KAZAKHSTAN: ECONOMIC AND ENERGY UPDATE, MARCH 15-28

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SUBJECT: KAZAKHSTAN: ECONOMIC AND ENERGY UPDATE, MARCH 15-28

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


2. (U) SUMMARY: This information is drawn primarily from the
Kazakhstani local press and has not been verified for accuracy.

-- Adjusted Macroeconomic Forecast and Budget
-- "Wartime" Economy
-- Government to Issue Domestic Bonds in 2009
-- Astana Finance Interested in Kazakhstan Subsidiary of RBS
-- Criticism of Bloated Structure of KazMunaiGas
-- Serik Burkitbayev Sentenced to Six Years
-- Foreign Investments in Electric Power Industry
-- Energy Statistics

END SUMMARY.

ADJUSTED MACROECONOMIC FORECAST AND BUDGET


3. (SBU) On March 24, the Kazakhstani government adjusted its
macroeconomic forecast and national budget for 2009. The GDP growth
projection was decreased from 2.7% to 1%; the inflation forecast was
increased to 11%. The projected world price of oil remained
constant at $40 per barrel. Budget revenues were adjusted to 2,837
billion tenge (or $18.9 billion),a 23.5 billion tenge decrease from
the plan approved earlier. The two major sources of revenue are
1,529 billion tenge (about $10.2 billion) of non-oil taxes and
non-tax revenues and 1,292 billion of transfers from the National
(Oil) Fund and local budgets. Expenditures will be cut by 21.2
billion tenge to 3,411 billion tenge (about $22.74 billion). The
budget deficit will thus increase by 2.3 billion tenge to 573.6
billion tenge (approximately $3.8 billion),though its share of GDP
will remain the same, at 3.4%. The Ministry of Economy and Budget
Planning continues to make assurances that no social expenditures
will be cut. (COMMENT: The government, however, is feeling the
pinch. Samruk-Kazyna National Welfare Fund officials confirmed to
us that they are reducing staff and MFA sources state that there is
a freeze on vehicle and furniture purchases. A senior expat advisor
to Samruk-Kazyna was observed driving a government-supplied Toyota
Camry -- quite a step down from the usual Land Cruiser. END
COMMENT.)


4. (U) The government proposed the allocation of additional
resources from the National (Oil) Fund for anti-crisis measures.
The government will transfer 348 billion tenge (approximately $2.3
billion),in addition to the earlier approved 843 billion tenge
(about $5.57 billion). The additional amount is expected to be
spent to create jobs and improve conditions for post-crisis
development. The Ministry of Economy and Budget Planning
anticipates that the National Fund will receive 1,193 billion tenge
(about $7.88 billion) in revenue in 2009.


5. (U) Oraz Zhandosov -- a well-known economist, former chairman of
the National Bank, and former co-chairman of the opposition Azat
party -- wonders why the new budget uses the same forecast for the
price of crude -- $40 per barrel -- as the old budget. He questions
whether the government understands how the Kazakhstani economy has
been impacted by the low price of hydrocarbons. To all appearances,
the government was simply sitting and naively waiting for an oil
price hike, Zhandosov claimed. He also expressed doubt that
Kazakhstan's economy will experience positive growth in 2009.
According to Zhandosov, if oil prices continue to fluctuate between
$40 and $50 per barrel and the state maintains its bailout program,
Kazakhstan can expect zero GDP growth in 2009.

"WARTIME" ECONOMY


6. (U) Speaking at a Cabinet meeting on March 26, Prime Minister
Masimov announced that until the end of 2009, the government is
switching to "manual management" of the economy. "I do not see any
other solution to the crisis; the market is not working as it
should." The Prime Minister added that active intervention on the
part of the government has become necessary not just in Kazakhstan

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but in all countries affected by the crisis. "If a crisis is a war,
then now we will live by wartime rules," the Prime Minister
concluded.

GOVERNMENT TO ISSUE DOMESTIC BONDS IN 2009


7. (U) According to a high-ranking official at the Ministry of
Finance, the government is considering borrowing on the domestic
market and issuing government bonds worth 780 billion tenge
(approximately $5 billion) this year. A share of the bonds worth
about 15 to 20 billion tenge ($99 million to $132.2 million) could
be issued especially for the public. According to the official,
government bonds could be a good alternative to bank deposits, whose
credibility has been undermined in the last months. While it does
not guarantee a high yield, the Finance Ministry promises "absolute
liquidity" of the bonds.

ASTANA FINANCE INTERESTED IN KAZAKHSTAN SUBSIDIARY OF RBS


8. (U) Astana Finance Bank has submitted an offer to Royal Bank of
Scotland to purchase its Kazakhstani subsidiary, Interfax reported.
Should the transaction proceed, Astana Finance is expected to
refocus the bank on retail banking, away from its current emphasis
on corporate banking. The price and the timing of the deal have not
been specified, and RBS itself refused to give an official comment.
Astana Finance Bank is part of the Kazakhstan-based investment group
Astana Finance. The Government of Kazakhstan and Samruk-Kazyna
National Welfare Fund together own about 25% of the shares in Astana
Finance.

CRITICISM OF BLOATED STRUCTURE OF KAZMUNAIGAS


9. (U) In an article titled "Goodbye, KazMunaiGas!," the newspaper
"Megapolis" criticized the non-transparent organization of the
national oil and gas company KazMunayGas (KMG). With KMG having
numerous non-core assets and a complex structure of subsidiaries,
the author compared the conglomerate to a set of Russian nesting
dolls. The article calls on the owner of KMG, the Samruk-Kazyna
National Welfare Fund, to radically restructure KMG. To support
this view, "Megapolis" cites a memorandum, reportedly written for
President Nursultan Nazarbayev by Nurlan Balgimbayev, his energy
advisor. Balgimbayev purportedly wrote, "KMG has four vice
presidents, plus 12 managing directors with authorities similar to
those of first deputies. Moreover, managing directors supervise 11
executive directors. Decisions are delayed for months due to
internal procedures, the efficiency of operational management is
worsening, and the responsibility of executive officers has been
diffused."


10. (U) KMG president Kairgeldy Kabyldin revealed plans to boost
KMG's transportation capacity to 170 million tons of crude oil and
180 billion cubic meters of gas within the next ten years. He said
that by 2013, KMG aims to reduce the number of its subsidiaries by
more than half, boost corporate governance, streamline its decision
making processes, and shed non-core unprofitable assets. After
having revised its 2009 revenues and budget expenditures, KMG
expects a net profit of 88 billion tenge ($581.58 million) in 2009.
Kabyldin also said that the company may acquire assets in Central
Asia and other CIS member states.

SERIK BURKITBAYEV SENTENCED TO SIX YEARS


11. (U) The media reported on March 24 that former KMG president
Serik Burkitbayev was sentenced to six years in prison by a closed
military tribunal for providing technical equipment used by former
Nazarbayev son-in-law Rakhat Aliyev to eavesdrop on Nazarbayev and
other senior government officials. The investigation of this case
was conducted by the Committee for National Security (KNB),but the
Financial Police are also investigating Burkitbayev for the
embezzlement of $20 million from the Kazakh Institute of Oil and
Gas, where he was director from 2003 to 2007.


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FOREIGN INVESTMENTS IN ELECTRIC POWER INDUSTRY


12. (U) The European Bank for Reconstruction and Development (EBRD)
is acquiring a 18% stake in Central Asian Electric Power Corporation
(CAEPCo),a subsidiary of Central Asian Power Energy Company
(CAPEC),for 9.2 billion tenge ($61.3 million). CAEPCo plans to use
the funds to invest in modernizing its power transmission and
generation assets in Astana, Petropavlovsk, and Pavlodar by 2013.
In 2007, CAEPCo received a $30-million loan to modernization the
Pavlodar coal-fired plant TETs-3.


13. (U) According to a March 25 agreement, the Korean Electric Power
Corporation and Samsung Corporation acquired a 75% share of the
Balkhash coal-fired power plant (TETs). The remaining 25% of
outstanding shares belong to Samruk-Energo, a 100% subsidiary of the
Samruk-Kazyna National Welfare Fund. The first two 660-megawatt
blocks of the Balkhash TETs are planned to be launched in 2014, and
the other two in 2016-2017. The first two blocks will cover a
one-gigawatt power deficit in southern Kazakhstan, and the remaining
blocks will replace the Zhambyl power plant, which serves as a
back-up power-generator in the winter. The construction of the
Balkhash TETs costs $4.5 billion.

ENERGY STATISTICS


14. (U) During January and February, Kazakhstan produced 10.01
million tons of crude oil and 5.74 billion cubic meters of natural
gas, an increase of 7.5% and 3.4%, respectively, over the same
period in 2008. In January, Kazakhstan exported 4.45 million tons
of crude oil and gas condensate, valued at $1.37 billion, marking a
9.3% decrease in export volume and a 56.1% decrease in export value
compared to the same period last year. In the first two months of
2009, Kazakhstan's coal production decreased 20% year-on-year to
15.9 million metric tons. Power generation similarly decreased 9.6%
year-on-year to 14.23 billion kilowatt-hours.

HOAGLAND