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O 241118Z OCT 08
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UNCLAS SECTION 01 OF 02 ASTANA 002115 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN EINV KZ
SUBJECT:  ASIAN DEVELOPMENT BANK DIRECTOR LAYS OUT HIS PRIORITIES IN 
KAZAKHSTAN 
 
REF:  (A) ASTANA 2086 (B) ASTANA 2095 
 
ASTANA 00002115  001.2 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY.  On October 24, Asian Development Bank (ADB) 
Country Director Stephen Wermert briefed the Ambassador on ADB's 
current priorities in Kazakhstan, touted the Central Asia Regional 
Economic Cooperation Program and the Foreign Investment Council, 
commented on the management and strategy of AES corporation, and 
assessed the government's response to the current financial crisis. 
END SUMMARY. 
 
ADB FOCUS IS ON BANKING AND INFRASTRUCTURE 
 
¶3.  (SBU) During an introductory call with the Ambassador on October 
24, ADB's Wermert, who has been in Kazakhstan for two and a half 
years and also serves on the Regional Management Team of ADB's 
Central and West Asia Department, informed the Ambassador that 
Kazakhstan's level of GDP per capita excludes the country from 
receiving low-margin loans from ADB.  "Loans will not be a big 
business for ADB in Kazakhstan," he said.  Nevertheless, Wermert 
disclosed that ADB is prepared to make its first loan to Kazakhstan 
in five years for a major highway project that would reach to 
western China.   According to Wermert, the ADB's focus in Kazakhstan 
will be on private-sector development in two main areas:  support to 
the banking industry, and private infrastructure projects in areas 
such as water, electricity, and transportation, based on the 
"Build-Own-Operate-Transfer" model.  In banking, Wermert confided 
that ADB's largest exposure to banks worldwide is in Kazakhstan, 
"even greater than in China or India."  In infrastructure, he 
mentioned that the Government of Kazakhstan plans to conduct a 
competition to build a new coal-fired power plant in the Balkhash 
region.  According to Wermert, Kepco (Korea), Datan (China), and 
Matsui (Japan) will submit competing bids for a 75% stake in the 
power plant.  ADB considers that project its number one priority. 
(NOTE:  On October 13, President Nazarbayev was reported as saying, 
"We have talked much about the construction of electric power 
stations in Balkhash and in Kostanay, about the expansion of 
Ekibastuz GRES (hydroelectric distribution station), hydro power 
stations, and power transmission lines.  The problem of power 
engineering should be tackled.  It is time to move from words to 
action.  This problem could slow down the entire country's economic 
development."  END NOTE). 
 
CENTRAL ASIA REGIONAL ECONOMIC COOPERATION 
 
¶4.  (U) Wermert touted the Central Asia Regional Economic 
Cooperation (CAREC) Program, initiated in 1997.  (NOTE: The CAREC 
Program operates in eight countries:  Afghanistan, Azerbaijan, the 
People's Republic of China (with a focus on the Xinjiang Uygur 
Autonomous Region), Kazakhstan, the Kyrgyz Republic, Mongolia, 
Tajikistan, and Uzbekistan.  END NOTE.)   To date, CAREC has focused 
on financing infrastructure projects and improving the policy 
environment in four areas:  transport, energy, customs, and trade. 
For Kazakhstan, the World Bank has the lead on energy issues (mostly 
in the power sector), the Islamic Development Bank (IDB) has the 
lead on trade, and the European Bank for Reconstruction and 
Development (EBRD) has the lead on transportation.  ADB's CAREC Unit 
(CARECU) has served as the CAREC Program Secretariat since March 
¶2000. 
 
THE FOREIGN INVESTMENT COUNCIL 
 
¶5.  (SBU) Wermert briefed the Ambassador on the Foreign Investment 
Council, a high-level body comprising 24 international companies in 
Kazakhstan that meets twice annually and is chaired by President 
Nazarbayev.  He said that the EBRD President flies in from London to 
attend and co-chair the meetings, along with CEOs or executive vice 
 
ASTANA 00002115  002.2 OF 002 
 
 
presidents from the companies.  A major topic of discussion at the 
June meeting was the investment climate in the power sector, while 
the next meeting in December is expected to focus on Kazakhstan's 
local-content requirements.  The Ambassador suggested that there was 
a natural synergy between the Foreign Investment Council and the new 
Public-Private Economic Partnership Initiative (PPEPI), since many 
of the issues and key players are likely to be the same. Wermert 
agreed that the PPEPI could help to identify issues that could be 
raised with the President at the Foreign Investment Council. 
 
AES COULD USE AN IMAGE UPGRADE 
 
¶6.  (SBU) To support the development of Kazakhstan's power sector, 
ADB considered making a loan to AES before it sold the GRES-1 
coal-fired power plant in Ekibastuz to Kazakhmys (see ref A). 
Wermert was directly involved in the negotiations and shared his 
opinions about AES's management and conduct with the Ambassador.  He 
said, "An image upgrade for them would be useful" because they have 
not been very successful in the region overall, noting AES's forced 
withdrawal from the Georgia market and inability to enter the 
Russian market.  Wermert was surprised that AES did not distance 
itself more forcefully from a negative June 2 Forbes article and 
opined that AES's "Kazakhstani entity appears to operate 
independently of the home office."  He speculated that this was due 
to the fact that AES's Kazakhstan operations do not require regular 
infusions of cash payments.  Wermert also suggested that AES "take a 
more pro-active approach" to investing in Kazakhstan's 
infrastructure and long-term development.  He said that the public 
impression of AES is similar to that of Western extractive 
companies:  they utilize Kazakhstan's natural resources to turn a 
profit, which they use to pay internal dividends, and do not invest 
in Kazakhstan's future growth.  Noting that AES's corporate strategy 
includes a strong emphasis on alternative energy, Wermert chided 
their Kazakhstan office for not doing more in this area. 
"Renewables are very popular in Kazakhstan," he noted.  "AES should 
be out in front on this issue, even if it won't be commercially 
viable for several years." 
 
KAZAKHSTAN'S RESPONSE TO THE FINANCIAL CRISIS 
 
¶7.  (SBU) When asked how he thought Kazakhstan had responded to the 
current financial crisis, Wermert said, "Their performance has been 
quite good."  He noted, for example, that the government acted 
quickly to provide liquidity to banks that suffered when the 
Eurobond markets closed.  Wermert did, however, raise two concerns 
about Kazakhstan's response to the crisis:  (1) whether Kazakhstan's 
banks are properly and transparently disclosing the quality of their 
assets; and (2) whether the new Samruk-Kazyna National Welfare Fund 
has the management expertise and financial practices necessary to 
make sound, long-term decisions.  He suggested the government was 
slow to set up Samruk-Kazyna and recommended that they recruit a 
"mature, professional candidate" from the United States to manage 
it.  According to Wermert, Samruk-Kazyna's newly-appointed 
Management Board Chairman, Kairat Kelimbetov, is trusted by 
President Nazarbayev, but "he doesn't know how to run this kind of 
an organization."  Wermert had a higher opinion of Kelimbetov's new 
deputy, Arman Dunayev, former head of the Kazyna Sustainable 
Development Fund, which was merged with the state-owned Samruk 
holding company to form Samrum-Kazyna.  "Dunayev well understands 
the financial industry," said Wermert, "and we can channel our 
advice through him."  (See ref B for the World Bank's more 
pessimistic view of Samruk-Kazyna.) 
 
HOAGLAND