UZBEKISTAN: SCA DAS KROL'S MEETINGS ON ECONOMIC AND ENERGY

C O N F I D E N T I A L SECTION 01 OF 05 TASHKENT 001595

SIPDIS
DEPT FOR SCA/CEN
AMEMBASSY ASTANA PASS TO AMCONSUL ALMATY
AMEMBASSY HELSINKI PASS TO AMCONSUL ST PETERSBURG
AMEMBASSY MOSCOW PASS TO AMCONSUL VLADIVOSTOK
AMEMBASSY MOSCOW PASS TO AMCONSUL YEKATERINBURG
AMEMBASSY ANKARA PASS TO AMCONSUL ADANA
AMEMBASSY BERLIN PASS TO AMCONSUL DUSSELDORF
AMEMBASSY BERLIN PASS TO AMCONSUL LEIPZIG
AMEMBASSY BELGRADE PASS TO AMEMBASSY PODGORICA
AMEMBASSY ATHENS PASS TO AMCONSUL THESSALONIKI

E.O. 12958: DECL: 2019/11/24
TAGS: ETRD ECON EINV EPET ENRG PREL BEXP UZ
SUBJECT: UZBEKISTAN: SCA DAS KROL'S MEETINGS ON ECONOMIC AND ENERGY
ISSUES

REF: TASHKENT 1591

CLASSIFIED BY: Robert McCutcheon, Econ Officer, State, Pol/Econ
Office; REASON: 1.4(B),(D)


1. (C) SUMMARY. On November 19 and 20, DAS for South and Central
Asian Affairs George Krol had a series of meetings on economic,
trade, and energy issues in Tashkent. Meetings at the Ministry of
Foreign Economic Relations, Investment, and Trade and at the Uzbek
Chamber of Commerce revolved primarily around the now familiar
recitation of Uzbekistan's economic success in this year of global
financial crisis and the need for greater foreign investment.
Meetings at Uzbekneftegaz and Uzbekenergo, however, yielded new
information on Uzbek plans in the oil and gas sectors, on
opportunities for U.S. businesses in these plans, and on
Uzbekistan's possible full or partial withdrawal from the Central
Asia Power Grid on December 1. END SUMMARY.



UZBEKNEFTEGAZ: OIL AND GAS

--------------




2. (SBU) DAS Krol began his meeting with Uzbekneftegaz Chairman
Ulugbek Nazarov by asking about plans to develop Uzbekistan's oil
and gas sector, plans to diversify export markets, and possible
roles for U.S. companies. Nazarov responded by describing
Uzbekneftegaz as a national holding company with 120,000 employees
that is responsible for the full spectrum of oil/gas operations
ranging from prospecting, drilling, and producing to refining,
transport, and export. He said prospecting is ongoing nearly
everywhere from the oldest fields with proven reserves to new areas
with good geological indicators. The goal, said Nazarov, is to
increase gas reserves by 1.5 times by opening new fields and by
drilling deeper in older areas.




3. (SBU) Nazarov continued that per capita gas consumption in
Uzbekistan is 1.5-3 times greater than in the U.S., largely because
most of the country's energy and power sectors are built on natural
gas. He said a presidential program to modernize the gas
infrastructure will make gas usage more efficient. This will allow
Uzbekistan to increase gas exports to a level approaching 30 bcm as
compared with the 16 bcm exported in 2008.




4. (SBU) Nazarov said the first of two new gas pipelines from
Turkmenistan to China will open in December with a capacity of 40
bcm. He continued that Uzbekistan believes in energy security and
has an agreement to export up to 10 bcm to China when the second
pipeline and associated infrastructure are completed. This will be
in addition to its existing export markets in Europe (via Russia),
Kyrgyzstan, Tajikistan, and southern Kazakhstan.




5. (SBU) Uzbekistan is actively seeking foreign investment in the
oil and gas sector. Nazarov noted that Petronas, Sasol, China
National Petroleum Company (CNPC),and several Korean companies are
already active, and he added that Uzbekneftegaz is currently in
talks with three U.S. companies. He said Uzbekistan needs new
technology to increase output from older, underperforming sites,
and he named Baker Hughes and Schlumberger as companies that can
contribute in this area. "We're open to all countries," Nazarov
concluded.



MFERIT: THE UZBEK ECONOMY IS COMING UP ROSES

--------------

TASHKENT 00001595 002 OF 005



6. (SBU) DAS Krol met next with Minister Elyor Ganiev, recently
promoted to Deputy Prime Minister, at the Ministry of Foreign
Economic Relations, Investment, and Trade (MFERIT). Ganiev opened
by citing oft-repeated statistics demonstrating the resilience of
the Uzbek economy in this time of world financial crisis: 8
percent GDP growth and 10 percent growth in exports in the first
nine months of 2009. Ganiev attributed much of Uzbekistan's
success this year to the GOU's anti-crisis program, which along
with other measures allocates 43 billion USD to projects of
national importance such as power plant upgrades and improving the
highway network. He added that Uzbekistan still needs to attract
more foreign investment, saying at least 6-8 billion USD is needed
annually to maintain 8 percent GDP growth, whereas there has been
only 4.5 billion USD this year.




7. (SBU) Ganiev noted successful joint ventures in the automotive
sector with foreign partners GM, Isuzu, and Mercedes, and he
claimed thirty foreign companies have begun projects in the Navoi
Free Industrial Economic Zone (FIEZ). He said there is still room
in Navoi for U.S. companies, and he characterized his recent
meeting with Honeywell CEO Dave Cote as very encouraging.




8. (SBU) On Afghanistan, Ganiev said Uzbekistan is ready to meet
all standards required by the U.S. for local purchase, and he added
that MFERIT is working with both the Embassy and CENTCOM on this
issue. He said electricity exports have increased by nearly a
factor of two this year, largely due to exports to Afghanistan. He
noted that Uzbekistan is preparing to begin construction of the new
ADB-funded Afghan rail extension from Hayraton to Mazar-i-Sharif.




9. (SBU) On the Central Asia Power Grid (CAPG),Ganiev said
Uzbekistan is preparing to limit its participation due to accidents
in neighboring countries. He characterized Tajik and Kyrgyz plans
for large hydroelectric projects as "crazy," adding that they need
to increase the efficiency of their internal grids, not criticize
Uzbekistan.




10. (SBU) Commenting on the business climate in Uzbekistan, Ganiev
said it is now possible to register a joint venture in a week.
Taxes are dropping, particularly for small and medium enterprises
(SMEs). He confirmed there have been some problems with customs
and with conversion, but he characterized these all as temporary.
As concerns reports that GM is having currency conversion problems,
Ganiev said GM is a strategic partner and that there are no real
problems.




11. (SBU) Responding to DAS Krol's question on Uzbekistan's
withdrawal from the Moscow-led Eurasian Economic Community
(EvrAzES),Ganiev quoted Uzbek President Karimov's statement that
"economics creates politics." He continued that EvrAzES members
are more interested in protecting their own industries than they
are in crafting mutually-beneficial policies. He concluded that
EvrAzES simply had not been effective.




12. (SBU) Ganiev talked about the increasingly important role of
SMEs in Uzbekistan, saying they account for 48 percent of GDP this
year. He said the GOU is doing all it can to create favorable
conditions for SMEs, in particular low-cost financing. He

TASHKENT 00001595 003 OF 005


cautioned, however, that cheap Chinese imports are still a factor
and that contraband trade in Chinese goods via Kyrgyzstan can harm
Uzbek SMEs.




13. (SBU) On agriculture, DAS Krol raised agricultural reforms and
mechanization as ways possibly to address the issue of child labor
in the cotton harvest. Ganiev reminded us that the acreage devoted
to cotton has dropped by 50 percent since independence. He
asserted there were no quotas on how much cotton a farmer must
produce, just "serious recommendations" that must be acknowledged
if a farmer wants government financing help. (COMMENT: These
"serious recommendations" are, in effect, quotas in all but name.
END COMMENT) Ganiev said the price for cotton in Uzbekistan is set
in accordance with world prices. He said Uzbek farmers buy
agricultural machinery produced both domestically and in Russia and
China, but he added that tractors manufactured by the U.S. firm
Case are just too expensive for Uzbek farmers. He repeated the
GOU's claim, a claim we have heard many times before, that the
issue of child labor in Uzbek agriculture is "fictitious" and
reiterated that no children under 14 can be involved in
agricultural work. He characterized the boycott of Uzbek cotton by
WalMart and other chains as "stupid." Unlike the U.S., Ganiev said
no genetically modified crops are grown in Uzbekistan. He
described Uzbek cotton as genetically and ecologically clean.




14. (SBU) Finally, Ganiev said he saw the Shanghai Cooperation
Organization (SCO) as having great economic potential. By removing
trade barriers, SCO could develop the overland transit corridor
from Beijing to Paris. He noted that China had opened a 10 billion
USD credit line to SCO member countries at 0.75-2.0 percent
interest rate. "We understand the nature of this loan," he said,
"but the U.S. relegates Uzbekistan to the 6th category of risk,
thereby making loans from the U.S. too expensive. At 8 percent,
these loans carry a higher interest rate than the average 4 percent
commercial loan." He continued that such limitations do not allow
U.S. companies, GE being a good example, to participate in Uzbek
projects directly.



SHAYKHOV RAMBLES ON

--------------




15. (SBU) In a long and rambling monologue, Alisher Shaykhov,
Chairman of the Chamber of Commerce and Industry of Uzbekistan,
said he liked to separate politics from business and that Uzbek
businessmen want to make a profit when and where they can. He
noted Uzbekistan's great potential for outsourcing but added that
Uzbekistan should be viewed not just as a source of raw labor. He
said that strong education in math and technical disciplines should
make the country particularly attractive for information technology
firms such as Microsoft and Cisco, but he deplored the lack of
cooperation with U.S. companies. Shaykhov asked why it is so
expensive to buy U.S. goods when China, in contrast, offers low
interest loans to Uzbek firms that want to buy Chinese
manufacturing equipment. Overall, Shaykhov said it was important
to look at the development of the U.S.-Uzbekistan trade and
business relationship over the long term, saying that he hoped he
was building "a program for my grandson."



UZBEKENERGO: ELECTRICITY

--------------

TASHKENT 00001595 004 OF 005



16. (SBU) DAS Krol's official meetings ended on a high note at
Uzbekenergo, where he met with Deputy Chairman Bakhodir
Abdurakhmanov. Krol began by asking directly about issues
involving Tajikistan and whether Uzbekistan intends to withdraw
from the Central Asia Power Grid (CAPG). Without answering
directly, Adkurakhmanov said the Tajiks had not been cooperating
with instructions issued by the Coordinating Dispatch Center (CDC)
in Tashkent and had, rather, been improperly taking electricity
from the grid above their allowed quota. Abdurakhmanov said
Kazakhstan had demanded Uzbekistan take steps to prevent this but
that rather than waiting, Kazakhstan had decided to pull out of the
grid unilaterally, leaving Uzbekistan as the only country from
which the Tajiks could still "steal" electricity. He continued
that Tajikistan had "stolen" 58 million kWh in October alone. In
August, Tajikistan did the opposite when it oversupplied the system
with so much excess power that it caused an overload leading to a
serious accident at Uzbekistan's Talimardjan Power Plant.




17. (SBU) Because of Kazakhstan's withdrawal and continuing
problems with Tajikistan, Abdurakhmanov said that on December 1
Uzbekistan would disconnect line No. 57 that provides power via
Guzar to that portion of Tajikistan that is served domestically by
the Nurek hydroelectric plant. As of that date Uzbekistan will
also cease operating its domestic grid in parallel with the Tajik
system. Uzbekistan will, however, continue to provide electrical
power to Khujand and northern Tajikistan and will seek to establish
bilateral power relationships with both Kyrgyzstan and Tajikistan.




18. (SBU) Abdurakhmanov described in detail plans to renovate
Uzbekistan's domestic electrical infrastructure, citing 38 projects
costing 3.5 billion USD in accordance with a presidential program
lasting through 2014. He said Uzbekenergo had just met with GE's
representative regarding the turbines that GE is to provide for
renovation of the Tashkent Power Plant, but he lamented that GE was
participating in this project not directly but through a consortium
of relatively unknown Eastern European firms. (COMMENT: Ganiev
had made a similar comment. This is good news. GE had been in
touch with us several times over the summer concerning fears that
it and the entire consortium was being discarded in favor of
Siemens. END COMMENT.) Abdurakhmanov described plans to upgrade
other gas-fired power plants and said the door is open to
participation by GE and other U.S. firms.




19. (SBU) In addition to providing improved electrical service in
Uzbekistan, Abdurakhmanov told us the infrastructure upgrades will
greatly improve efficiency and will, thereby, make more natural gas
available for export. Uzbekistan plans to increase coal-fired
power generation to 10 percent, build three relatively small
hydroelectric plants, and upgrade existing hydroelectric
facilities, all of which will make the country less dependent on
gas.



COMMENT

--------------




20. (C) DAS Krol was originally scheduled to meet not with
Abdurakhmanov but with Uzbekenergo Chairman Teshaboev and DPM
Shoismatov. We were informed this meeting would not be possible
because both Teshaboev and Shoismatov had been sent on an
inspection tour of the country in preparation for the winter energy

TASHKENT 00001595 005 OF 005


and heating season. We suspect, however, that the reason these two
high level officials were on travel was more specific: to inspect
the new 500 kW transmission line linking the Guzar and Surkhan
substations. This line, which is scheduled to become operational
on December 1, avoids Tajik territory and is the new element in
Uzbekistan's domestic grid that will make it possible to disconnect
line No. 57 to Tajikistan without disconnecting portions of
Uzbekistan as well.




21. (C) Although Uzbekistan can easily disconnect from the CAPG,
its domestic system still faces frequent deficits. The larger
issue, however, is water, the Achilles Heel of Central Asia. An
Uzbek withdrawal from the grid, absent an agreement with Tajikistan
on direct power purchases, could force Tajikistan to increase
winter water releases to its hydro plants. The rivers that feed
Tajik hydro plants account for as much as a third of the flow into
the Amu Darya; using more water in the winter could make for a very
dry planting season in the spring in Uzbekistan. Many in
Uzbekistan are aware of this risk and are wondering if this is a
case where politics will trump prudence. It would not be the first
time this happened in the region, though the usual pattern is to
find a last-minute way to avert crisis.




22. (U) DAS Krol has not had an opportunity to clear this cable.
NORLAND