09ASTANA442, KAZAKHSTAN: ITALY REMAINS A MAJOR INVESTOR, ACTIVE IN

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Reference ID Created Released Classification Origin
09ASTANA442 2009-03-13 08:30 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO8587
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0442/01 0720830
ZNR UUUUU ZZH
O 130830Z MAR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4886
INFO RUCNCIS/CIS COLLECTIVE 1349
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0728
RUEHKO/AMEMBASSY TOKYO 1431
RUEHUL/AMEMBASSY SEOUL 0415
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0910
RUEKJCS/SECDEF WASHDC 0823
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 ASTANA 000442 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN EINV EPET ETRD IT KZ
SUBJECT:  KAZAKHSTAN:  ITALY REMAINS A MAJOR INVESTOR, ACTIVE IN 
SEVERAL KEY SECTORS OF THE ECONOMY 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  PolOff met on February 17 with Ugo Boni, First 
Secretary and DCM at the Italian Embassy in Astana, to discuss the 
Kazakhstan-Italy relationship.  Boni characterized the overall 
Kazakhstan-Italy relationship as positive and robust, and said that 
both sides looked forward to President Nazarbayev's planned visit to 
Italy sometime during 2009.  Boni told PolOff that the Italian 
government's top priority in Kazakhstan is pursuing energy security, 
followed by strengthening other commercial ties.  Italy remains one 
of the major sources of foreign direct investment in Kazakhstan, and 
several Italian companies remain active in the construction, 
property management, construction materials, fashion, and alcohol 
sectors, despite the effects of the global financial crisis. 
Italian companies in the construction sector complain of pressure 
and delayed payments from local and central authorities, while 
fashion and wine exporters complain that profits are primarily being 
captured by customs and local retailers.  Boni told PolOff that he 
did not expect finalization in the near future of an EU-Kazakhstan 
agreement on Kazakhstan's WTO accession.  END SUMMARY. 
 
NAZARBAYEV PLANS TO VISIT ITALY 
 
3.  (SBU) Boni characterized the overall Kazakhstan-Italy 
relationship as very positive and robust.  Italy's Prime Minister, 
Silvio Berlusconi, visited Kazakhstan briefly in 2008. (NOTE:  He 
was supposed to make a technical refueling stop, but President 
Nazarbayev invited him into town, and they had a lengthy meeting and 
windshield tour of Astana.  END NOTE.)  Boni said that Nazarbayev 
had planned to visit Italy in March, but also wanted to call on the 
Pope.  Since the Pope expects to be abroad in March, the Nazarbayev 
trip was postponed to "later in 2009."  Boni expressed some relief 
at the postponement, noting that the Kazakhstani side hopes to sign 
a range of commercial agreements which will take time to prepare. 
 
TOP PRIORITY IS ENERGY SECURITY 
 
4.  (SBU) Boni said the Italian government's top priority in 
Kazakhstan is pursuing its energy security, since Italy is a major 
importer of Kazakhstani crude oil.  However, Boni explained that the 
Italian Embassy's role is primarily one of quiet support, since 
policy is made at the EU-level.  Boni also maintained that 
oil-related issues are not really a "bilateral" EU issue with 
Kazakhstan, but also involve the EU-Russia relationship.  "Without 
Russia, it is impossible to generate agreement," Boni claimed. 
 
5. (SBU) Boni reminded PolOff that the most important Italian 
company with a presence in Kazakhstan is Italy's national oil 
company Eni.  However, he said that much of Eni's investment is 
channeled through the Netherlands, which results in a statistical 
understatement of Italy's importance as a foreign investor in 
Kazakhstan.  Boni maintained that that Eni, along many other Western 
oil companies, finds it very difficult to meet local content 
requirements.  Boni asked, "Where can you find certain goods made in 
Kazakhstan?  Local content requirements are a huge problem for our 
companies in the oil sector."   At the same time, Boni said that 
many Italian companies complain that Eni does not favor Italian 
companies enough, but Boni explained that for items Eni cannot 
procure from local suppliers, Eni typically uses the same diverse 
international network of suppliers it relies on for projects in 
other countries. 
 
ITALY REMAINS A MAJOR SOURCE OF INVESTMENT 
 
6.  (SBU) Boni said that Kazakhstan and Italy have had a robust 
economic relationship since Kazakhstan became independent.  In 2008, 
total trade between Kazakhstan and Italy amounted to over $13 
billion, including over $11 billion worth of Kazakhstan exports to 
Italy (primarily oil) and more than $1 billion in Kazakhstani 
imports.  Italy officially ranks fourth in terms of cumulative 
foreign direct investment (FDI) in Kazakhstan, behind the United 
States, the Netherlands, and the United Kingdom.  Boni expects Italy 
to continue to be a significant foreign investor in Kazakhstan, 
 
ASTANA 00000442  002 OF 003 
 
 
although he note
d that Italian investment outside of the oil sector 
has been declining since 2006.  Boni attributes the decline to a 
fall in Kazakhstani demand and an increase in competition.  For 
example, during the 1990s, many Italian companies moved quickly into 
the newly open Kazakhstani construction market and used their 
expertise to build high quality buildings cheaply and quickly.  As 
more local and foreign companies entered the market, it became 
saturated, and Italian construction companies withdrew or moved into 
the property management business. 
 
PROBLEMS WITH CEMENT FACTORY INVESTMENT 
 
7.  (SBU) Italy's second largest commercial investor in Kazakhstan 
is Italcementi, the world's fifth largest cement-producer, which 
acquired the Shymkent cement factory in 1998.  According to Boni, 
the Shymkent factory's operations have been problematic because of 
pressure from local authorities.  Cement prices in Kazakhstan are 
controlled by the government, but actual free-market prices are much 
higher, which creates a lucrative trade for intermediaries.  Boni 
told PolOff that the factory's production is frequently stopped by 
local authorities, who claim that the company does not have the 
"necessary permits."  This is a pretext for demanding bribes or 
other compensation.  Such problems were particularly egregious 
during the spike in world cement demand in 2007.  Kazakhstan was 
particularly affected by China's demand for cement and other 
construction materials in the run-up to the Summer 2008 Olympics, 
which also coincided with building booms in Astana and Almaty, Boni 
argued. 
 
MINISTRY OF TRANSPORTATION DELAYS PAYMENT 
 
8.  (SBU) Other Italian companies have also faced problems with 
Kazakhstani authorities.  The large Italian company Grupo Todini, 
controlled by prominent Italian politician Luisa Todini, has been 
active in construction and road-building in Kazakhstan for 12 years, 
and completed two roads in western Kazakhstan, one from Atyrau to 
Aktau and one from Atyrau to Samara, Russia.  Boni told PolOff that 
the Kazakhstani Ministry of Transport paid the company approximately 
$8 million less than the amount due.  Although the company has the 
right to take the case to international arbitration and is confident 
it would win, Boni said Grupo Todini is reluctant to take this step 
for fear that it could endanger future deals.  The company is 
currently completing one-fifth of the road from Astana to the resort 
of Borovoye; the other four sections are being completed by one 
Iranian and three Kazakhstani companies.  According to Boni, all of 
the companies, including Todini, were forced to purchase materials 
at prices at least seven times the officially set rates, without 
being able to recover payment from the Ministry of Transportation. 
 
 
PROPERTY MANAGEMENT MORE LUCRATIVE 
 
9.  (SBU) Despite the hardships several larger Italian companies 
face doing business in Kazakhstan, several medium-sized firms have 
successfully carved out niches, especially in property management. 
Boni told PolOff that Renco is well-established in property 
management in Kazakhstan.  The company's largest market is Armenia, 
where it dominates the construction sector, whereas in Kazakhstan it 
is a medium-sized, but highly successful company.  According to 
Boni, Renco, which was started by an Eni employee, moved 
successively from oil services to construction and then to property 
management, and now manages a large number of the buildings it 
constructed, including the office building in Almaty where USAID is 
located, the Astana Renco building which houses a number of 
diplomatic missions, and several hotels located adjacent to oil 
fields.  Boni said that the company wisely moved out of the 
Kazakhstani construction market after the 1990s just as lower-cost 
firms entered it.  Renco then used its brand and its knowledge of 
basic Western service standards to become successful in property 
management. 
 
GLOBAL FINANCIAL CRISIS TAKES ITS TOLL ON BANKING INVESTMENT 
 
 
ASTANA 00000442  003 OF 003 
 
 
10.  (SBU) Boni admitted that the global financial crisis is having 
a negative effect on Kazakhstan-Italy commercial relations. 
Italy-based Unicredit bought Kazakhstan's ATF bank in 2007, but this 
acquisition has lost 90 percent of its value.  Boni also expressed 
concern over the Kazakhstani government's reorganization and 
nationalization of banks as an anti-financial crisis measure.  Boni 
said that the Director of the Italian Trade Delegation in Almaty 
believes "the nationalization of Alliance Bank is a big scam."  Boni 
said that the government take-over of BTA Bank was "not a positive 
step."  BTA, Boni claimed, was well-known even outside of Kazakhstan 
as a sound financial institution.  Boni admitted that he had even 
put some of his own money in BTA, judging it to be the safest of the 
Kazakhstani banks, and that he had been one of the many people who 
had rushed to the bank to withdraw money after the nationalization. 
(NOTE:  International financial institution and Western 
private-sector bankers have told us the opposite --that BTA was 
badly over-extended and frequently cooked its books.  END NOTE.) 
 
ITALIAN COMPANIES CONTINUE COMMERCE IN FASHION AND WINE 
 
11.  (SBU) Despite the financial crisis, Boni expects small and 
medium-sized Italian firms to continue to develop their markets in 
Kazakhstan, particularly in the fashion and wine industries in which 
Italian firms have been highly successful.  Boni told PolOff that 
Italian exporters have used their reputation for high quality 
fashion to capture large parts of the high-end clothing market, 
especially for lucrative fur goods.  At a November exposition in 
Almaty, one businessman sold his entire stock, worth $50,000, on the 
first day.  (NOTE:  Prominent Kazakhstani businessman Nurlan 
Kapparov, who heads the Lancaster Group holding company, is the 
chairman of the Kazakhstan-Italy Business Council.  His wife 
reportedly owns many boutiques featuring Italian brand-name products 
such as MaxMara and Dolce and Gabbana.  END NOTE.) 
 
12.  (SBU) Many small Italian companies continue to be active 
exporters of wine to Kazakhstan.  According to Boni, however, 
Italian wine exporters have failed to build a strong lobby, and 
therefore, lack collective bargaining power.  Most Italian wine 
exporters, except for larger companies like Martini, are unable to 
effectively capture the profits from their products.  For a bottle 
of wine that costs $10 in Italy, Kazakhstani retailers can get $20 
or more, but most of the mark-up goes into the pockets of local 
retailers or is taken by customs in the form of import duties. 
 
ROME WAS NOT BUILT IN A DAY 
 
13.  (SBU) Boni explained that for Italy, Kazakhstan's accession to 
the WTO is an EU-level issue -- and one that involves Russia. 
According to Boni, the EU would like to have an accession agreement 
with Russia before Kazakhstan joins the WTO, and therefore Boni does 
not expect quick finalization
on an EU-Kazakhstan accession 
agreement.  Regarding the proposed customs union among Kazakhstan, 
Russia, and Belarus, Boni expressed doubts it would soon come to 
fruition -- despite claims from the three participating countries 
that it will.  As Boni put it, "Developing a customs union is very 
complicated.  It took 12 years for the EU to come together." 
 
HOAGLAND

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