KAZAKHSTAN: KAZAKHSTAN WELCOMES REVITALIZED TIFA

UNCLAS SECTION 01 OF 05 ASTANA 000830 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB STATE PLEASE PASS TO USTR AND OPIC E.O. 12958: N/A TAGS: PGOV PREL ECON EINV EFIN EAID KZ SUBJECT: KAZAKHSTAN: KAZAKHSTAN WELCOMES REVITALIZED TIFA ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On April 24 and April 27, Deputy Assistant United States Trade Representative (DAUSTR) for South and Central Asia Claudio Lilienfeld held meetings in Almaty and Astana to discuss the future of the Central Asia Trade and Investment Framework Agreement (TIFA) established between the five former Soviet republics of Central Asia. Meetings in Kazakhstan demonstrated continued frustration with regional integration/cooperation attempts, and welcomed efforts to enhance the bilateral agenda. Security concerns dominated the discussion of Afghanistan, and pleas were made for a coordinated international approach to regional development to prevent duplication of efforts and the overextension of limited Kazakhstani resources. END SUMMARY. MAKING THE CASE FOR TIFA ¶3. (SBU) On April 24 in Almaty, and April 27 in Astana, DAUSTR Claudio Lilienfeld met with numerous Kazakhstani government officials, academics, as well as representatives of international financial institutions and foreign diplomats to discuss the Central Asia Trade and Investment Framework Agreement (TIFA). In each of his meetings, Lilienfeld explained that USTR is reviewing its approach to the US-Central Asia TIFA (seeking to determine whether and how the regional approach can be reinvigorated),is exploring creating an enhanced bilateral approach to trade and investment with Kazakhstan, and is examining ways to facilitate regional trade and commerce involving Afghanistan. CONCERNS ABOUT TIFA TO DATE ¶4. (SBU) MFA Americas Department Deputy Director Alim Kirabayev told Lilienfeld that his government welcomed the opportunity for a pragmatic reorganization of the TIFA agenda, but claimed that outside of several international meetings, there has been little concrete action on TIFA taken to date. Vice Minster of Industry and Trade Zhanar Aitzhanova said that she appreciates the venue TIFA has historically provided and looks forward to Kazakhstan's continued participation in it. However, she maintained that while "it is a good forum for meeting and discussion, which we like, it has thus far accomplished little." She said that whole TIFA process should be reorganized, claiming that thus far it has been too ad hoc. Aitzhanova shared her belief that not all TIFA members have demonstrated similar commitments to the initiative, which may be the result of different levels of political or economic development. "We intimidate our neighbors by just talking about our problems" she said. ¶5. (SBU) Samruk-Kazyna National Welfare Fund Managing Director Aidan Karibzhanov expressed doubts about the multi-country/regional aspects of TIFA because, in his view, relationships among the Central Asian states are worsening. Professor Nargis Kassenova of the prestigious Kazakhstani Institute of Management and Economic Policy (KIMEP) expressed a similarly skeptical view. Kassenova conceded that the financial crisis may encourage more regional cooperation, but that the real opportunities in that context for Kazakhstan lie in cooperation with China. BILATERAL APPROACH WELCOMED ¶6. (SBU) Though they expressed doubts about the multi-country Central Asia TIFA, Lilienfeld's interlocutors were much more positive about the prospects for bilateral efforts. Vice Minister Aitzhanova said that Kazakhstan would very much welcome its own bilateral TIFA. "I don't know if it would undermine the regional meeting, but if the old one is not working, perhaps it should be replaced" Aitzhanova said. World Bank Economist John Litwak expressed support for an intensified bilateral approach with each of the Central Asian countries, noting that there may be little alternative given that "the World Bank can hardly even get the Tajiks and Uzbeks to talk, let alone cooperate." According to Litwak, enhanced bilateral engagement may be able to identify common denominators for regional focus. ASTANA 00000830 002 OF 005 CONNECTION TO AFGHANISTAN LOST ON MANY, UNTIMELY TO OTHERS ¶7. (SBU) There were doubts expressed about engaging Afghanistan in the regional TIFA. Samruk-Kazyna Managing Director Karbizhanov claimed that in Kazakhstan, there is not much interest in Afghanistan. "Perhaps there is a psychological barrier," he opined. He sees little room for trade growth with Afghanistan, largely because of the poor relations between the Central Asian republics. Karbizhanov cited the example of a Kazakhstani cement factory to be built on the Afghan-Tajik border to supply northern Afghanistan with construction materials. In the end, he explained, the project never materialized because they could not get agreements from the Uzbeks to provide the necessary natural gas. According to Professor Kassenova from KIMEP, Kazakhstanis feel "downgraded" by direct association with Afghanistan, and see little benefit in enhanced integration. "Perhaps" she said "there might be a greater role for Iran and China in Afghanistan." ¶8. (SBU) The MFA's Kirabayev noted that Kazakhstan has provided significant humanitarian assistance to Afghanistan, but said that the current security environment there is not favorable to business development. MFA Asia and Africa Department Deputy Director Yerlan Alimbayev said that Kazakhstan will send a Vice Minister of Industry and Trade to participate in the May 14-15 regional economic conference in Islamabad, and is now researching the best means of providing economic support to Afghanistan. Alimbayev said that commercial trade between Kazakhstan and Afghanistan also increased six times in 2008 to a value of approximately $1 billion (apparently mostly in the form of Kazakh exports to Afghanistan). Vice Minister Aitzhanova, however, said that it was unlikely that Kazakhstan could offer any significant assistance for Afghanistan in the near future. She explained that "during our periods of 10% GDP growth, we were very interested in channeling our excess liquidity into these markets." But in the current circumstances, "everything is domestic" and that Kazakhstan is mostly concerned about maintaining its own businesses. "So for this year, and probably next year we will be less enthusiastic vis-`-vis our foreign investment programs." AGENDA ITEMS PROPOSED FOR TIFA ¶9. (SBU) Lilienfeld's interlocutors mentioned several specific areas of potential focus for the regional TIFA. These included assistance in developing effective marketing campaigns to attract international investors, fostering educational exchanges and in-country development of human capital, continued customs reform, infrastructure and public private partnership (PPP) development, and identification of promising growth sectors. NEW ECONOMIC REALITIES, NEW OPENNESS TO FOREIGN INVESTMENT? ¶10. (SBU) First and foremost on the minds of both Kazakhstani government officials and IFI representatives was the promotion of Kazakhstan to potential international investors. World Bank economist John Litwak said that historically, Kazakhstani officials "have had no trouble attracting investment in oil, but there has been no red carpet treatment for other investors and the rest of the economy suffers for it." He explained that "one of the main problems in the economy, outside of the resource sector, is that it is not clear where foreign investors would be interested. Kazakhstan could be doing a lot more to attract foreign firms." Litwak gave the example of representatives of a Singaporean technology firm who recently traveled to Kazakhstan but had little success in setting up meetings. After contacting government representatives, they were directed to an individual who claimed he could set up the meetings at a cost of $500 per meeting. "They've never made a serious effort to make foreign investors feel welcome" Litwak said. ¶11. (SBU) According to Samruk-Kazyna's Karibzhanov, the role of international companies will become more important than ever for Kazakhstan. He claimed that "the government has lost the ability to ASTANA 00000830 003 OF 005 really attract foreign investment." According to Karibzhanov, the government will again promote special incentives for big business. "We really need some big names" he said, adding that growth over the next few years will likely be dependent on the ability of industry to attract export-import financing. Karibzhanov said the government increasingly recognizes the need to create the necessary conditions for foreign investment, and admitted the government previously had an arrogant attitude built on oil and gas-fueled economic growth. "If you look at the last ten years of growth, you see that not a single new plant has been built. Only upgrades of existing Soviet-era facilities. We need to define the competitive advantages of the country." Karibzhanov conceded that the financial crisis could be somewhat fortuitous given that "you never find the answers when you have plenty of money, but now the government is brainstorming" on issues such as anti-corruption measures, reformed regulatory frameworks, and refined stable tax structures. ¶12. (SBU) Some of Lilienfeld's interlocutors argued that creating the conditions for foreign investment is far easier said than done. At a luncheon hosted by the Ambassador, German Embassy DCM Wolfgang Brett said that Kazakhstan is a difficult market for potential German investors. "Kazakhstan is very large and sparsely populated, though it promises access to greater Central Asian markets. However, to date it has failed to provide this access and alone does not present significant commercial potential outside the extractive sector" he maintained. These factors combined make it very difficult for him personally to recommend Kazakhstan to German investors. World Bank economist John Litwak claimed the government is actually too focused on addressing its ratings in the World Bank Doing Business Report, and argued that given the nature of Kazakh clan structures, the need to have influential local connections will likely remain an impediment to foreign investment. INFRASTRUCTURE: A STRATEGIC AREA FOR DEVELOPMENT ¶13. (SBU) The EBRD remains one of the biggest proponents of infrastructure development in Kazakhstan and is currently participating, along with the World Bank, in financing portions of the Kazakhstani segment of the ambitious China-Europe transportation corridor. However, at a meeting in Almaty, EBRD Senior Banker and Corporate Sector Head Tomas Bravenec told Lilienfeld that despite Kazakhstan's expectations for private international investment to fund its infrastructure development plans, not a single Public Private Partnership (PPP) has operated successfully in Kazakhstan to date. In a separate meeting, Astana-based EBRD Senior Banker Ulf Hindstrom explained that Kazakhstan is in need of massive development of its rail, road, and communications infrastructure. Hindstrom said that the Kazakhstani government is putting significant resources into developing possible PPPs, but "they are trying to reinvent the wheel, and placing far too high expectations on the private sector." According to Hindstrom, the government currently has over $4 billion in tenders for roads, but private money for these projects does not currently exist. Unless the tendering process is vastly improved, Hindstrom believes the government will need to finance these initiatives itself. ASSISTANCE REQUESTED IN DEVELOPING POTENTIAL ¶14. (SBU) According to Samruk-Kazyna's Karibzhanov, the government could use international assistance to identify promising economic sectors for development. He said such promising sectors could include agriculture, food processing, and pharmaceuticals. More important, he said, is gaining the support of President Nazarbayev himself in attracting large international companies with brand names, with the hopes that they will then develop associated industries. "Nazarbayev needs this to demonstrate that the markets are attractive. We need to produce something internationally on the local level -- meaning not just an upgrade of Soviet-developed sectors," Karibzhanov maintained. LEGAL ENVIRONMENT REMAINS A CHALLENGE ¶15. (SBU) Remarking on the challenges the legal environment poses ASTANA 00000830 004 OF 005 to foreign investment, World Bank economist Litwak said the "government gives good lip service (to the legal environment),and it looks good in writing. But when it comes to actual implementation they are lacking." Vice Minister Aitzahnova echoed this statement saying that the USTR National Trade Estimate provided a lot of constructive criticism, and admitted that "our (legal) framework is good, but our problem is enforcement." POSSIBLE ROLE FOR PPEPI ¶16. (SBU) Several interlocutors drew parallels between the goals of TIFA and the U.S.-Kazakhstan Public-Private Economic Partnership Initiative (PPEPI). Doris Bradbury, Executive Director of the American Chamber of Commerce in Kazakhstan, which currently implements the PPEPI, and Lilienfeld agreed on the likely importance of close collaboration between USTR's bilateral work with the Government of Kazakhstan and PPEPI in order to prevent duplication of efforts. Vice Minister Aitzhanova repeated that call. She argued that multiple initiatives can become problematic for her staff. Rather than running parallel initiatives, "We think it is better to have one framework. We are a small government with a limited number of English speaking people." She said, "our Prime Minister is very committed to the PPEPI, and this can be our broader framework." Aitzhanova also encouraged Lilienfeld to consider the ADB-organized CAREC model for regional integration, and possible TIFA collaboration within it. Aitzhanova said that Kazakhstan supports CAREC because it offers a unique framework that "is working because it has resources attached to it." CUSTOMS UNION REMAINS A PRIORITY, BUT NOT AT WTO EXPENSE ¶17. (SBU) Vice Minister Aitzahnova readily acknowledged that Kazakhstan is actively working to create a customs union with Russia and Belarus, but not at the expense of its efforts to enter the WTO. (NOTE: Aitzhanova said that Kyrgyzstan has also expressed an interest in joining this customs union, which might require the Kyrgyz to restructure some of their existing WTO agreements. END NOTE.) According to Aitzhanova, Uzbek Foreign Minister Norov recently told her that Uzbekistan is not currently pursuing WTO because it wants first to diversify its economy. Aitzhanova, however, emphasized that she believes WTO accession will be a vital component of Kazakhstan's efforts to diversify. Responding to Lilienfeld's remark that she must be very busy with WTO, Aitzhanova said with a smile that it was "mostly due to your government, I should add." Aitzhanova went on to explain that in the negotiation process with the United States, she has limited staff and resources. "We are traveling all the time." Aitzhanova proposed using the bilateral TIFA process to sensitize the WTO negotiators to specific conditions and challenges in Kazakhstan; "each country has its own institutional capacity," she argued. Aitzhanova ended the meeting by reiterating Kazakhstan's commitment to entering the WTO, adding an indirect request for patience: "We need expertise, time to study and adapt." ¶18. (SBU) COMMENT: Overall, Lilienfeld's meetings revealed intense skepticism about the prospects for progress on the regionally-focused Central Asia TIFA, though there was wide support for stepping up bilateral engagement. This is consistent with our experience on other issues -- such as regional water and energy cooperation. Though the Kazakhstanis are supportive of greater regional cooperation across a range of issues, they believe that there are serious political impediments to bringing this about. END COMMENT. ¶19. (SBU) COMMENT CONTINUED: The comments on Afghanistan reflect the existing divide between the former Soviet states and the remainder of South and Central Asia. Top leadership understands that former Soviet Central Asia cannot build a wall to its south, but there is no great enthusiasm to embrace it either. The current "Path to Europe" accurately reflects where Kazakhstan's government would like its future to lie. Nonetheless, it also grudgingly recognizes that embracing Europe may require giving a hug to the south as well. END COMMENT. ASTANA 00000830 005 OF 005 MILAS