09ASTANA420, KAZAKHSTAN: NO GRAND BARGAIN IN THE WORKS

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Reference ID Created Released Classification Origin
09ASTANA420 2009-03-06 09:44 2011-08-30 01:44 SECRET Embassy Astana

VZCZCXRO3780
RR RUEHBI
DE RUEHTA #0420/01 0650944
ZNY SSSSS ZZH
R 060944Z MAR 09 ZDK
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 4845
INFO RUCNCIS/CIS COLLECTIVE 1320
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0699
RUEHKO/AMEMBASSY TOKYO 1402
RUEHUL/AMEMBASSY SEOUL 0386
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0881
RUEKJCS/SECDEF WASHDC 0794
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC

S E C R E T SECTION 01 OF 03 ASTANA 000420 
 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: DECL: 03/06/2059 
TAGS: PGOV ECON EINV EPET RS CH KZ
SUBJECT: KAZAKHSTAN:  NO GRAND BARGAIN IN THE WORKS 
 
REF: A. (A) EEB DAS HENGEL EMAIL OF 03/05/09 (NOTAL) 
     B. (B) ASTANA 0386 
     C. (C) ASTANA 0382 
     D. (D) ASTANA 0344 
 
ASTANA 00000420  001.2 OF 003 
 
 
Classified By: Ambassador Richard E. Hoagland, 1.4 (b), (d) 
 
1.  (S) SUMMARY:  As EEB DAS Hengel conveyed to the 
Ambassador (ref A), a Shell oil executive expressed concern 
on March 4 that economic problems in Kazakhstan increase the 
likelihood that the government will turn to Russia or China 
for financial assistance.  If that were to happen, Shell is 
concerned that Kazakhstan would reorient its foreign policy 
away from the West and would seek to renegotiate yet again 
the terms of the Kashagan project, in which Shell and other 
international oil companies have invested billions of 
dollars.  We have no credible evidence that suggests that the 
Russian or Chinese governments are preparing to offer 
significant financial assistance to Kazakhstan, and no 
evidence that Kazakhstan needs such outside assistance -- 
yet.   The government still has deep pockets, and is 
implementing a broad program to mitigate the effects of the 
global financial crisis which has received praise from 
international financial institutions.  END SUMMARY. 
 
KAZAKHSTAN OFFICIALS DETERMINED TO MANAGE ECONOMIC CRISIS 
 
2. (S) Ref A reports that a Shell executive told EEB DAS 
Hengel on March 4 that the Kazakhstani economy is 
experiencing serious problems.  He expressed concerns that 
Kazakhstan might turn to Russia or China, rather than the 
IMF, for financial help, and said there are rumors that the 
Russians have offered Kazakhstan significant assistance in 
return for reorienting their foreign policy away from the 
West and more toward Russia.  The executive also implied that 
a Kazakhstani shift toward Russia could lead to new 
Kazakhstani efforts to renegotiate the contract terms for the 
Kashagan oil and gas field, in which Shell and several other 
western companies have major ownership stakes. 
 
3.  (SBU) We have reported in detail on the effects of the 
global economic crisis in Kazakhstan (refs B, C, D).  The 
Kazakhstani economy does face serious problems, as the Shell 
executive asserted, particularly in the banking sector. 
However the Kazakhstani government has deep pockets -- well 
over $40 billion in reserves -- and has openly acknowledged 
the need to take extraordinary measures to manage the 
situation and preserve social stability.  As previously 
reported, these measures have included a 22 percent 
devaluation of the currency, nationalization of two of the 
country's largest private banks, and plans to invest up to 
2.7 trillion tenge (approximately $18 billion), nearly 18 
percent of GDP, in projects to support the financial-services 
industry, agriculture, infrastructure and innovation, housing 
construction and mortgage lending, and small- and 
medium-sized enterprise development.  As Shigeo Katsu, World 
Bank regional vice president for Europe and Central Asia, 
said after meeting Prime Minister Masimov on February 23, 
Kazakhstan's anti-crisis program "contains strong policy 
measures designed to improve the resilience to crisis of all 
segments of Kazakhstan's society....  The government has 
taken the right track with crisis mitigation and demonstrates 
strong leadership." 
 
NO EVIDENCE OF A GRAND BARGAIN WITH RUSSIA OR CHINA 
 
4.  (C) We have seen no evidence that Russia -- or China -- 
has offered Kazakhstan an assistance package in exchange for 
reorienting its foreign policy or granting access to or 
ownership of Kazakhstan's natural resources.  Furthermore, we 
have no evidence or indication that the Kashagan project has 
experienced further delays that would give the government 
cause to renegotiate Kashagan,s terms yet again, 
particularly something as drastic as changes to the 
 
ASTANA 00000420  002.2 OF 003 
 
 
consortium's ownership structure.  Several international oil 
company representatives in Kazakhstan share that view.  For 
example, on March 5, Patty Graham, Government Relations 
Director for ExxonMobil Kazakhstan, told Energy Officer that 
Kazakhstan has resisted overtures from China to trade loans 
for oil or infrastructure.  "The Chinese National Petroleum 
Company submitted a proposal to acquire 49 percent of 
MangistauMunaiGas," she said, "but the Kazakhstanis appear to 
have rejected it.  They are very reluctant to give the 
Chinese ownership of any significant o
il production assets, 
even though they desperately need the cash."  (NOTE:  India's 
Oil and Natural Gas Corporation is now believed to have an 
inside track on this attractive asset, following President 
Nazarbayev's visit to India on January 26.  END NOTE). 
 
5.  (SBU) On March 4, Dan Worrall, Shell's Corporate Affairs 
Manager in Kazakhstan, told Energy Officer that Russian 
investment in Kazakhstan's oil and gas sector has been 
severely restricted in recent months.  He cited, for example, 
Lukoil's decision to cut global expenditures by 20 percent, 
and said Lukoil's investments in Kazakhstan have been cut 
even more drastically, to the point where Lukoil canceled a 
lease on new office space in a prominent building in central 
Astana.  We also understand from sources at the Karachaganak 
Petroleum Operating Company (KPO) that Gazprom backed out of 
plans to invest millions of dollars in a new gas processing 
plant in Orenburg, ostensibly because KPO decided to delay 
Phase III of the project, but we suspect that cost was a 
factor in the decision. 
 
KAZAKHSTAN TO USE ENERGY REVENUE FOR PRIORITY PROJECTS 
 
6.  (C) Although Kazakhstan does not appear poised to accept 
outside financial assistance to help manage the effects of 
the global crisis, President Nazarbayev is keen to cut costs, 
save jobs, and invest in infrastructure.  On March 6, in his 
annual address to the nation, Nazarbayev indicated that 
revenue from oil and gas would finance priority projects. 
"We need fresh funds," he said.  "I deem it expedient to use 
the revenues generated by the mineral resource sector, which 
we have traditionally accumulated in the National Fund, to 
finance the new plan," which he said will cost 600 billion 
tenge (approximately $4 billion), in addition to money 
already transferred from the National Fund. 
 
NO PLANS TO BORROW FROM THE IMF 
 
7.  (SBU) On October 20, 2008, Prime Minister Masimov told 
Bloomberg, "We have our own specific plan to survive without 
any external support.  I don't think we need support from the 
International Monetary Fund (IMF) or overseas."  On March 6, 
the IMF's local representative Olga Bisekeeva told Energy 
Officer that the Fund has "no plans" to offer a loan package 
to Kazakhstan, although she said that the IMF mission head 
for Kazakhstan would visit the country in May to meet with 
government officials and assess the impact of the economic 
crisis. 
 
8.  (C) COMMENT:  We doubt that even if Kazakhstan did need 
assistance, Russia could come up with a figure large enough 
to entice the Kazakhstanis.  We would be talking about tens 
of billions of dollars, not the $2 billion or so in grants 
and loans the Russians apparently offered the Kyrgyz to close 
Manas.  Some believe the Russians can,t even afford to 
follow through the Kyrgyz package.  It would appear that only 
an international financial institution like the IMF has 
sufficient funds for a Kazakhstan bailout, if it ever came to 
that.  In addition, in his March 6 speech to Parliament, 
President Nazarbayev said he is looking forward to 
celebrating the 20th anniversary of Kazakhstan's independence 
in 2011:  "The dreams of our ancestors are coming true," he 
said.  Kazakhstan clearly values its independence and 
sovereignty too much to make a grand bargain with Russia or 
China that would limit its foreign policy flexibility.  END 
 
ASTANA 00000420  003 OF 003 
 
 
COMMENT. 
HOAGLAND

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