KAZAKHSTAN: SENIOR OFFICIALS DENY GOVERNMENT INTENDS TO

UNCLAS SECTION 01 OF 02 ASTANA 000598

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EFIN KZ
SUBJECT: KAZAKHSTAN: SENIOR OFFICIALS DENY GOVERNMENT INTENDS TO
IMPOSE CURRENCY CONTROL MEASURES


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


2. (SBU) SUMMARY: The Mazhilis (i.e., the lower house of
parliament) is currently considering draft legislation regarding the
introduction of a special currency regime, which would include
certain currency control measures. Senior Kazakhstani officials
maintain that the legislation merely clarifies procedures in
existing law, and that the government has no intention of using this
authority in any event. END SUMMARY.

AMENDMENTS WOULD CLARIFY EXISTING LEGISLATION


3. (U) Draft legislative amendments regarding certain currency
control measures went through a first reading in the Mazhilis (i.e.,
the lower house of the parliament) on March 4. The amendments --
which are part of a broader package of legislation on currency
regulation -- would provide for the introduction of a special
currency regime that would require companies to keep a certain
percentage of their foreign currency profits in the National Bank of
Kazakhstan or other authorized banks. Under the regime, special
permission would be required to conduct foreign currency operations,
and there would be requirements for the mandatory sale of foreign
currency earnings and limits on the use of foreign bank accounts.
In addition to these measures, the President would have the right to
introduce other temporary currency restrictions.


4. (U) In fact, Kazakhstan's existing legislation already contains
provisions that would allow the President to invoke a special
currency regime in case of a "threat to the economic security of
Kazakhstan and to the stability of its financial system." The
existing legislation, however, does not specify the measures and
restrictions that the President could introduce. The proposed law
is apparently aimed at spelling out those measures. (NOTE: A
special currency regime would not be a completely new phenomenon for
Kazakhstan. During 1994-95 and 1999, Kazakhstan mandated the sale
of 50 percent of all foreign currency earnings to the National Bank,
at a time when it was battling economic uncertainty following the
fall of the Soviet Union and the 1998 Russian financial crisis. END
NOTE.)

SENIOR OFFICIALS MAINTAIN NO INTENT TO IMPOSE CONTROLS


5. (U) National Bank Deputy Chairman Daniyar Akishev stressed to
journalists in early March that the proposed legislation simply
clarifies procedures already provided for in existing legislation.
He emphasized that Kazakhstan does not actually plan to introduce
these measures. As he put it, "We are defining more clearly what
controls can be introduced in case the country's economic security
is threatened." Similarly, an Embassy contact in the National
Bank's currency control division told us on April 1 that the
legislation is only a precautionary measure, and that it would be
invoked only in case of an emergency.


6. (SBU) At a reception for the Public Private Economic Partnership
Initiative on April 1, we asked Deputy Prime Minister Yerbol
Orynbayev about the legislation. His first reaction was to explain
that Prime Minister Karim Masimov and National Bank head Grigoriy
Marchenko wanted to eliminate "mom and pop" currency exchange points
and allow currency exchange only in banks. When pressed further, he
said the government already has the authority to restrict the
transfers of foreign currency, but added that it has no intention of
using that authority. (COMMENT: Orynbayev's apparent lack of
familiarity with the legislation provides further evidence that the
government is not planning on using such authority in the near
future. END COMMENT.)


7. (SBU) According to Dominic Lewenz, an analyst at Visor Capital,
an Almaty-based investment banking firm, Kazakhstan is unlikely to
invoke currency control provisions so long as crude prices do not
plunge further. However, according to Lewenz, should the price of
oil continue to fall and stay low for a prolonged period of time,
Kazakhstan could be forced to introduce the proposed measures to

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avoid further pressure on its currency and gold reserves.


8. (SBU) COMMENT: Imposing foreign currency controls would have a
negative impact on Kazakhstan's investment climate. Kazakhstani
officials are clearly aware of this, which makes it likely that they
are not planning any such steps for now, and would only invoke
currency control measures in an emergency situation. END COMMENT.

HOAGLAND