07ASTANA856, GE SEEKS TO BUILD ON SUCCESSES IN KAZAKHSTAN

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Reference ID Created Released Classification Origin
07ASTANA856 2007-04-04 09:32 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO4140
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #0856/01 0940932
ZNR UUUUU ZZH
R 040932Z APR 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 8987
INFO RUCNCIS/CIS COLLECTIVE 0111

UNCLAS SECTION 01 OF 02 ASTANA 000856 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ENRG EAIR ETRD EPET KZ
SUBJECT: GE SEEKS TO BUILD ON SUCCESSES IN KAZAKHSTAN 
 
REF: A) Astana 753 B) 06 Astana 899, C) 04 Almaty 483, D) 06 Astana 
 
17 
 
1. (SBU) Summary.  On March 13 and 29, high-ranking GE executives 
discussed with Ambassador Ordway the company's plans for Kazakhstan. 
 Six months after signing a contract, valued at about $700 million, 
with Kazakhstan Temir Zholy (KTZ, Kazakhstan's national railroad 
company), the company held in Astana a "GE Day" and is seeking to 
broaden the range and depth of its involvement in Kazakhstan.  End 
summary. 
 
EYING THE FUTURE... 
------------------- 
 
2. (SBU) Astana's GE Day, held on March 31, attracted high-level GE 
Executives (including Vice Chairman John Rice and President & CEO of 
GE Russia/CIS Ronald Pollett), as well as top representatives of 
Kazakhstan's economic elite (including KTZ President Yerlan 
Atamkulov and KazMunaiGas President Uzakbay Karabalin). 
(Separately, Rice met with Kazakhstan's Prime Minister, Karim 
Masimov, with a number of other ministers present.)  GE's 
presentation focused on the breadth of the company's reach, 
featuring its products and services in transport, industry, 
healthcare, finance (corporate and retail), and media. 
 
3. (SBU) GE's ambitions in Kazakhstan are, indeed, broad. 
Discussing with the Ambassador their plans to enter the healthcare 
market, the GE executives said that they are currently holding 
discussions with the city of Astana but noted their concerns about 
corruption.  In an earlier conversation, Pollett had noted that 
dealing through intermediaries cost the end-user as much as a 100 
percent markup; GE wanted to sell directly to the customer.  The 
Ambassador acknowledged corruption as a factor but remarked that the 
combination of a superior product and persistence is capable of 
overcoming it.  The Kazakhstanis, he said, admire U.S. technology in 
the medical field. 
 
...AND BUILDING ON THE PRESENT 
------------------------------ 
 
4. (SBU) GE executives told the Ambassador that the company's 
operations in Kazakhstan currently focus on three areas: energy, 
railroads, and aviation. 
 
ENERGY 
------ 
 
5. (SBU) In the energy sector, GE is not involved in exploration and 
production, but supplies the oil majors with machinery.  In regard 
to their interest in entering Kazakhstan's electricity-generation 
market, the executives stated that they see the GOK's penchant for 
nuclear power as politically motivated, since it does not make sense 
economically.  (Note: Although the GOK's nuclear power vision may 
have recently suffered a setback, it appears to remain alive.  Ref 
A.  End note.)  The low price of electricity in Kazakhstan at the 
wholesale level - currently 1" per kilowatt - is, they said, a 
result of the country's abundance of coal.  Generating electricity 
using clean-coal technology, they stated, is 25% more expensive than 
using pulverized coal.  GE is working on reducing the gap but 
"hitting some speed bumps."  The Ambassador noted that the future 
economics of power generation in Kazakhstan partly depends on the 
path of Kazakhstan's environmental regulation. 
 
RAILROADS 
--------- 
 
6. (SBU) On the railroad front, GE is modernizing KTZ's 400 
Russian-built locomotives.  The contract signed in September 2006 
calls for GE to supply to KTZ 310 new, state-of-the-art locomotives, 
of which 10 will be built in the U.S. and 300 will be assembled from 
U.S.-built "kits" at a plant near Astana. 
 
7. (SBU) GE executives expressed a slight concern about the 
repercussions of Samruk's takeover of KTZ.  (Note: Kazakhstan Temir 
Zholy is one of the national companies included under the umbrella 
of the National State Holding Company "Samruk."  Ref B.  End note.) 
KTZ, they said, had been making timely payments to GE in accordance 
with their agreement until about four months ago.  KTZ has assured 
GE that the problem is temporary, and that Samruk is merely 
reviewing contracts entered into by its component institutions "to 
ensure that they are good for Kazakhstan."  (Note: Samruk's takeover 
of national companies has not been entirely smooth.  Resistance from 
KTZ, whose president Atamkulov is known as a political force in his 
own right, has been particularly strong and apparent.  End note.) 
 
AVIATION 
-------- 
 
8. (SBU) In regard to aviation, the GE executives noted that the 
company supplies 70% of the world's airplane engines.  They remarked 
 
ASTANA 00000856  002 OF 002 
 
 
that GE had a "terrible experience" with Air Kazakhstan but 
expressed a cautious interest in working with Air Astana.  (Note: 
Air Kazakhstan was Kazakhstan's national air carrier until it went 
bankrupt in 2003.  Air Astana, in which BAE has a 49 percent share, 
is now the national carrier.  See Ref C.  End note.)  The Ambassador 
noted two fa
ctors working in Air Astana's favor: on domestic routes, 
the airline has a monopoly that the government seems committed to 
defending, while international routes to Kazakhstan are underserved 
by foreign carriers. 
 
9. (SBU) GE is strongly skeptical of the GOK's vision of 
establishing in Astana a regional hub for airplane maintenance (Ref 
D).  The executives said they have told the GOK that they see the 
maintenance facility - which envisions attracting planes from 
Russia, the Caucasus, Central Asia, and South Asia - as economically 
unsound.  The Ministry of Transport, however, appears to persist 
with this plan.  GE's concern is that "selling the government what 
it does not need" may adversely affect the company's potential to 
make future deals.  The Ambassador noted the political dimension of 
this plan, comparing it to the GOK's previous vision of constructing 
a standard-gauge "railroad to nowhere" from western China to western 
Kazakhstan (Ref D).  (In a separate conversation on the margins of 
GE Day, a Deputy Minister of Transportation told the Ambassador that 
the ministry now realized they needed a firm market of 100 engines 
to make the project economically feasible, and that they are now 
researching this aspect.) 
 
COMMENT 
------- 
 
10. (SBU) Comment:  GE presents an interesting case study of a U.S. 
investor making big strides into Kazakhstan's non-extractive sector. 
 Their success is based on having a long-term view of the country, 
clearly superior projects, and building relationships.  How the 
company fares may serve as an indicator of Kazakhstan's investment 
climate for non-energy investors.  So far, the signs appear 
generally positive.  Still, GE's example may be somewhat atypical in 
that its size and profile will likely provide partial insulation 
from the potential obstacles, particularly corruption, that smaller 
entrants into the non-extractive sector may face.  End comment. 
 
ORDWAY

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