NORTHERN KAZAKHSTAN WELCOMES CUSTOMS UNION

UNCLAS SECTION 01 OF 03 ASTANA 000010 SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/RUS, EEB E.O. 12958: N/A TAGS: PGOV PREL ECON EAGR ETRD SOCI RS KZ SUBJECT: NORTHERN KAZAKHSTAN WELCOMES CUSTOMS UNION ASTANA 00000010 001.2 OF 003 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: During a series of visits to Kazakhstan's two northernmost provinces, local officials praised their regions' economic stability and growth potential. Accounting for the largest share of Kazakhstan's 20.8 million ton grain harvest, much of which is exported via Russia, Kostanai and North Kazakhstan Oblasts act as Kazakhstan's "front door to Russia." Local officials welcomed the Customs Union with Russia and Belarus, which entered into force on January 1. Although few new buildings and glitzy high-rises dot their big cities, Kazakhstan's northernmost provinces realistically epitomize the country's economic accomplishments and challenges. END SUMMARY. KAZAKHSTAN'S DOOR TO RUSSIA ¶3. (SBU) Sharing a 2400 kilometer border with Russia, Kostanai and North Kazakhstan Oblasts depend economically on agriculture and trade with Russia. In 2008, Kazakhstani-Russian trade turnover exceeded $19.9 billion. Kazakhstan expects to export at least half of its 2009 grain harvest, much of which will transit through Russia to countries in the Commonwealth of Independent States and ports on the Azov, Baltic, and Black Seas. Kostanai and North Kazakhstan Oblasts produce the majority of Kazakhstan's high-quality wheat, which often is mixed with Russian grain and milled into flour. RURAL KAZAKHSTAN ¶4. (SBU) Sparsely populated, more than 60% of these regions' residents live in rural areas. Despite record harvests in recent years, their per capita GDPs of $5,264 (Kostanai Oblast) and $3,120 (North Kazakhstan Oblast) are well below the national average of $6,870. Officials and local residents assert that economic growth is steady, but inconspicuous, with capital cities noticeably eschewing ostentatious high-rise buildings. KOSTANAI ENTREPRENEURIAL UNIONS PREDICT ECONOMIC GROWTH ¶5. (SBU) On December 28, Peter Sukhinin, President of the Association for the Support of Entrepreneurial Activity in Kostanai Oblast, told PolOff the region follows the national trajectory, with steady improvements to its business climate. He particularly highlighted the national and regional governments' allocation of significant sums of money to promote development. Sukhinin noted the economy could grow even faster, but is still restrained by the dominance of large industrial conglomerates, with small and medium business generating only 20% of tax revenue. Sukhinin highlighted Kostanai's large ore-extraction enterprises in Lisakovsk and Rudny, aluminum production in Arkalyk, and the agricultural conglomerate, Ivolga Holding. ¶6. (SBU) Sukhinin drew a parallel between the expansion of his association, which includes a large number of businesses in a wide array of sectors (e.g., services, publishing, trade, and agricultural processing),and Kostanai's continued growth. According to Sukhinin, his organization supports small and medium-sized businesses holding regular meetings with entrepreneurs and authorities, and by publishing business brochures with the local government. He credited his visit to the United States with giving him the idea for the brochures, the most popular of which concern how to handle licensing and inspection processes. Its cooperation with other NGOs includes its recent assistance to an organization of disabled persons to publish 1000 books. ¶7. (SBU) Another affiliated entrepreneurial organization, the Union of Individual Entrepreneurs of Kostanai Oblast, provides a forum for consultation on common problems -- such as tax issues -- about which it then lobbies the local and national government. (NOTE: Tatyana Zueva, the Akimat's Internal Policy Department representative, confirmed the active dialogue with entrepreneurs, which she claimed gradually is improving the legal code. END NOTE.) In addition, Chairwoman Gulnara Uralova highlighted the fund established in 2003 to provide small loans to entrepreneurs through a second-tier bank at a constant rate of 14% -- in contrast to typical commercial bank ASTANA 00000010 002.2 OF 003 interest rates of 25-30%. OFFICIALS AND BUSINESSPEOPLE PRAISE BUSINESS CLIMATE ¶8. (SBU) According to Roza Goryannaya, Director of the Entrepreneurship Section of Kostanai Oblast's Department of Industry, half of Kostanai's small businesses are trade-oriented. She expressed hope for small- and medium-sized enterprise growth, especially in the industrial sector, but admitted such development requires significant capital investments. ¶9. (SBU) Nikolai Fast, owner of the Lux-Voda company, described a paucity of qualified lawyers and accountants, frequent legislation changes, and problems with banking services as challenges. The quiet-spoken, middle-aged Fast also complained about tax problems and government inspections lasting up to four months. Fast acknowledged entrepreneurial associations' value in pooling resources to hire well-qualified accountants and attorneys, whose services would otherwise be prohibitively expensive. He noted steady improvement in business conditions, and, with hearty assent from all the other roundtable participants, favorably compared Kostanai's business climate to that of Russia and other Kazakhstani regions. ¶10. (SBU) Marina Byt, an elegantly dressed middle-aged clothing importer, recounted the start to her career in outdoor bazaars in the 1990s and her expansion courtesy of Kazakhstan's first loans. Today, local entrepreneurs are struggling to survive the economic crisis, she said, especially in light of the credit crunch and diminished demand. Byt welcomed a Japanese-government grant for a business-development workshop and South Korean business-promotion assistance. As the Chairperson of the Supervisory Council of the Union of Individual Entrepreneurs, Byt attended in Israel a December international workshop for businesswomen, and invited a business expert to visit Kostanai under an Israeli program. Byt highlighted international trade fairs' utility for Kazakhstani entrepreneurs, and called for expanded interaction with U.S. business experts. NORTH KAZAKHSTAN OFFICIALS PRAISES ECONOMIC GROWTH ¶11. (SBU) In North Kazakhstan, Erlik Zhandildin, Director of the Oblast Akimat's Internal Policy Department, described the overall economic situation in North Kazakhstan as excellent, and emphasized the oblast's production of half of Kazakhstan's 2009 wheat harvest. Quoting an old Soviet adage, "as long as there will be bread, there will be song," Zhandildin said good salaries, reliable pensions, large harvests, and development have made the region popular, including for many ethnic Russians and Germans who previously emigrated abroad. ¶12. (SBU) Zhasulan Shaymerdenov, Director of the Industrial Division, highlighted North Kazakhstan Oblast's significant industrial potential, especially in the production of grain products, including bio-ethanol. The oblast manufactures biochemical products and heavy-industry machinery, including mobile drill rigs for KazMunaiGas (KMG) and specialized railcars for grain and machinery for Kazakhstan's national railway Temir Zholiy (KTZh). Other enterprises include a joint Kazakhstani-Turkish elevator venture, a flour refinery, and candy, pasta, and dairy-product companies. Since several small and medium-sized sausage companies operate in the region, Shaymerdenov called meat production a promising field. ¶13. (SBU) Under President Nursultan Nazarbayev's policy of industrialization, Shaymerdenov said his department had to design and implement by January 1 a new development plan, for which the government will provide credit. The region's administration soon will ratify 23 agricultural and industrial projects worth over $1 million, including a pasta-production program. The region also is building a plant to produce locomotive-security and railroad-communication equipment for KTZh. ¶14. (SBU) Shaymerdenov underlined North Kazakhstan Oblast's overall economic stability, noting physical output of GDP increased steadily ASTANA 00000010 003.2 OF 003 despite the financial crisis and corresponding decreases in investments. Shaymerdenov, who grew up in an agricultural village in the region, attributed this steadiness to the region's history as a land of farmers, where people tend to be cautious. "We do not boast too much when times are good. We just buy something new, such as a tractor, or more land." CAUTIOUS OPTIMISM IN KOSTANAI ABOUT CUSTOMS UNION ¶15. (SBU) PolOff's interlocutors in Kostanai do not expect any immediate economic effect from the Customs Union. Nikolay Fast stated that only the Customs code will change on January 1. He said Kazakhstani Customs Services have become "the most professional on the border," but complained that other agencies, such as Sanitary and Epidemiological, Border Guard, and Immigration Services, make border crossings long and difficult. Fast asserted it takes about 12 hours for his trucks to complete border-crossing and inspection procedures, and welcomed service and transparency improvements potentially generated by the Customs Union, especially in relation to sanitation inspections. Byt expressed hope that the Customs Union will boost trade and lift tight restrictions on fur imports, which value-added-tax issues have also complicated. ¶16. (SBU) Sukhinin and Goryannaya highlighted the lengthy harmonization process required by differences in the economic and legal systems of Kazakhstan, Russia, and Belarus. However, they still hailed the Customs Union as "a step forward" due to increased competition and an expanded market. He conveyed his optimism that many Kostanai businesses will outperform their Russian counterparts and benefit from the Customs Union given the cooperation of Kostanai entrepreneurs with each other and local authorities. OFFICIALS IN NORTH KAZAKHSTAN LOUDLY PRAISE CUSTOMS UNION ¶17. (SBU) Zhandildin predicted the Customs Union's "very positive results" on North Kazakhstan Oblast due to its integration with Russia. (NOTE: Flights from Petrapavlovsk to Astana are offered only twice per week, and take an hour and a half, whereas Omsk is located only three hours by car or train. END NOTE.) Zhandildin highlighted the similarities of Kazakhstan's and Russia's agricultural industries and processing systems. He asserted that consumers will benefit from the Customs Union, because it will force competition and encourage quality improvements. Although he acknowledged difficulties in the initial post-implementation phases, Zhandildin highlighted Kazakhstani companies' competitiveness in selling steel, non-ferrous metals, copper, zinc, aluminum, and wheat. ¶18. (SBU) COMMENT: Local businesspeople and officials in Kostanai and North Kazakhstan Oblasts are proud of their region's steady economic growth, and cautiously optimistic about the Customs Union's likely effect. The trends found in Kazakhstan's northernmost provinces -- where oil and gas income does not skew growth like in Atyrau, Almaty, and Astana -- realistically epitomize Kazakhstan's economic development and its reliance on heavy industry and agriculture. END COMMENT. HOAGLAND