KAZAKHSTAN: GE EXECUTIVE DISCUSSES REGIONAL PLANS

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000159

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STATE FOR SCA/CEN, EEB
STATE PASS TO USTDA

E.O. 12958: DECL: 03/06/2059
TAGS: PGOV PREL ECON ELTN RS TX KZ
SUBJECT: KAZAKHSTAN: GE EXECUTIVE DISCUSSES REGIONAL PLANS

Classified By: Charge Pamela L. Spratlen, 1.4 (b),(d)


1. (SBU) SUMMARY: An American executive with General
Electric's Transportation Division visited the Embassy on
February 3 to discuss the company's plans to assemble
locomotives in Kazakhstan and expand into the Russian market.
He identified financial and political challenges the company
faces, and said the customs union with Russia and Belarus is
unlikely to change the conservative culture or monopolistic
practices of Russia's state railway company. He also said
draft U.S. legislation to strengthen sanctions against Iran
would be a "catastrophe" for U.S. businesses that invest
abroad. END SUMMARY.

EXIM WANTS A SOVEREIGN GUARANTEE


2. (C) On February 3, Richard Herold, International
Government Relations Leader for General Electric (GE)'s
Transportation division, briefed acting Pol/Econ chief on
GE's plans and prospects for assembling and manufacturing
locomotives and diesel engines in the region. (NOTE: Herold
is a former Foreign Service Officer, fluent in Chinese, who
served primarily in Asia and Africa. After leaving the
Foreign Service in 1990, he joined British Petroleum, where
he worked for 19 years, including during the acrimonious
dispute between BP and its Russian partners in the TNK-BP
joint venture. END NOTE). Herold said that GE has already
assembled one Evolution-class locomotive at the new Astana
plant, and plans to produce at total of 20 locomotives by the
end of 2010. He added that GE is in talks with National
Welfare Fund Samruk-Kazyna, which owns national railway
company Kazakhstan Temir Zholy (KTZh),to sell an additional
$150 million in locomotive kits. Herold said that the U.S.
Export-Import Bank (EXIM) has insisted on a sovereign
guarantee before it agrees to provide financing for the
transaction. However, according to Herold, Samruk-Kazyna's
chairman Kairat Kelimbetov told GE on February 3 that he was
reluctant to ask the government to provide a sovereign
guarantee, saying, "our word should be good enough." Herold
said that negotiations with EXIM and Samruk-Kazyna were
ongoing.

GE EAGER TO ENTER RUSSIAN MARKET


3. (C) Herold also discussed GE's ambitions to sell its
locomotives on the Russian market. He said that, on paper,
the Customs Union with Russia, Kazakhstan, and Belarus should
give GE an opportunity to compete with Russian locomotive and
diesel engine manufacturers. However, he admitted that
Russia's state-owned railway company Russian Railways (RZhD)
has strong, monopoly control over the Russian market, and
breaking in will not be easy. Herold said RZhD is "a huge,
sprawling empire. It's worse than Gazprom." According to
Herold, the head of RZhD, Vladimir Yakunin, is an old friend
of Russian Prime Minister Putin, and a "fellow member of the
St. Petersburg mafia." He added that Yakunin has made
sizeable cash payments to Putin, and speculated that Putin's
net worth is well over $10 billion. (NOTE: RZhD is one of
the largest railway companies in the world, with more than
1.2 million employees. It accounts for nearly 4% of Russia's
GDP and handles approximately 80% of all freight in Russia.
Yakunin graduated from the Leningrad Institute of Mechanics
in 1972, worked as a senior engineer in the Soviet Council of
Ministers for Foreign Trade, and served as First Secretary of
the USSR's Permanent Representative Office at the United
Nations from 1985-1991. END NOTE).

PRESSURE TO INCREASE LOCAL CONTENT


4. (SBU) According to Herold, GE is pleased with the success
of its locomotive assembly plant in Astana, but he said the
company has come under increasing pressure to raise the
percentage of local content among staff and subcontractors.
Herold said he understood the government's position, but

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stated, "there simply is not enough talent out there now" to
meet GE's demand for experienced managers and engineers.

IRAN SANCTIONS BILL


5. (C) Herold also said GE was concerned about draft U.S.
legislation that would strengthen the sanctions regime
against Iran. He said that if the legislation is adopted as
currently drafted, it would sanction companies that do
business with companies that do business with Iran. He said
the consequences for U.S. trade and investment would be
"catastrophic." For example, he noted that GE's Astana
locomotive assembly plant is a joint venture with KTZh, and
he said that KTZh is in detailed discussions with the
national railway company of Turkmenistan to build a rail line
to Iran. Herold speculated that GE would be subject to
sanctions under the draft U.S. law, and would lose EX-IM
financing for future expansion projects. (NOTE: On February
5, Turkmenistan's Ministry of Foreign Affairs released a
statement following a meeting with an Iranian delegation,
calling construction of a rail link from the city of Bereket
to the Iranian border, "an important factor in the develop of
an unbiased, mutually beneficial relationship with Iran."

NAZARBAYEV'S HEALTH


6. (C) Before the meeting adjourned, Herold said that
President Nazarbayev was scheduled to meet GE's CEO Jeff
Immelt last summer, but cancelled the meeting "for health
reasons." Herold said he was told that Nazarbayev flew to an
undisclosed location in Europe for a medical procedure.


7. (SBU) COMMENT: Senior government officials often cite
GE's investment in Kazakhstan as a perfect example of the
type of investment they would like to attract, particularly
as the country seeks to diversify its economy. Certainly
GE's locomotive assembly plant is an important investment.
But the true test of Kazakhstan's commitment to economic
diversification will be its support of GE's more ambitious,
long-term plans to manufacture locally and export regionally
its locomotives and engines, rather than simply assembling
kits that were made in the USA. END COMMENT.
SPRATLEN