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FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 7989
INFO RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 03 ASTANA 000889 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ENRG EPET KZ
SUBJECT: Kazakhstan: Economy Minister Comments on Tengiz Brawl 
 
REF: A: Astana 501; B: Astana 737 
 
ASTANA 00000889  001.2 OF 003 
 
 
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¶1. (SBU) Summary.  In a December 6 meeting with the Ambassador, 
Economy Minister Musin identified the inadequacy of Kazakh workers' 
wages as a key contributor to the recent "Tengiz brawl."  Even 
though an oil company might allocate funds for a decent wage, Musin 
explained, by the time a contractor and sub-contractor took their 
cut, only a fraction of that wage reached the workers - a result the 
Minister termed a "social injustice."  End summary. 
 
¶2. (SBU) In a December 6 meeting with the Ambassador,  new Economy 
Minister Aslan Musin added to our insight on the economic context of 
what has become known as the "Tengiz brawl" (Ref A).  A key problem, 
UNCLASSIFIED 
 
SIPDIS 
PROG 12/12/06 
AMB:JORDWAY 
POEC:SMIKHELSON/JLOVELAND 
DCM:KMILAS; POEC:DMENNUTI 
POLA DCM DAO FCS 
 
AMEMBASSY ASTANA 
SECSTATE WASHDC 
INFO CIS COLLECTIVE 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ENRG EPET KZ
SUBJECT: KAZAKHSTAN: SAMRUK'S NEW BOARD CHAIRMAN DEALS WITH 
EXPANSION, GOVERNANCE 
 
REF: A) ALMATY 3278, B) Almaty 3178, C) Astana 147 
 
¶1. (SBU) Summary: On December 8, Sir Richard Harry Evans, the newly 
appointed Chairman of the Board of Directors of the Samruk State 
Holding Company, discussed with the Ambassador his uphill battle in 
establishing proper corporate oversight over the Samruk companies, 
working with the GOK, and plans for Air Astana.  End summary. 
 
¶2. (SBU) Background:  Samruk, the national holding company based on 
Singapore's Temasek, was established in January to provide 
state-owned companies with professional management (Ref A).  The 
appointment of Evans as Chairman of the Board in November roughly 
coincided with the announcement that another 17 companies would join 
the original five in Samruk's fold.  Evans has a prior indirect 
connection to Samruk: he is the former chairman of BAE Systems, a 
British giant with a 49% stake in Air Astana.  Air Astana, the de 
facto national airline in which the GOK currently holds a 51% stake, 
is one of Samruk's 17 "new arrivals." 
 
¶3. (SBU) The seventeen "new arrivals," along with their state 
ownership share, are: 
 
In Power Generation and Distribution: 
- KazKuat  (100%) 
- Ekibastuz Energy Center (100%) 
- Kazakhstan Electrical Energy & Capacity Operator (100%) 
- Mangistauskaya Electrical Distribution & Grid Company (94.25%) 
- Shulbinskaya Hydro Power Station (92.13%) 
- Bukhtarminskaya Hydro Power Station (90%) 
- Ust-Kamenogorskaya Hydro Power Station (89.99%) 
- Astana Energy Service (61.72%) 
- Kazakh Scientific Research Institute of the Power Sector (50%) 
 
In Transportation: 
- Pavlodar Airport (100%) 
- Aktobe International Airport (100%) 
- Astana International Airport (100%) 
- Air Astana (51%) 
- National Sea Shipping Company "KazMorTransFlot" (50%) 
 
In Mining and Metals: 
- Akbakai Mining & Metals Combine (33%) 
- Maikainezoloto (25%) 
 
In Engineering: 
- National Company "Kazakhstan Engineering (100%) 
 
¶4. (SBU) The original five companies subsumed under Samruk's 
authority are KEGOC (100%), KazMunayGas (100%), KazPochta (100%), 
Kazakhstan TemirZholy (100%), and KazakhTelecom (55.6%).  Ulf 
Wokurka, Samruk's Deputy Chairman and CFO, told us that there were 
originally three more candidates for inclusion in Samruk.  One of 
them, KazAtomProm, has been temporarily set aside due to concerns 
that its Russian partners would object. 
 
"Board Members Are Violating Their Fiduciary Duties" 
 
ASTANA 00000889  002.2 OF 003 
 
 
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¶5. (SBU) Evans told the Ambassador that Samruk has three strategic 
objectives: 
- Professional management: operating "like a real company," adopting 
international accounting standards, and achieving proper corporate 
governance; 
- Improved performance, derived from better governance; and 
- IPO flotations, private placements, etc. 
Evans, whose involvement with the company will be part-time, said "I 
am clear on these goals.  I am not sure other people in the 
organization want the same." 
 
¶6. (SBU) The focus, Evans said, must be on governance, which means 
"getting everyone at Samruk on the same page" and implementing a 
proper accounting system.  He stated that there has been no 
presentation of financial data to the board, leading him to conclude 
that "all the board members are violating their fiduciary duties." 
Evans stressed Samruk's need to overcome the Soviet mentality that 
fails to pursue minimization of inputs in relation to output.  "Good 
governance," he continued, requires bringing into Samruk and its 
corporate components "truly independent directors." 
 
¶7. (SBU) The picture painted by Evans of an almost total  lack of 
effective corporate oversight tracks with what we have heard from 
some other westerners with insight into the inner workings of large 
Kazakhstani corporations.  These observers have privately expressed 
reat skepticism`2%gaRDiNG dhe sestaafmfilipy"mf"Kcxbjish 
copanies'`listi.'S NQthULWvtgv8Ghcoc$M~klejaa"*MPF).!for%i'ne23W ( xq&Q`'/QsMtQOR$hde0GLM%'liqegw$ve" 4(4MJ4HEQ5p8as0 
Q}N _yFQIhZmqB"~xugwwu'j$h`mpjn"edboQrQ]Q:$Qry&o@ 4p9Q02QQ;Yy;kKQchdq`oc  Ref B.  End note.)  According to these observers, the 
Kazakhstani IPOs on the LSE have not been accompanied by a 
significant level of disclosure.  At best, this view goes, the 
London IPOs have failed to force the Kazakhstani companies to 
reform; at worst, the limited flotations represent little more than 
a short-term vehicle for company insiders to access the prestige and 
the capital provided by an LSE listing without introducing proper 
business practices or significantly diluting their ownership. 
 
Dealing with the GOK: It's a Cultural Thing 
------------------------------------------- 
 
¶8. (SBU) Evans stressed Samruk's need for directors who are "totally 
independent but know something about these businesses," and asked 
whether the Ambassador could help in this regard.  Evans 
acknowledged that attracting such talent will be problematic.  The 
government, he said, "has got itself into a corner" by orchestrating 
the so-called "bonus scandal" (Ref C).  As a result, Samruk finds 
itself unable to provide the salaries necessary to recruit quality 
management talent, foreign or domestic.  The problem, Evans said, is 
particularly acute in the oil and gas sector: "we provide them with 
training, they go to foreign companies." 
 
¶9. (SBU) Evans considers it crucial to establish a proper 
relationship with the GOK.  He said he asked President Nazarbayev 
"to give Samruk a free hand on remuneration" and "to get rid of the 
[unbearable] procurement laws." (Note: Wokurka told us earlier of 
the stifling effect of the state's procurement bureaucracy, which 
imposes huge administrative burdens "just to get paperclips." End 
note.)  GOK control over Samruk, Evans said, rests with Deputy Prime 
Minister Karim Masimov, whom he called "the de facto owner."  The 
GOK, according to Evans, is serious about bringing about "a 
transparent way of government."  But this "won't sit well with the 
way some of these companies are run."  "There is already some 
discomfort," Evans continued, "in areas like audit and debate on how 
it should be done.  The government has excessive expectations on how 
fast the results will come.  Some of this is cultural." 
 
Samruk Becomes an "Investor" 
---------------------------- 
 
¶10. (SBU) "All of the five [original] companies have pretty 
substantial growth prospects," said Evans.  He acknowledged that 
with the current round of expansion, Samruk is considering adopting 
an investment strategy.  (Note: Samruk's initial focus was only on 
the management of state assets.  End note.)  However, he added, 
Samruk already has its hands full and should limit its investment 
activity to the core areas of its original five companies.  Another 
problematic issue here, he said, is the possibility of competing 
with Kazyna, which "makes no sense."  (Note: The Kazyna Fund for 
Sustainable Development is the GOK's other holding company, 
encompassing a number of state-owned institutions charged with 
realizing the GOK's goal of economic diversification away from 
energy.  End note.)  "My feeling," Evans continued, "is that 
eventually, there needs to be some sort of co-existence with Kazyna. 
 
ASTANA 00000889  003.2 OF 003 
 
 
 Not a merger but a superstructure." 
 
The Plan for Air Astana: Hire Crews, Lease Planes 
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¶11. (SBU) Addressing Air Astana, Evans said he believes the airline 
should continue to lease, not buy, its aircraft.  He also stated 
that the decision should rest with professional managers, not the 
government.  Between now and fall 2007, he said, the airline needs 
to hire an additional 600 to 700 crew members, adding to the current 
total of 2,300.  Air Astana is also considering a long-term training 
program for pilots, Evans said.  (Note: Another Samruk insider tells 
us that there is a plan for the GOK and BAE Systems to draw down 
their ownership of Air Astana in parallel; the resulting shares will 
be distributed to the airline's employees.  End note.) 
 
¶12. (SBU) On the choice between Boeing and Airbus aircraft, Evans 
said "in narrow-body aircraft, the products are very similar; what 
swings the decision is advantages in maintenance.  In wide bodies, 
Boeing is better. The 777 is probably the best product." 
 
Comment 
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¶13. (SBU) Comment:  Samruk's current expansion, which its executives 
have told us will not be the last, signals growth not only in the 
company's size but also its mandate.  Towering over 22 state-owned 
companies, Samruk looks quite different from its original 
incarnation as the holding company dedicated merely to professional 
management of "strategic state assets."  Notably, with the arrival 
of "the new 17," Samruk already finds itself as a minority 
shareholder in two companies; the number is likely to increase as 
the GOK sheds shares through planned IPOs and privatizations.  It is 
still unclear whether Samruk will become primarily a stepping stone 
for privatizing state-owned companies or a de facto investment 
vehicle for the GOK.  In a sign that Samruk may not be too quick to 
relinquish to the market much of its newly acquired holdings, one 
insider told us that a new government resolution will soon formalize 
Samruk's mandate not only as a "management company" but an 
"investment company" as well.  End comment. 
 
MILAS