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

UNCLAS SECTION 01 OF 02 ALMATY 000214 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 190356: N/A 
TAGS: OVIP PREL ECON KZ ECONOMIC
SUBJECT: KAZAKHSTAN: SECRETARY JOHANNS' JANUARY 11 MEETING 
WITH HALYK BANK CEO MARCHENKO 
 
¶1. (SBU) Summary: During a January 11 meeting with 
Secretary of Agriculture Johanns and his delegation, Halyk 
 
SIPDIS 
Bank CEO offered his opinion of the greatest challenges to 
the country's economic future: in the medium term, the 
choice of a new Prime Minister and the nature of reforms 
the new government might undertake; in the long term, 
diversification of the economy and the 2012 presidential 
succession.  Marchenko described Kazakhstan's mortgage 
market and private pension system, and identified areas of 
potential export growth in Kazakhstan's agricultural 
sector.  The former presidential advisor and Central Bank 
chairman was pessimistic about the prospect of Central 
Asian economic cooperation, claiming that, economically, 
Kazakhstan was "looking outside the region."  Marchenko 
gave Kazakhstan high marks for managing its oil revenues, 
while cautioning that the Chinese were aggressively 
pursuing additional Kazakhstani oil assets.  End Summary. 
 
¶2. (U) Secretary of Agriculture Mike Johanns met with 
Grigory Marchenko, former presidential advisor and Chairman 
of Kazakhstan's Central Bank and current CEO of Halyk Bank, 
on January 11 in Astana. 
In addition to Secretary Johanns and Marchenko, meeting 
participants included Ambassador John Ordway, Under 
Secretary of State Josette Shiner, Under Secretary of 
 
SIPDIS 
Treasury Timothy Adams, Mrs. Stephane Johanns, Deputy 
Assistant Secretary of State Matthew Bryza, and Jim 
Loveland (Embassy notetaker). 
 
Identifying Kazakhstan's Economic Challenges 
-------------------------------------------- 
 
¶3. (SBU) Ambassador Ordway opened the conversation by 
asking Marchenko to identify Kazakhstan's major 
macroeconomic challenges.  Marchenko identified two long- 
term challenges: diversification of the economy ("easier 
said than done"), and managing the 2012 presidential 
succession. "We have a good, strong president, he said, 
"but what will happen in seven years is a wide-open 
question." 
 
¶4. (SBU) Marchenko told Secretary Johanns that, in the 
medium term, the question of who would be the next Prime 
Minister was important, as were the reforms that the next 
government would undertake.  "We've lost two years of the 
reform process," Marchenko lamented.  "Reforms are harder 
to come by when oil prices are high."  Marchenko explained 
that, in the competition to attract outside capital, 
Kazakhstan had to push its reform process faster than 
Russia's; otherwise the latter would attract all the 
outside investment.  "Due to the reforms Kazakhstan 
undertook in the 1990s, we're still ahead - especially in 
the banking sector." However, Kazakhstan lagged behind 
Russia in education, health care, and culture.  Marchenko 
concluded by listing three other challenges which lay ahead 
for the Nazarbayev government:  fighting corruption, 
"legitimizing" the shadow economy, and undertaking housing 
reform.  Kazakhstan's construction boom should not be 
construed as a sign of genuine housing reform, he warned. 
"What was done was only a billion-dollar interest-free loan 
to the construction companies." 
 
Characteristics of the Kazakhstani Economy 
------------------------------------------ 
 
¶5. (SBU) Treasury Under Secretary Adams asked Marchenko if 
Kazakhstan possessed a mortgage market.  Yes, Marchenko 
replied, with two principal instruments - some 15-year 
mortgages, modeled after Freddie Mac and an Indonesian 
security; and a large number of 10-year "mortgage lites," 
offered with an effective 13-14% effective interest rate. 
 
¶6. (SBU) Marchenko described the Kazakhstani population as 
"confident in the medium-term" about the Kazakhstani 
economy, as evidenced by their willingness to hold short- 
and medium-term securities denominated in the local 
currency.  However, he said, "of deposits longer than three 
years, 91% are in dollars." 
 
¶7. (SBU) Continuing his description of the economy, 
Marchenko noted that in Kazakhstan the ratio of pension 
assets to GDP was very high, due to widespread employer 
contributions to pension plans.  Marchenko described the 
rules governing pension fund investments as "fairly 
liberal," especially a rule which allowed up to 40% of 
pension assets to be invested abroad. 
 
Dependency on the Oil Economy 
----------------------------- 
 
¶8. (SBU) Secretary Johanns asked Marchenko how dependent 
Kazakhstan's economy was on the current, high price of oil. 
In reply, Marchenko characterized the GOK's management of 
oil revenues as "positive," explaining that a cumulative $7 
billion had been saved in the National Fund, both to combat 
Dutch Disease and to provide for budgetary stabilization. 
(Marchenko noted that, as Central Bank Chairman, he, along 
with the then-Minister of Finance, had set up the Fund.) 
"The Fund could support the budget for two-and-a-half to 
three years if oil prices went down," Marchenko explained. 
While money was being set aside, he concluded, little had 
been done to diversify the economy.  The National 
Innovation Fund and Development Fund, he said, "have made 
little progress." 
 
Rural Sector Potential 
---------------------- 
 
¶9. (SBU) Asked about the economic potential of Kazakhstan's 
rural sector, Marchenko replied that exports of wheat, 
cotton, sunflower seeds and oils, and rice were "positive," 
and that animal husbandry had "huge potential," especially 
the raising of sheep for lamb and mutton export.  With the 
country's free pasture, "we could triple the number of 
sheep we raise."  Marchenko also lauded the potential of 
the food processing and wool processing industries, noting 
that, unlike the oil sector, these industries generated 
significant employment.  "The potential is big, but success 
so far is limited." 
 
Growing the Regional Economy 
---------------------------- 
 
¶10. (SBU) Under Secretary Shiner asked Marchenko how 
important the regional economy was to Kazakhstan. 
"Regional cooperation," Marchenko answered, "is as dead as 
always."  Kazakhstan, he said, was looking outside the 
region, comparing itself to Russia, Poland, and Hungary. 
In terms of Central Asia, "the key to the region is 
Uzbekistan, but they are not interested in cooperation." 
Marchenko told the Secretary that Halyk Bank had tried to 
open a branch in Uzbekistan "for five years before I 
joined," without success.  From Uzbekistan, he concluded, 
Kazakhstan gets only capital flight and illegal labor. 
President Karimov, he said, is "very smart, but very much 
into state capitalism."  In Uzbekistan, he added, "Stalin 
is alive."  "It's a pity," he said, "because the Uzbek 
entrepreneurial spirit is good." 
 
Increasing Market Forces in the Energy Sector 
--------------------------------------------- 
 
¶11. (SBU) U/S Shiner asked how the U.S. could help increase 
market forces in the region's energy sector.  First, 
replied Marchenko, "a pipeline through Iran would be good." 
Second, "try to counter what China is doing."  China, he 
said, "will offer 25% more for oil assets than anyone 
else...at some point, they will have a really healthy chunk 
of our market."  When Ambassador Ordway noted that the 
Chinese were not getting "first-line" Kazakhstani oil 
assets, Marchenko grudgingly agreed:  "There are not too 
many first-line assets left.  Still," he said, "your energy 
policy is not that clear."  U/S Shiner responded:  "we are 
clear that the Chinese approach to energy security - 
actually owning the producing assets - isn't helpful." 
 
¶12. (U) Secretary Johanns did not have the opportunity to 
clear this cable. 
 
ASQUINO