09ASTANA21, KAZAKHSTAN: CONNECTIONS KEY TO SMALL BUSINESS SUCCESS

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Reference ID Created Released Classification Origin
09ASTANA21 2009-01-08 11:49 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO2204
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0021/01 0081149
ZNR UUUUU ZZH
O 081149Z JAN 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4278
INFO RUCNCIS/CIS COLLECTIVE 1005
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0404
RUEHKO/AMEMBASSY TOKYO 1110
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUEKJCS/SECDEF WASHDC 0493
RHEHNSC/NSC WASHDC 0578
RHEFAAA/DIA WASHDC
RUEAIIA/CIA WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 ASTANA 000021 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN EINV KCRM KZ
SUBJECT:  KAZAKHSTAN:  CONNECTIONS KEY TO SMALL BUSINESS SUCCESS 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  Kazakhstan is home to a number of 
government-sponsored initiatives to improve conditions for small and 
medium enterprises.  However, such support from the highest levels 
of government still has little impact on the daily reality of 
business operations, which require the extensive utilization of 
private networks of connections as well as bribes.   END SUMMARY. 
 
PRESIDENT CALLS FOR INCREASED SUPPORT FOR SME'S 
 
3.  (U) Improving the business climate for small and medium 
enterprises (SMEs) remains a publicly expressed priority for the 
Kazakhstani government.  In his December 16 Kazakhstani Independence 
Day address, President Nazarbayev noted that more than 1.8 million 
people work in SMEs in Kazakhstan, and said that Kazakhstan "must 
significantly increase the share of small and medium enterprise in 
the structure of the economy," bringing it to the level moderately 
developed European countries.  He argued that "for every Kazakhstani 
there must be the possibility to take on new ventures, open new 
businesses, or expand their sphere of operations." 
 
4. (U) Nazarbayev promised that the government will increase support 
for SMEs as one of its principal steps to mitigate the effects of 
the global financial crisis.  This support will apparently include 
several components.  In 2009, the Samruk-Kazyna National Welfare 
Fund will distribute $1 billion to commercial banks in support of 
SME activity, 70% of which will be for existing businesses, and 30% 
for new enterprises, with no loans exceeding $5 million.  The 
government will guarantee interest rates at no more than 14% for 
SMEs.  Samruk-Kazyna will also work to reduce administrative 
barriers to trade and entrepreneurship, and develop a micro-credit 
program designated specifically for the economic development of 
rural territories. 
 
PROCUREMENT LAW TO NURTURE SMALL BUSINESS 
 
5.  (SBU) In the latter half of 2008, the government of Kazakhstan 
enacted several laws designed to nurture economic diversification 
and increase opportunities for domestic SMEs to find a role in the 
extractive sector.  The new Law on Government Procurement was 
approved in November 2008 and is designed to make government 
procurement procedures more open and transparent.  More 
specifically, it also requires foreign and domestic companies to 
maintain unspecified percentages of local content.  This is expected 
to benefit Kazakhstani small and medium businesses by granting them 
access to approximately $9-10 billion in business annually.  In a 
bid to promote e-commerce, the law also includes plans to introduce 
a centralized portal by 2010 through which SMEs can more readily 
participate in government contract bidding. 
 
DOING BUSINESS IN ASTANA MEANS HAVING CONNECTIONS 
 
6.  (SBU) While the government continues to seek out ways to support 
the growth and development of SMEs, its bureaucrats continue to reap 
the officially illegal but culturally accepted benefits of their 
authoritative positions over Kazakhstan's new entrepreneurs. 
According to one former Embassy employee, who has since moved on to 
open a small restaurant in the heart of new Astana, the greatest 
secret to owning and operating a successful business in Astana is 
having the right friends in the right places.  Almost every facet of 
starting and operating a business depends on these connections, she 
maintained.   According to the former Embassy employee, those who 
intend to open a small enterprise in Astana must have a "check list" 
of permissions signed off by all major city administrative 
departments.  Once completed, it is submitted to the City 
Architecture Department for final approval.  She maintained that she 
never would have been able to complete this process without an 
extensive network of friends and contacts.  However, she noted, 
these friends do not normally provide their assistance for free. 
For example, getting necessary signatures from the city sanitation 
and fire departments (among others) meant identifying and coming to 
an "agreement" with the right people.  (COMMENT:  This was clearly a 
thinly veiled reference to bribery.  END COMMENT.)  Once an 
 
ASTANA 00000021  002 OF 003 
 
 
agreement has been reached, business owners are promised freedom 
from excessive inspections and requirements, with the understanding 
that t
his arrangement will continue in the future for nominal fees. 
This agreement also tends to include a provision that will shield 
them from other possible inspections or disruptions. (COMMENT: This 
arrangement is commonly referred to as paying for the "krisha" or 
roof.  END COMMENT.)  In her own arrangements, because she owns a 
restaurant, she must also be prepared to regularly serve free 
lunches to representatives of the state bodies with whom she has 
made agreements.  She reports that with the support of these new and 
old friends, she has managed to avoid any inspection since April 
2008 from any government agencies including the Financial Police and 
the Tax Committee. 
 
7.  (SBU) Aside from the complexities of registration, there were 
other difficulties which she has successfully surmounted.  Getting 
credit is not cheap, she said.   However, she was able to open a 
line of credit with KazKommertsBank at what she said was a very good 
18% interest rate.  She also said that she had searched for an 
appropriate location for unexpectedly long period of time, noting 
that despite the appearances of extensive growth, viable commercial 
real estate is in very short supply in Astana.  Once a suitable 
location had been found, she spent nearly two months navigating the 
city bureaucracy to get necessary permits from the City 
Architectural Department to renovate the premises.  She was lucky 
enough to have a "friend" who works for the Tax Committee and works 
under the table as a bookkeeper for the restaurant, ensuring that 
tax documents are both properly prepared and efficiently filed. 
 
HARSH CLIMATE IN ASTANA 
 
8.  (SBU) There are many challenges to doing business in Astana, the 
least of which comes from being located at the end of one of the 
world's longest supply chains.  For the former Embassy employee, 
simply finding good equipment and dishes for the restaurant was a 
challenge.  Her store-front sign needed to be approved by city 
authorities, which afforded more opportunities to make friends, and 
they are constantly encouraged to appropriately decorate for holiday 
seasons, plant flowers, or keep their store front spotless. 
(COMMENT:  Her restaurant is located on the main strip near many of 
the main government ministry buildings, in a highly visible showcase 
part of the new capital city. END COMMENT.)  She also noted that it 
has been extremely difficult to find and retain qualified kitchen 
staff. 
 
9.  (SBU) The challenges of running a small successful restaurant 
were echoed by Vice Minister of Industry and Trade Zhanar Aitzhanova 
during a December 24 meeting with the Ambassador.  Aitzhanova 
confidently pointed out that the finest restaurants in Astana tend 
to be owned by people "with other sources of revenue" and need not 
concern themselves with successful business models.  In fact, most 
of the extremely expensive high-end restaurants (which comprise 
about 50% of all restaurants) sit empty most evenings. 
 
FRANCHISES BEGIN TO BRAVE ASTANA 
 
10.  (SBU) Unlike most places in the world, there continues to be a 
noticeable lack of western franchise operations in Kazakhstan, with 
one major exception.  One December 5, a Friday's (TGIF) restaurant 
celebrated its grand opening in Astana.  The Astana Friday's is 
supervised from Moscow by the Russian-owned Rostik group, and the 
restaurant managers surmise that the owners are very well-connected 
in Kazakhstan.  They did reportedly have problems initially with the 
Ministry of Justice (MOJ) when attempting to register the business 
because of the English name, but have since reported few problems 
with authorities. (NOTE:  The MOJ initially insisted that the 
restaurant be given the Kazakh name Allah Zhaksy - Bugin Zhuma or 
"God is Great - Today is Friday" until they were persuaded of the 
necessary inclusion of the TGIF trademark.  END NOTE.)   However, 
TGIF was subject to one inspection raid prior to opening which 
indicated that its connections may be tested.  In a November 20 
meeting with the DCM, TGIF managers described the raid by a combined 
group of inspectors representing Financial Police, the Tax 
Committee, and the Procurator's Office that they believe to be the 
 
ASTANA 00000021  003 OF 003 
 
 
result of a complaint lodged with MOJ by a competitor.  (NOTE:  A 
moratorium on random inspections has been in effect since January 1, 
2008, except in the event that an alleged licensing violation is 
reported to authorities.  END NOTE.)  TGIF managers noted, however, 
that once inspectors realized that the business had not even opened, 
they had no real grounds for the clearly unfounded inspection. 
Despite their ability to avoid conflict, TGIF managers agreed that 
Kazakhstani regulations are likely designed such that a violation 
can always be detected, but were quick to point out that the system 
of connections also allows for the quick resolution of potential 
problems.  TGIF has also been hampered by the long supply chain and 
the expense of importing goods.  Despite $20 hamburgers, TGIF could 
not obtain an egg timer for cooking their French fries.  Managers, 
all of whom happen to be young and female, also noted that sexism in 
male-dominated Kazakhstani society remains a constant challenge in 
operating a business. 
 
BUREAUCRACY AND CORRUPTION CHALLENGE PROFITABILITY 
 
11.  (SBU) According to the President of the American Chamber of 
Commerce in Kazakhstan, Kenneth Mack, there are many legitimate 
business opportunities in Kazakhstan, but the system is entirely 
based on connections, and a lot of demands for payoffs from 
government officials.  Acknowledging a lack of Western business, 
particularly SMEs, Mack said in a December 30 meeting with Econoff 
that given Kazakhstan's physical isolation, the relatively small 
size of the domestic market, and a lack of infrastructure in the 
country that complicates the delivery of supplies and services, the 
margin of profit is very small.  He concluded that "if you add 
bureaucracy and corruption, you remove the profitability 
altogether."  "Generally speaking" he said, "there is no room for a 
small business without connections, and it is not at all safe for a 
U.S. business without a well-connected local partner." 
 
12.  (SBU) COMMENT:  The World Bank recently ranked Kazakhstan at 70 
out of 181 countries for the ease of doing business.  Kazakhstan was 
also ranked 145 out of 180 countries in Transparency International's 
perceptions of corruption index.   While Kazakhstan continues to 
address the need to improve the business climate for SMEs, and the 
political will for the financing and development of successful 
entrepreneurship remains high, the simple fact is that for now, 
patronage and connections above all else remain the key to operating 
a successful small- or medium-sized business. 
 
13.  (SBU) COMMENT CONTINUED:  The Public Private Economic 
Partnership Initiative (PPEPI) provides a vehicle through which 
SMEs, both foreign and Kazakhstani, could directly address their 
realities
 to the central government.  Currently, even the largest 
firms will not publicly raise corruption since they fear 
retaliation.  The PPEPI June launching was remarkable in that the 
Prime Minister held an "interactive session" during which he 
listened to constructive but blunt criticism.  Until the highest 
levels of the Kazakhstani leadership impose an anticorruption regime 
on the mid-level bureaucrats, investment in Kazakhstan will be 
limited to large firms able to deploy battalions of lawyers.  END 
COMMENT. 
 
HOAGLAND

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