VZCZCXRO8379
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #2201/01 2250325
ZNR UUUUU ZZH
R 130325Z AUG 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 0357
INFO RUEHAST/USOFFICE ALMATY
RUCNCIS/CIS COLLECTIVE 0229
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 02 ASTANA 002201 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/CEN - O'MARA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EIND ENRG PGOV KTDB KZ
SUBJECT: KAZAKHSTAN DIPS ITS TOE IN ETHANOL 
 
ASTANA 00002201  001.2 OF 002 
 
 
¶1. (SBU) Summary.  The recently built ethanol plant in North 
Kazakhstan Oblast is touted by regional officials and company 
executives as the first ethanol production facility in all of the 
CIS.  Officially opened in September 2006 (with President Nazarbayev 
pressing the "start" button to great fanfare), the plant is now 
planning to make its first export shipment, most likely to Finland. 
The facility's owner, the Almaty-based BIOHIM, is already eyeing 
constructing more ethanol plants in Kazakhstan and considering 
production of biodiesel as well.  The company, the recipient of $60 
million in state financing, enjoys government support and is looking 
forward to the expected passage of legislation it helped write that 
will introduce in Kazakhstan a minimum ethanol use requirement.  End 
Summary. 
 
The Business Model 
------------------ 
 
¶2. (SBU) Kazakhstan's first bioethanol plant is located in Tayynsha 
(pop. 13,000), the official center of the overwhelmingly 
agricultural Tayynsha Rayon of the North Kazakhstan Oblast. 
Anatoliy Makovskiy, the rayon's akim for ten years (since the 
rayon's establishment following a redrawing of official maps), told 
visiting Econoff that Tayynsha's biggest draws for BIOHIM were 
abundance of high-quality wheat, the proximity of a major railroad 
line, and "cheap" water.  Makovskiy spoke of the BIOHIM plant being 
at the center of a "production chain:" the locally grown wheat is 
converted into ethanol and useful byproducts, with some of the 
latter being used as feedstock for locally raised cattle.  "Basco," 
a Kazakhstani company with a stake in BIOHIM, is currently building 
in Tayynsha a cattle farm and a meat processing plant.  The akim 
proudly declared to Econoff that his rayon is facing labor shortages 
even among unskilled workers. 
 
¶3. (SBU) According to Yermek Berdinov, the BIOHIM plant's director, 
sales of byproducts are a critical aspect of the operation, which 
cannot be profitable solely by selling ethanol.  Berdinov estimated 
that for each dollar of revenue, 70 cents would derive from ethanol 
and 30 cents from the useful byproducts.  These byproducts, he said, 
include gluten, starch, and carbon dioxide.  The economic necessity 
to produce the byproducts, Berdinov explained, results in a highly 
complex production process.  Thus, while BIOHIM imported all its 
technology from Europe, the plant's production system is uniquely 
designed to take advantage of the high quality of local wheat that 
enables extraction of the byproducts in addition to ethanol. 
Production, Berdinov noted, is highly automated; the facility, which 
operates around the clock, employs a relatively modest 300 or so 
people.  During the mid-day tour, the buzzing plant appeared quite 
deserted. 
 
¶4. (SBU) The company plans to export its ethanol production to 
Europe, most likely to Finland, by rail.  Berdinov approximated that 
transportation costs would constitute roughly 1/5 of ethanol's price 
in Europe.  However, BIOHIM is now looking forward to selling its 
ethanol domestically as well.  Berdinov expects adoption of a law 
(that he and another BIOHIM executive helped draft), which will 
introduce mandatory use of ethanol.  The content requirement will 
start at 5% and come into force in 2008.  Berdinov remarked that 
Kazakhstani gasoline is currently of very low quality, precluding 
the possibility of mixing it with ethanol.  This, he noted, will 
change with the new law, which will introduce European quality 
standards. 
 
¶5. (SBU) BIOHIM, Berdinov said, is eyeing expansion.  A "strong 
interest" is biodiesel, but the company is also preparing plans for 
construction of another, larger ethanol plant.  The "desired plant 
size" from the economic perspective, Berdinov explained, calls for a 
150,000 ton capacity.  The first plant, he said, provides 57,000 
tons. 
 
The Government Takes (Strong) Interest 
-------------------------------------- 
 
¶6. (SBU) Financing for BIOHIM's first plant, Berdinov said, was 
provided by a number of financial institutions, including German, 
Finnish, Russian, and Chinese banks.  What distinguishes the 
project, however, is the $60 million loan the company received from 
the Development Bank of Kazakhstan (DBK, the largest institution of 
the government-owned "Kazyna" Sustainable Development Fund), the 
DBK's largest single loan to date.  Berdinov acknowledged that the 
terms of the DBK loan were no better than those offered by 
commercial institutions.  What the DBK's involvement provides, he 
said, is "the government support." 
 
¶7. (SBU) In addition to branding the BIOHIM facility "a breakthrough 
project," a key political buzzword these days, the government is 
planning to launch its own ethanol production plants.  These would 
be run by KazAgro, a recently created state holding company for the 
government's agricultural assets.  With KazAgro's planned entry, the 
 
ASTANA 00002201  002.2 OF 002 
 
 
Kazakhstani ethanol industry appears to be headed for public-private 
competition.  Berdinov predicted an "ethanol boom" in Kazakhstan. 
 
¶8. (SBU) There is still more the government needs to do to make 
ethanol economically viable.  Berdinov told Econoff that BIOHIM is 
currently stymied by a statutory failure to recognize ethanol as a 
form of fuel.  According to press reports, BIOHIM is unable to 
export its ethanol because CIS countries uniformly classify all 
ethanol as a "food product," imposing on it an exorbitant excise 
tax, which results in a sixteen-fold increase in its cost.  Alikhan 
Smailov, KazAgro chairman, is quoted by the press as stating that 
the solution lies in having a CIS commission task member states to 
change their tariff schedules accordingly.  He expects this issue to 
be resolved soon. 
 
Comment 
------- 
 
¶9. (SBU) Comment.  The BIOHIM ethanol plant, in some ways, 
epitomizes the government's stated ambition to diversify the economy 
away from the extractive sector and toward high value-added, 
high-tech, export-oriented industries.  Moreover, through its 
linkages with the agricultural sector (by using wheat as input and 
marketing ethanol byproducts as feedstock), the plant significantly 
stimulates employment and provides a strong boost to an area, which 
- like much of rural Kazakhstan - had been mostly untouched by the 
country's economic boom.  At the same time, BIOHIM's decision to 
rely on government financing in order to ensure political support, 
along with its success in contributing to the passage of favorable 
legislation, highlights the importance of political muscle in 
navigating Kazakhstan's investment waters.  End Comment. 
 
ORDWAY