This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L  ALMATY 002637 
 
SIPDIS 
 
 
DEPARTMENT FOR EUR/CACEN, EB/TPP/BTA/EWH, INR/REA 
TREASURY FOR CENTRAL ASIA DESK OFFICER GAERTNER 
COMMERCE FOR CENTRAL ASIA DESK OFFICER STARKS 
MOSCOW FOR LANIER 
DEPARTMENT PLEASE PASS TO USTR 
 
E.O. 12958: DECL: 07/18/2015 
TAGS: ECON EFIN PGOV PINR KZ ECONOMIC
SUBJECT: MARCHENKO BELIEVES ELECTIONS TO BE EARLY, CALLS 
OPPOSITION &PATHETIC,8 DOUBTS FISCAL DIRECTION OF GOK 
 
REF: A. (A) 04 ALMATY 4168 
 
     ¶B. (B) ALMATY 2119 
 
Classified By: Ambassador John Ordway. Reasons 1.4 (b) and (d). 
 
 
¶1. (C) Summary:  At a July 11 meeting at the Almaty 
headquarters of the Halyk Savings Bank where he is Chairman 
of the Board, Grigoriy Marchenko had a wide-ranging 
discussion of the political and economic atmosphere in 
Kazakhstan with Econoff and the Embassy Moscow Treasury 
Attache.  Inter alia, Marchenko expressed his certainty that 
presidential elections will be called for the end of 2005, 
evaluated the opposition and their electoral chances as 
"pathetic," and said that Kazakhstan has "lost two years" of 
opportunity for further economic reform.  He also offered a 
fairly pessimistic view of the outlook for growth in the 
countries where "color revolutions" have taken place.  End 
summary. 
 
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"Our Opposition is Pathetic" 
---------------------------- 
 
¶2. (C) Marchenko shares the widely held view that 
presidential elections will be held in December 2005.  He 
dismissed the political opposition as "pathetic."  He opined 
that the opposition has no coherent program, and that its 
most prominent leaders (in Marchenko's opinion) had all taken 
their turns benefiting from corrupt privatization deals in 
the past.  (Note: As Marchenko discussed the opposition, he 
waved a July 6 personal letter from "For a Just Kazakhstan" 
leader and presumptive candidate Zharmakhan Tuyakbay, 
apparently seeking his participation in a forum on economic 
issues.  We expect he will not attend.  End Note.) 
 
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"This Government Should Be Dismissed" 
------------------------------------- 
 
¶3. (SBU) Unsurprisingly, Marchenko's analysis of the 
political and economic landscape is based on a highly 
critical appraisal of Prime Minister Daniyal Akhmetov's 
policies.  After reiterating his opinion that Akhmetov should 
be dismissed (Ref A), he criticized the expansionist fiscal 
tendencies of the current Government.  He observed that an 
alternative to using higher spending as the means of passing 
the benefits of high growth to the population, the Government 
should take the opportunity to reduce tax burdens and 
eliminate red tape while sharply intensifying the struggle 
with corruption. 
 
¶4. (SBU) Marchenko noted disapprovingly that the National 
Bank has come under criticism for sustaining losses to its 
reserves in calendar year 2005.  According to him, the 
National Fund's sterilization function has been weakened 
considerably in the past three years: in 2003, 60% of oil 
revenues went straight to the Fund and 40% to the budget; now 
the opposite situation obtains.  Further, the GOK's practice 
is to deposit funds into the budget accounts for the first 
8-9 months of the year and only then supply the National 
Fund.  As a result, the National Bank is left to its own 
resources for sterilization and incurs considerable costs. 
 
¶5. (SBU) Marchenko briefly stated that he could not 
satisfactorily explain the latest trend in the tenge exchange 
rate, which has depreciated to 135 KZT/USD from 130.  He 
suspected that the National Bank's recent lack of 
intervention in the currency market has engendered some 
speculative tendencies, but did not elaborate.  (Note: 
Presumably the interventions ended as the dollar stabilized 
during the spring of 2005.  End Note.) 
 
--------------------------------- 
Want a Cluster?  Get a Helicopter 
--------------------------------- 
 
¶6. (SBU) Marchenko was intensely critical of several of the 
Akhmetov government's key economic initiatives.  (Note: 
Marchenko's low regard for Akhmetov is public and well known. 
 Akhmetov was appointed Prime Minister in June 2003, so it is 
no accident that Marchenko would opine that policy has been 
deteriorating for two years.  End note.)  He was particularly 
acerbic regarding the Ministry of Economy and Budget 
Planning's reliance on Harvard Professor Michael Porter's 
 
 
"cluster theory" of development.  He ridiculed the idea of 
establishing the cotton textile cluster in South Kazakhstan 
(Ref B). 
 
¶7. (SBU) Marchenko dismissed the textile initiative, 
predicting that within two years the tax incentives that 
underlie it will be buttressed or replaced by direct 
subsidies, which will be a waste.  Noting that labor costs in 
Kazakhstan (average wage $240/month) are up to eight times as 
high as in Uzbekistan and six times as high as in China, that 
both Uzbekistan and China have established textile 
industries, and that Kazakhstan produces comparatively little 
cotton on its own, Marchenko claimed, "as Friedman says," 
that the only way to sustain the cluster would be "to drop 
money on it from a helicopter." 
 
¶8. (C) Marchenko confirmed that he still advises the 
President on economic policy.  He told us that his latest 
advice was a single paragraph.  Marchenko said that he told 
the President that "he is kidding himself" if he thinks that 
investment in non-oil sectors will happen if the corporate 
tax rate stays at 30%.  Marchenko was pessimistic that 
serious reforms would be made until after the elections, and 
even then perhaps only if oil prices were to fall. 
 
¶9. (SBU) The reforms Marchenko favors include revamping the 
tax system - not necessarily by cutting rates but by 
simplifying it to reduce the incentive for and ability of 
taxpayers at every level to hide income.  He would also 
encourage simplification of the Administrative Code, both to 
reduce red tape and to prevent it from being an effective 
tool for harassment of small and medium entrepreneurs. 
 
¶10. (C) Marchenko also expressed disgust at the continuing 
high levels of corruption across the civil service of 
Kazakhstan.  Despite the fact that Halyk Bank pays its 
professional employees 5-7 times the salary of (for example) 
city court judges, Marchenko observed tongue-in-cheek that 
better than 60% of the bank's mortgage clients are 
bureaucrats. 
 
-------------------------------------- 
"Paragon of Proper Development" Needed 
-------------------------------------- 
 
¶11. (C) Marchenko also shared his views on economic 
development in the post-Soviet space writ large.  He was 
deeply pessimistic about the Yushchenko government's 
prospects and felt that it was taking considerable 
inflationary risks that would jeopardize its electoral 
prospects.  Citing conversations with Andrey Ilarionov, he 
offered the opinion that meaningful reforms would not likely 
spread throughout the CIS unless Russia or Ukraine sets the 
example.  He doubted that other post-Soviet countries would 
look at Poland or the Baltic states as examples to be 
followed; he similarly doubted Russia's ability to absorb 
lessons from its former possessions. 
 
------------------------ 
Banking Sector Overview 
----------------------- 
 
¶12. (SBU) Finally, Marchenko discussed the state of play in 
Kazakhstan's banking sector and his concerns about the 
growing real estate "boom" in Almaty and Astana.  Of 
particular concern, he said, was the extent to which 
commercial bank portfolios are tied up in real estate 
investments, either as the purpose for loans as the 
collateral for them.  He said that Halyk is conservative in 
its mortgage lending practices, requiring 100 percent 
collateral and a 15 to 20 percent down payment.  Even so, the 
bank has made 19,000 mortgage loans in the past two years. 
Marchenko said that those loans that go bad are most likely 
to do in the fifth to eighth years of the typical ten-year 
term.  In his view, there is a danger that the bubble will 
burst, disastrously for banks overexposed to real estate, 
mainly because up to 40 percent of the buyers are not living 
in the apartments they buy.  This increases the risk of a 
sell-off across the market. 
 
¶13. (SBU) Marchenko did not comment on Halyk bank's search 
for a "strategic investor" to increase its capital and growth 
prospects.  On becoming Chairman of Halyk, Marchenko said 
that a partner would be found by the end of March 2005 (Ref 
A).  This has not happened to date, and EBRD's Almaty 
 
 
Principal Banker told us separately that the deadline moved 
first to the end of June, and now to the end of October.  The 
EBRD banker said that five to six foreign banks were 
interested, with "a French bank" (NFI) the most likely 
suitor.  Apparently no Russian banks are interested, and 
Halyk is specifically seeking a Western partner.  (Note: 
Marchenko told the Ambassador on June 14 that the only 
remaining step was for the bank's principal owner to "make up 
his mind" on which strategic partner to select.  He said that 
there were a couple of possibilities, each was excellent -- 
but that the owner did not seem to be in a rush to decide. 
End note.) 
 
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Comment 
------- 
 
¶14. (C) As always, Marchenko was outspoken, authoritative, 
candid and even entertaining.  Apparently he still has direct 
access to President Nazarbayev, but it also seems that his 
economic prescriptions are for the moment not finding a 
receptive ear in Astana.  While Marchenko does little to hide 
his contempt for Akhmetov and his team (which probably means 
he is much happier in the private sector), his criticisms 
are, as always trenchant and well informed.  Unsurprisingly, 
he is as dismissive of the opposition's economic platform as 
he is of the government's.  His comments indicate to us that 
to the extent Marchenko remains an opinion leader, President 
Nazarbayev's challenger(s) can expect nothing from this still 
highly regarded former official.  End comment. 
ORDWAY 
 
 
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