to visit Italy in March, but also wanted to call on the
Pope. Since the Pope expects to be abroad in March, the Nazarbayev
trip was postponed to "later in 2009." Boni expressed some relief
at the postponement, noting that the Kazakhstani side hopes to sign
a range of commercial agreements which will take time to prepare.

TOP PRIORITY IS ENERGY SECURITY


4. (SBU) Boni said the Italian government's top priority in
Kazakhstan is pursuing its energy security, since Italy is a major
importer of Kazakhstani crude oil. However, Boni explained that the
Italian Embassy's role is primarily one of quiet support, since
policy is made at the EU-level. Boni also maintained that
oil-related issues are not really a "bilateral" EU issue with
Kazakhstan, but also involve the EU-Russia relationship. "Without
Russia, it is impossible to generate agreement," Boni claimed.


5. (SBU) Boni reminded PolOff that the most important Italian
company with a presence in Kazakhstan is Italy's national oil
company Eni. However, he said that much of Eni's investment is
channeled through the Netherlands, which results in a statistical
understatement of Italy's importance as a foreign investor in
Kazakhstan. Boni maintained that that Eni, along many other Western
oil companies, finds it very difficult to meet local content
requirements. Boni asked, "Where can you find certain goods made in
Kazakhstan? Local content requirements are a huge problem for our
companies in the oil sector." At the same time, Boni said that
many Italian companies complain that Eni does not favor Italian
companies enough, but Boni explained that for items Eni cannot
procure from local suppliers, Eni typically uses the same diverse
international network of suppliers it relies on for projects in
other countries.

ITALY REMAINS A MAJOR SOURCE OF INVESTMENT


6. (SBU) Boni said that Kazakhstan and Italy have had a robust
economic relationship since Kazakhstan became independent. In 2008,
total trade between Kazakhstan and Italy amounted to over $13
billion, including over $11 billion worth of Kazakhstan exports to
Italy (primarily oil) and more than $1 billion in Kazakhstani
imports. Italy officially ranks fourth in terms of cumulative
foreign direct investment (FDI) in Kazakhstan, behind the United
States, the Netherlands, and the United Kingdom. Boni expects Italy
to continue to be a significant foreign investor in Kazakhstan,

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although he noted that Italian investment outside of the oil sector
has been declining since 2006. Boni attributes the decline to a
fall in Kazakhstani demand and an increase in competition. For
example, during the 1990s, many Italian companies moved quickly into
the newly open Kazakhstani construction market and used their
expertise to build high quality buildings cheaply and quickly. As
more local and foreign companies entered the market, it became
saturated, and Italian construction companies withdrew or moved into
the property management business.

PROBLEMS WITH CEMENT FACTORY INVESTMENT


7. (SBU) Italy's second largest commercial investor in Kazakhstan
is Italcementi, the world's fifth largest cement-producer, which
acquired the Shymkent cement factory in 1998. According to Boni,
the Shymkent factory's operations have been problematic because of
pressure from local authorities. Cement prices in Kazakhstan are
controlled by the government, but actual free-market prices are much
higher, which creates a lucrative trade for intermediaries. Boni
told PolOff that the factory's production is frequently stopped by
local authorities, who claim that the company does not have the
"necessary permits." This is a pretext for demanding bribes or
other compensation. Such problems were particularly egregious
during the spike in world cement demand in 2007. Kazakhstan was
particularly affected by China's demand for cement and other
construction materials in the run-up to the Summer 2008 Olympics,
which also coincided with building booms in Astana and Almaty, Boni
argued.

MINISTRY OF TRANSPORTATION DELAYS PAYMENT


8. (SBU) Other Italian companies have also faced problems with
Kazakhstani authorities. The large Italian company Grupo Todini,
controlled by prominent Italian politician Luisa Todini, has been
active in construction and road-building in Kazakhstan for 12 years,
and completed two roads in western Kazakhstan, one from Atyrau to
Aktau and one from Atyrau to Samara, Russia. Boni told PolOff that
the Kazakhstani Ministry of Transport paid the company approximately
$8 million less than the amount due. Although the company has the
right to take the case to international arbitration and is confident
it would win, Boni said Grupo Todini is reluctant to take this step
for fear that it could endanger future deals. The company is
currently completing one-fifth of the road from Astana to the resort
of Borovoye; the other four sections are being completed by one
Iranian and three Kazakhstani companies. According to Boni, all of
the companies, including Todini, were forced to purchase materials
at prices at least seven times the officially set rates, without
being able to recover payment from the Ministry of Transportation.


PROPERTY MANAGEMENT MORE LUCRATIVE


9. (SBU) Despite the hardships several larger Italian companies
face doing business in Kazakhstan, several medium-sized firms have
successfully carved out niches, especially in property management.
Boni told PolOff that Renco is well-established in property
management in Kazakhstan. The company's largest market is Armenia,
where it dominates the construction sector, whereas in Kazakhstan it
is a medium-sized, but highly successful company. According to
Boni, Renco, which was started by an Eni employee, moved
successively from oil services to construction and then to property
management, and now manages a large number of the buildings it
constructed, including the office building in Almaty where USAID is
located, the Astana Renco building which houses a number of
diplomatic missions, and several hotels located adjacent to oil
fields. Boni said that the company wisely moved out of the
Kazakhstani construction market after the 1990s just as lower-cost
firms entered it. Renco then used its brand and its knowledge of
basic Western service standards to become successful in property
management.

GLOBAL FINANCIAL CRISIS TAKES ITS TOLL ON BANKING INVESTMENT


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10. (SBU) Boni admitted that the global financial crisis is having
a negative effect on Kazakhstan-Italy commercial relations.
Italy-based Unicredit bought Kazakhstan's ATF bank in 2007, but this
acquisition has lost 90 percent of its value. Boni also expressed
concern over the Kazakhstani government's reorganization and
nationalization of banks as an anti-financial crisis measure. Boni
said that the Director of the Italian Trade Delegation in Almaty
believes "the nationalization of Alliance Bank is a big scam." Boni
said that the government take-over of BTA Bank was "not a positive
step." BTA, Boni claimed, was well-known even outside of Kazakhstan
as a sound financial institution. Boni admitted that he had even
put some of his own money in BTA, judging it to be the safest of the
Kazakhstani banks, and that he had been one of the many people who
had rushed to the bank to withdraw money after the nationalization.
(NOTE: International financial institution and Western
private-sector bankers have told us the opposite --that BTA was
badly over-extended and frequently cooked its books. END NOTE.)

ITALIAN COMPANIES CONTINUE COMMERCE IN FASHION AND WINE


11. (SBU) Despite the financial crisis, Boni expects small and
medium-sized Italian firms to continue to develop their markets in
Kazakhstan, particularly in the fashion and wine industries in which
Italian firms have been highly successful. Boni told PolOff that
Italian exporters have used their reputation for high quality
fashion to capture large parts of the high-end clothing market,
especially for lucrative fur goods. At a November exposition in
Almaty, one businessman sold his entire stock, worth $50,000, on the
first day. (NOTE: Prominent Kazakhstani businessman Nurlan
Kapparov, who heads the Lancaster Group holding company, is the
chairman of the Kazakhstan-Italy Business Council. His wife
reportedly owns many boutiques featuring Italian brand-name products
such as MaxMara and Dolce and Gabbana. END NOTE.)


12. (SBU) Many small Italian companies continue to be active
exporters of wine to Kazakhstan. According to Boni, however,
Italian wine exporters have failed to build a strong lobby, and
therefore, lack collective bargaining power. Most Italian wine
exporters, except for larger companies like Martini, are unable to
effectively capture the profits from their products. For a bottle
of wine that costs $10 in Italy, Kazakhstani retailers can get $20
or more, but most of the mark-up goes into the pockets of local
retailers or is taken by customs in the form of import duties.

ROME WAS NOT BUILT IN A DAY


13. (SBU) Boni explained that for Italy, Kazakhstan's accession to
the WTO is an EU-level issue -- and one that involves Russia.
According to Boni, the EU would like to have an accession agreement
with Russia before Kazakhstan joins the WTO, and therefore Boni does
not expect quick finalization on an EU-Kazakhstan accession
agreement. Regarding the proposed customs union among Kazakhstan,
Russia, and Belarus, Boni expressed doubts it would soon come to
fruition -- despite claims from the three participating countries
that it will. As Boni put it, "Developing a customs union is very
complicated. It took 12 years for the EU to come together."

HOAGLAND