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DE RUEHTA #2095/01 2961249
ZNR UUUUU ZZH
O 221249Z OCT 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3626
INFO RUCNCIS/CIS COLLECTIVE 0713
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 2203
RUEHBJ/AMEMBASSY BEIJING 0113
RUEHKO/AMEMBASSY TOKYO 0823
RUEHIT/AMCONSUL ISTANBUL 0044
RUEAWJA/DEPT OF JUSTICE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEKJCS/JOINT STAFF WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RHEHNSC/NSC WASHDC 0269
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEKJCS/SECDEF WASHDC 0191
RUEAIIA/CIA WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RHEFAAA/DIA WASHDC
RUEHVEN/USMISSION USOSCE 1997
RUCNDT/USMISSION USUN NEW YORK 1946
RUEHNO/USMISSION USNATO 2282
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 03 ASTANA 002095 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
JUSTICE FOR DANIEL CLAMAN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EINV EFIN EAID KZ
SUBJECT: KAZAKHSTAN:  WORLD BANK COUNTRY MANAGER DISCUSSES 
ECONOMIC SITUATION, BOTA FOUNDATION 
 
REF: ASTANA 2070 
 
¶1. (U) Sensitive but unclassified.  Not for Internet 
distribution. 
 
¶2.  (SBU) SUMMARY.  During an October 15 introductory meeting 
with the Ambassador, World Bank Country Manager for 
Kazakhstan Sergei Shatalov provided his views on the state of 
the Kazakhstani economy, discussed the government's efforts 
to deal with the global financial crisis, and gave an update 
on the activities of the Bota Foundation.  END SUMMARY. 
 
ECONOMIC OVERVIEW 
 
¶3.  (SBU)  Shatalov told the Ambassador that economic growth 
in Kazakhstan has been down for the last three quarters. 
With the exceptions of the Atyrau and Aktau regions -- the 
heart of Kazakhstan's hydrocarbons sector -- growth has 
actually been flat in the country as a whole.  According to 
Shatalov, Chinese demand for raw materials is shrinking as 
China switches to domestic producers, which is having a 
significant impact on steel production in Kazakhstan.  (NOTE: 
 This was evidenced by the October 3 layoffs of over 4000 
steel workers from the Temirtau steelworks owned by 
ArcelorMittal.  END NOTE.) 
 
¶4.  (SBU) Shatalov explained that the grain harvest is down 
significantly this year, and maintained that grain exports 
will not exceed 3 million tons, as a result of which 
Kazakhstan will not reach the ranks of one of the world's top 
five wheat exporters.  (NOTE:  The government maintains that 
overall grain exports will be between 5.5 and 6 million tons. 
 END NOTE.)  The construction sector has visibly declined 
throughout Kazakhstan, particularly in Astana, where most of 
what is currently under development is driven by government 
spending.  There remains almost no foreign direct investment 
in the construction sector.   On a more positive note, 
Shatalov said that Shymkent appears to be benefiting from 
significant private sector investments in various sectors of 
its economy. 
 
BANKING SECTOR NOT YET IN THE CLEAR 
 
¶5.  (SBU) Shatalov painted a picture of the banking sector 
not nearly as rosy as that presented to the public by 
Kazakhstani financial authorities.  According to Shatalov, 
the credit crisis in the construction sector has been 
accompanied by a significant drop in real estate values -- by 
up to 50% in Almaty -- leaving many banks with a very 
significant burden of debt, and very little collateral. 
Forty percent of the balance sheet of the Kazakhstani banking 
sector is comprised of debt and mortgages.  This ratio holds 
true for Kazakhstan's two largest banks, Bank Turan Alem and 
KazKommertsBank. 
 
RECOVERY EFFORTS QUESTIONABLE 
 
¶6.  (SBU)  When asked about the prospects for Kazakhstan's 
recovery from the global financial crisis, Shatalov noted 
that the government had allocated $10 billion from the 
National (Oil) Fund on October 13 as part of a stabilization 
package.  This allocation is in addition to the $4 billion 
made available last year from other reserves to support the 
construction sector, of which $2 billion has been transferred 
to banks under very strict lending conditions.  Shatalov 
questioned the government's decision to merge the Samruk 
 
ASTANA 00002095  002 OF 003 
 
 
state assets holding company and the Kazyna Sustainable 
Development Fund into the Samruk-Kazyna National Welfare 
Fund.  He termed Samruk-Kazyna a "super monster" and said the 
relevance of the merger to dealing with the financial crisis 
was unclear (see reftel).  He did, however, praise the recent 
creation of a stressed assets fund to buy up bad loans from 
banks, noting that after consultations with the World Bank, 
Kazakhstani financial authorities seem to be closely studying 
the case of the Resolution Trust Corporation (RTC), which 
liquidated the assets of failed savings and loan institutions 
in the United States in the late 1980s and early 1990s. 
Shatalov maintained that overall, there needs to be greater 
transparency with respect to the assets of Kazakhstan's 
banking sector -- which are estimated to be $120 billion, 
roughly the equivalent of the country's Gross Domestic 
Product. 
 
BOTA FOUNDATION OPEN FOR BUSINESS 
 
¶7.  (SBU) Shatalov gave the Ambassador a detailed update on 
the Bota Foundation, which was established by the United 
States, Kazakhstan, and Switzerland to disburse for 
humanitarian purposes $84 million in frozen bank funds linked 
to the James Giffen bribery case.  He described Bota as "at a 
turning point."   After three months of intensive work, 
Kazakhstan's Ministry of Justice (MOJ) and the U.S. 
Department of Justice (DOJ) finally reached agreement on 
changes to several of Bota's statutory documents.  The Bota 
MOU between the three country partners was also renegotiated. 
 Shatalov called the MOJ's work exemplary, specifically 
praising Deputy Justice Minister Marat Beketayev, who managed 
to get the foundation registered in just one day.  He 
half-jokingly noted that making such speedy registration 
routine would do "worlds of good" for Kazakhstan's ranking in 
the World Bank's annual "Doing Business" report. 
 
¶8.  (SBU) Shatalov explained that at an October 7 meeting, 
Bota's Board of Trustees selected IREX/Save the Children as 
the winning bidder to be the foundation's program manager. 
This decision is subject to approval by the three 
governments, as well as the successful conclusion of contract 
negotiations with IREX/Save the Children by October 31. 
Shatalov praised the work to date of the Board (of which 
former U.S. Ambassador to Kazakhstan John Ordway is a 
member).  He said that the Kazakhstani trustees have been 
diligent, independent, and proactive, and "dead set" on the 
efficient use of Bota's funds. 
 
¶9.  (SBU)  Shatalov said that Bota anticipates launching its 
programmatic activities in November.  Assistance will be 
targeted to specific regions, which will be selected based on 
rural poverty rates.  Shatalov noted, however, that existing 
Kazakhstani data on poverty has proven unreliable.  To better 
address this issue, the Kazakhstani government recently 
commissioned the World Bank to conduct a standardized poverty 
study that will greatly assist in the identification of the 
regions most in need of assistance, as well as provide a 
basis for the comparison of poverty statistics across the 
Central Asia region.  In the meantime, a World Bank 
specialist is "roving the countryside" to identify at risk 
groups in need of Bota Foundation attention. 
 
¶10.  (SBU) Shatalov emphasized that the World Bank's primary 
work on Bota is to define an efficient delivery mechanism for 
the assistance.   The role of the Kazakhstani government 
will, of course, be limited to the provision of material 
 
ASTANA 00002095  003 OF 003 
 
 
support, such as office space, not to exceed the mandated 
5-year program period.  The World Bank hopes, however, that 
many of the expected Bota Foundation regional offices will 
remain open after the 5-year period via private and corporate 
contributions, thereby fulfilling the second mandate of the 
foundation:  to nurture a philanthropic culture in 
Kazakhstan.  According to Shatalov, the Bota Foundation will 
serve as a model for similar opportunities identified in Chad 
and Cameroon. 
HOAGLAND