07ASTANA2511, MERMOUD DISCUSSES PUBLIC-PRIVATE PARTNERSHIP INITIATIVE

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Reference ID Created Released Classification Origin
07ASTANA2511 2007-09-13 09:26 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO6438
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #2511/01 2560926
ZNR UUUUU ZZH
R 130926Z SEP 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 0649
INFO RUEHAST/USOFFICE ALMATY
RUCNCIS/CIS COLLECTIVE 0255
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 04 ASTANA 002511 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: ECON ECIN EINV ELTN PGOV PREL KZ
SUBJECT: MERMOUD DISCUSSES PUBLIC-PRIVATE PARTNERSHIP INITIATIVE 
WITH KAZAKHSTANI GOVERNMENT, BUSINESS 
 
Ref: Astana 1243 
 
ASTANA 00002511  001.2 OF 004 
 
 
1. (SBU) Summary.  In September 3-5 meetings with leaders of 
Kazakhstan's government and business, Special Representative for 
Commercial and Business Affairs J. Frank Mermoud discussed the 
planned October 22 Washington inauguration of the bilateral 
U.S.-Kazakhstani Public Private Partnership Initiative (PPPI) and 
the direction the Initiative should take.  S/R Mermoud's 
interlocutors reacted favorably to the proposed Initiative, hailing 
its focus on improving Kazakhstan's investment climate as well as 
its potential role in strengthening business, investment, economic, 
and educational links between the U.S. and Kazakhstan.  In 
particular, Prime Minister Masimov welcomed the idea of discussing 
"tough issues" that negatively impact Kazakhstan's business 
environment.  Masimov also assured S/R Mermoud that he will assist 
in achieving speedy resolution of two current hurdles on the 
bilateral economic front: the double-taxation Parker Drilling 
dispute and the Kazakhstani Customs Committee's newly introduced 
requirement for export declarations, an unintended consequence of 
which is prevention of entry of U.S. goods into Kazakhstan.  End 
summary. 
 
2. (SBU) S/R Mermoud met with the following representatives of the 
Kazakhstani government and business sector: 
 
September 3 (Almaty): 
-- Raimbek Batalov, President of the Forum of Entrepreneurs 
-- Nurlan Kapparov, President of KazInvest Bank 
 
September 4 (Almaty): 
-- Dennis Price, General Director of "Sayran" (a subsidiary of 
Kazakhstani construction conglomerate "Kuat"), and former head of 
Kazakhstan's Foreign Investors' Council (representing Access 
Industries) 
-- Gregory Vojack, Managing Partner - Bracewell & Giuliani, Central 
Asia 
-- Kenneth Mack, President of the American Chamber of Commerce, 
Partner - Chadbourne & Parke 
-- Mukhtar Ablyazov, Chairman of the Board - Bank Turan Alem 
-- Alexander Deriglazov, CEO - Meloman Ltd. 
 
September 5 (Astana): 
-- Azat Peruashev, Chairman - National Economic Chamber "Union 
Atameken" 
-- Serik Akhmetov, Minister of Transport and Communications 
-- Natalya Korzhova, Minister of Finance (with Nurlan Rakhmetov, 
Chairman of the Tax Committee) 
-- Karim Masimov, Prime Minister 
-- Kayrat Kelimbetov, Chairman - Kazyna Sustainable Development 
Fund. 
 
The Initiative - the Government Perspective... 
-------------------------------------------- 
 
3. (SBU) S/R Mermoud's discussions on the focus of the 
soon-to-be-inaugurated bilateral U.S.-Kazakhstani Public-Private 
Partnership Initiative followed his meetings in April (reftel).  The 
Initiative's stated focus on addressing the key problems in the 
Kazakhstani business environment (particularly corruption), 
facilitating the Kazakhstani government's (GOK) goals of increasing 
economic competitiveness and diversifying away from energy, and 
strengthening links (including educational) between the two 
countries' private sectors was broadly welcomed by GOK officials, as 
well as by executives of Kazakhstani companies and U.S. companies 
operating in Kazakhstan.  Prime Minister Masimov said he plans to 
attend the October 22 PPPI inauguration in Washington and was 
receptive to the idea of an open discussion of the problems plaguing 
Kazakhstan's business environment.  "It is important to address the 
tough issues," stated Masimov, adding that the discussion "should 
not be sweet."  Masimov added that he would like to make his October 
trip to the U.S., his first as a prime minister, a strong 
demonstration of the importance of U.S.-Kazakhstani relations and of 
Kazakhstan's affinity for western standards.  Transport Minister 
Akhmetov drew links between the PPPI and Kazakhstan's domestic 
public-private partnership program, "the Thirty Corporate Leaders" 
(announced earlier this year, see reftel), stating, "we do need 
feedback from the private sector" and adding that he would be 
"grateful for the invitation" to the PPPI inauguration. 
 
...And the Private Sector View 
---------------------------- 
 
4. (SBU) Raimbek Batalov, President of the Almaty-based Forum of 
Entrepreneurs (as well as a prominent businessman, heading the 
"Raimbek Group," a large retail chain), was strongly supportive of 
the Initiative.  He outlined three prerequisites for the 
Initiative's success: 
 
ASTANA 00002511  002.2 OF 004 
 
 
-- The idea should be embodied into a program ("we are ready to work 
on this," Batalov added); 
-- Relevant business associations should be brought in (citing the 
Forum and Atameken [see below]) 
-- Financing needs to be arranged (calling this issue "a sore 
point," since Kazakhstani associations and the business sector are 
"still young" and suggesting a combination of
government support, 
self-financing, and corporate financing). 
 
5. (SBU) Batalov also drew parallels between the thrust of the 
Initiative and his Forum's priorities.  The Forum, he said, 
currently focuses (i.e. produces research and analysis) on the 
following issues: 
-- Struggle with corruption 
-- Social responsibility of small- and medium-sized enterprises 
(SMEs) 
-- Mini-MBA (training for small business) 
-- Transit corridors 
-- Trans-border trade 
-- Tax & customs 
Batalov added that Kazakhstan is currently facing a "crisis" in the 
lack of skilled labor: there are "lots of lawyers and economists but 
very few welders and machine operators." 
 
6. (SBU) Batalov cited a number of examples of the government's 
"clumsiness," particularly the recent (and ongoing) aftermath of the 
Customs Committee's introduction of an export declaration 
requirement for goods entering Kazakhstan (see paragraph 15).  He 
also mentioned the implementation, by the Ministry of Industry and 
Trade, of the "made in Kazakhstan" stamp.  Each stamp, according to 
Batalov, costs KZT 3-4 (2.5-3.5 cents) to produce; the Ministry, 
however, has failed to print enough stamps, leading to 2.5 month 
delays for importation of some products, such as alcohol beverages. 
Another recent example, Batalov continued, is the Environment 
Ministry's new requirement for all automobile owners to fill out a 
declaration form on the condition of his vehicle.  As a result, 
Batalov said, "huge queues can be expected." 
 
7. (SBU) Batalov clearly saw a strong nexus between the Forum's work 
and the PPPI's priorities.  He expressed genuine regret about being 
unable to attend the October 22 inauguration due to a long-standing 
personal commitment and proposed sending to the event his deputy, 
the Forum's Executive Director, instead.  Finally, he sounded a 
cautiously optimistic, if mixed, note about his Forum's coexistence 
with the "Union Atameken" (recently rechristened from a "Union of 
Entrepreneurs" into a "National Economic Chamber").  Although, 
Batalov said, Atameken is still using "uncompetitive" means to 
secure for itself the official status of a national trade chamber, a 
"division of labor" of sorts is emerging between the Forum and the 
Atameken.  The former, Batalov said, focuses on small- and 
medium-sized enterprises; the latter is an umbrella organization for 
various business associations and large companies. 
 
8. (SBU) Atameken's Chairman Peruashev expressed a very strong 
interest in developing links with the U.S. business community in 
general and participating in the PPPI specifically.  Although 
Atameken is often seen as a semi-official, instinctively 
pro-government association (talking to Atameken, said Bank Turan 
Alem's (BTA's) Ablyazov, is "like talking to a government 
official"), Peruashev did express criticism toward some of the 
government's economic policies.  The bulk of this criticism fell on 
development institutions: "There is a growing view in the business 
community that development institutions are crowding out the real 
private business, because they are doing business themselves." 
Peruashev made it clear that his intended target was Kazyna, as he 
went on to bemoan some of Kazyna's development institutions' 
excessive focus on short-term profitability at the expense of 
innovation.  "We know," he said, "how development institutions 
operate in Russia and eastern Europe.  We would like to learn how 
they operate in western Europe and the U.S."  Peruashev welcomed S/R 
Mermoud's suggestion to facilitate Kazakhstani-U.S. private sector 
discussions by engaging Atameken with AmCham.  (Comment: While 
Atameken still appears to be a bloated, government-affiliated 
organization, there is a discernible and welcome shift in its 
willingness to offer criticism of Kazyna's (i.e. the government's) 
investment policy.  End comment.) 
 
9.  (SBU) Peruashev portrayed Atameken as a liaison of sorts between 
business and the government.  The organization, he explained, makes 
legislative proposals, particularly in the tax, customs, and 
agricultural arenas.  Other concerns include corruption; 
"raidership;" government interference in business; and 
administrative burdens for opening, running, and closing a business. 
 Peruashev also said that Atameken helps support actual projects by 
Kazakhstani entrepreneurs by "bringing" such projects to development 
institutions.  Finally, while he never actually acknowledged the 
Forum of Entrepreneurs, Peruashev echoed Batalov by stating that 
 
ASTANA 00002511  003.2 OF 004 
 
 
Atameken's focus is on medium-sized and large business. 
 
10. (SBU) Ken Mack of the (Kazakhstan-based) American Chamber of 
Commerce expressed great enthusiasm for the PPPI as a vehicle for 
addressing the problems of the Kazakhstani business climate.  He 
stated his opinion that corruption is "the number one problem, the 
root of all the other ones."  Mack told S/R Mermoud that he has been 
pursuing with Batalov the idea of a joint AmCham-Forum of 
Entrepreneurs paper, which he hopes to have ready by the October 
22nd  PPPI inauguration.  This paper, Mack said, will go into detail 
on how corruption is damaging the economy and provide ideas on how 
it can be stemmed. 
 
11. (SBU) Other representatives of the private sector also welcomed 
the PPPI's goal of raising the difficult issues and shedding light 
on the obstacles to business development in Kazakhstan.  "Another 
voice would be helpful; in this culture persistence pays off," 
stated Dennis Price (of Kuat).  Ablyazov of BTA bemoaned the lack of 
democratic institutions, particularly of a vibrant media, of 
regional officials' accountability (via elections), and of a strong 
judiciary.  He identified these deficits as the root causes of 
corruption and portrayed the government's efforts against corruption 
as window dressing.  Ablyazov endorsed the PPPI's focus on 
corruption, stating, "the more comments like these, the more they 
affect our government...  But the real change will come when 
business penetration is such that people have something to lose and 
something to defend."  He added, however, that as the governing 
elite acquires its own businesses, its interests are becoming more 
similar to those of business, leading to an "evolutionary change." 
 
The "Thirty Corporate Leaders:" Kazakhstan's Domestic PPP 
------------------------------- ------------------------- 
 
12. (SBU) Private sector representatives expressed some optimism 
about the GOK's recently launched domestic public-private 
partnership program, known as "the Thirty Corporate Leaders." 
Batalov called it "not a bad idea."  The plan, he explained, is to 
quickly launch large projects, which would then "pull up" 
medium-sized companies.  "Of course," Batalov mused, "a lot of our 
ideas start out well," strongly implying that implementation tends 
to be the problematic part.  Ablyazov sounded decidedly positive on 
the program, which he described as a m
echanism that forces 
bureaucrats ("from above") to assist business development (in lieu 
of democratic pressure acting "from below").  Ablyazov stated that 
even if only ten successful projects emerge from the program, it 
will still be a major success.  "I believe that in ten years," he 
stated, "this will be a diversifed economy."  Nurlan Kapparov of 
KazInvest Bank sounded equally positive.  The program, he said, 
facilitates close interaction between business and the president on 
a group basis (instead of on individual basis "like before"). 
Although the program does not focus on solving problems for all 
businesses (beyond the chosen thirty or so), it at least initiates 
the conversation in that direction.  "You do thirty half-billion 
dollar projects," summed up Kapparov, "and you've diversified the 
economy." 
 
East-West: The Way Ahead? 
------------------------- 
 
13. (SBU) A theme featuring in several of S/R Mermoud's discussions 
was the prospect of establishing an East-West corridor across 
Kazakhstan for transportation of goods from China to Europe. 
Kapparov stated that such a corridor must bypass Russia, which has 
its own shared border with China and is, therefore, a "competitor." 
The corridor, he explained, would rely on four terminals: in western 
China, on Kazakhstan's Chinese border, on Kazakhstan's Caspian 
coast, and on Georgia's Black Sea coast.  The total cost of the 
project, Kapparov said, would be $1.5-2.0 billion.  Ablyazov 
trumpeted the same idea which, he said, makes sense both politically 
and economically due to Russia's "inflexibility."  The corridor, he 
said, would reduce the transportation time of Chinese goods to 
Europe by 5-6 days (compared to the current sea route) as well as 
lower the cost.  According to Ablyazov, the GOK has already included 
the transport corridor project into its "Thirty Corporate Leaders" 
program. 
 
14. (SBU) Although Transport Minister Akhmetov did not mention the 
East-West corridor, he spoke extensively about transportation 
infrastructure development plans, which appeared consistent with 
building such a corridor.  He mentioned the development of Caspian 
ports, holding tenders for construction of railroads, and building 
toll highways (pointing out that these would likely be the first 
such highways in the CIS).  "We have huge territory and are 
landlocked.  Development of railroads and highways is very important 
to us," said Akhmetov, adding that he sees opportunities for 
involvement by U.S. companies in the development of various 
infrastructure and logistical projects.  S/R Mermoud suggested 
 
ASTANA 00002511  004.2 OF 004 
 
 
consideration of north-south transportation links, particularly to 
Afghanistan, in addition to the East-West corridor. 
 
15. (SBU) Kazyna's Chairman Kelimbetov did provide an indication of 
some Kazakhstani interest in developing regional north-south 
economic links.  Kazyna, Kelimbetov said, is looking at creation of 
joint investment funds with Kyrgyzstan and Tajikistan (each with the 
starting capital of about $100 million).  He added that Kazyna is 
also considering setting up a joint equity fund with Afghanistan but 
called this project "terribly difficult."  At the same time, 
Kelimbetov noted, Kazyna is looking to create a joint investment 
fund with Russia, with a starting capital of $1 billion. 
 
 
Customs and Taxes: the Latest Sagas 
----------------------------------- 
 
16. (SBU) Prime Minister Masimov assured S/R Mermoud that the two 
issues currently affecting U.S. commercial interests in the areas of 
customs and taxation are "within [his] competence]" and should soon 
be resolved.  Commenting on the long-standing Parker Drilling 
dispute under the bilateral U.S.-Kazakhstani tax treaty, Finance 
Minister Korzhova appeared to portray this as an isolated case and 
not a negative signal about Kazakhstan investment climate.  The more 
recent customs problem emerged on August 26, when the Customs 
Committee (which operates under the aegis of the Ministry of 
Finance) abruptly introduced a requirement for submission of export 
declarations for goods entering Kazakhstan.  Since U.S. regulations 
prohibit submission of such declarations, the inflow of U.S. goods 
into Kazakhstan abruptly stopped.  Moreover, new customs regulations 
appear to have briefly prevented entry of hard currency into the 
country, leading to a momentary, panicky sell-off of the tenge. 
Ablyazov called the episode "an example of state institutions 
malfunctioning."  Batalov commented wryly, "in 'normal' countries, 
such measures - if enacted - are well-announced."  S/R Mermoud noted 
to Prime Minister Masimov the importance of resolving both of these 
issues prior to the October 22 inauguration of the bilateral 
Initiative. 
 
Additional Engagement and Advocacy 
--------------------------------- 
 
17. (SBU) S/R Mermoud encouraged further U.S.-Kazakhstani 
public-private engagement on several fronts.  He suggested to Prime 
Minister Masimov the possibility, schedule permitting, of arranging 
a New York Stock Exchange "bell-ringing" during the latter's October 
visit to New York; Masimov responded favorably.  S/R Mermoud also 
recommended that Tax Committee Chairman Rakhmetov engage in dialogue 
with AmCham to facilitate a direct exchange of views and help ensure 
that foreign investors' concerns on taxation are addressed by the 
policymakers.  Rakhmetov accepted the idea.  Further, S/R Mermoud 
encouraged the CEO of Meloman, a pioneer Kazakhstani conglomerate 
importing licensed DVDs and CDs from the U.S. to Kazakhstan, to 
engage with AmCham. 
 
18. (SBU) S/R Mermoud advocated on behalf of Boeing in his 
discussions with Prime Minister Masimov and Transport Minister 
Akhmetov.  (Note: Air Astana, Kazakhstan's de facto domestic 
airline, is considering purchasing wide-body aircraft.  End note.) 
Masimov and Akhmetov praised Boeing but were non-committal in their 
responses.  S/R Mermoud suggested to Masimov the possibility of 
having a signing ceremony with Boeing during his October trip to the 
U.S. 
 
Comment 
------- 
 
19. (SBU) Comment.  Some of S/R Mermoud's more outspoken 
interlocutors astutely pointed out that the development of 
democratic institutions is the surest means of stemming corruption 
that is poisoning Kazakhstan's otherwise attractive business 
environment.  At the same time, there was a broad consensus that the 
proposed bilateral Public-Private Partnership Initiative can serve 
as an effective mechanism for addressing the difficult issues and 
promoting reform.  Combining the tough discussions with appropriate 
"sweeteners" - such as business and educational exchanges and, 
particularly, face time with potential U.S. investors - is likely to 
pique Kazakhstani interest and make the GOK more receptive to 
constructive criticism.  End comment. 
 
20. (U) This cable has been cleared by Special Representative 
Mermoud. 
 &#x0
00A;ORDWAY

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