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DE RUEHTA #2572/01 3651105
ZNR UUUUU ZZH
O 301105Z DEC 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4239
INFO RUCNCIS/CIS COLLECTIVE 0990
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0389
RUEHKO/AMEMBASSY TOKYO 1095
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RUEKJCS/SECDEF WASHDC 0464
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RUEHAST/USOFFICE ALMATY 1059

UNCLAS SECTION 01 OF 03 ASTANA 002572 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/CEN, EEB/IFD/OMA, EEB/EPPD 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV BEXP ECON EFIN EINV ELAB EPET KZ
SUBJECT:  KAZAKHSTAN:  PRESIDENT NAZARBAYEV CONVENES FOREIGN 
INVESTORS COUNCIL 
 
REF:  (A) ASTANA 1868 (B) SECSTATE 134459 
 
ASTANA 00002572  001.2 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On December 5, President Nazarbayev chaired the 
biannual Foreign Investors Council in Almaty, which was attended by 
the entire Cabinet and the top 15 foreign investors in Kazakhstan. 
The meeting was notable for its exclusive focus on local-content, 
concern about the global financial crisis, and Nazarbayev's sharp, 
public criticism of both foreign and domestic companies, including 
national oil company KazMunaiGaz.  Several Western company attendees 
said they had never before seen Nazarbayev so determined to take 
action to solve a problem.  He ordered that an independent committee 
be established immediately to increase local-content and warned that 
even existing contracts could be revised to increase local-content 
requirements.  END SUMMARY. 
 
THE FOREIGN INVESTORS COUNCIL 
 
¶3.  (SBU) The Foreign Investors Council (FIC) meets twice annually 
in different cities of Kazakhstan and provides an open forum for the 
country's largest foreign investors, as well as international 
financial institutions such as the European Bank for Reconstruction 
and Development (EBRD), to discuss the investment climate with the 
President and his Cabinet.  Usually, 15 foreign investors and 15 
government officials attend the FIC forum. 
 
¶4.  (SBU) U.S. companies Philip Morris, Chevron, ExxonMobil, 
ConocoPhillips, AES, and General Electric regularly attend, as do 
other major foreign investors, primarily from the oil and gas, 
mining, and transportation sectors.  President Nazarbayev chairs the 
meeting, which is dedicated to a single topic of general interest. 
On December 5, the government delegation read like a Who's Who of 
Kazakhstan's political elite:  Prime Minister Masimov, Minister of 
Finance Korzhova, Minister of Energy Mynbayev, Central Bank Chairman 
Saidenov, Samruk-Kazyna Chairman Kelimbetov and Deputy Chairmen 
Kulibayev and Dunayev, and KazMunaiGas (KMG) President Kabyldin, 
among others. 
 
¶5.  (SBU) According to Stephen Wermert, Kazakhstan Country Director 
for the Asian Development Bank, which co-chairs the FIC together 
with the EBRD, some companies simply use the FIC to brag about their 
latest accomplishments.  "They spend the whole time banging their 
chests, talking about how good their programs are," he said. 
Wermert attended the December 5 meeting and said the foreign 
investors missed an opportunity to build trust with the government. 
"They would have made a more favorable impression on the 
government," he said, "if they had talked about Kazakhstan's needs 
and future development, rather than their own company's parochial 
plans." 
 
THE LOCAL-CONTENT ISSUE 
 
¶6.  (SBU) The issue before the Foreign Investors Council on December 
5 was local content, i.e., the percentage and value of Kazakhstani 
participation in foreign investment projects, including staffing and 
subcontracts for goods and services.  All ma${d6FH{el A).  Nevertheless, the December 5 FIC meeting 
made it clear that the government expects more to be done to promote 
local companies, build local capacity, and develop local expertise. 
 
PRESIDENT LASHES OUT 
 
¶7.  (SBU) According to ConocoPhillips's Nick Olds, who attended the 
FIC on December 5 with ConocoPhillips CEO Jim Mulva, President 
Nazarbayev was more active, directive, and critical than during any 
of the previous six meetings.  Olds said that Nazarbayev lamented 
the low level of local content in Kazakhstan's mega-projects, then 
he went around the table, looked his ministers in the eye, and 
 
ASTANA 00002572  002.2 OF 003 
 
 
pointed his finger in turn, saying, "This is what I want you to do: 
boom, boom, boom." 
 
¶8.  (SBU) President Nazarbayev claimed that from January through 
September, Kazakhstani content in foreign purchases of goods and 
service did not exceed 15% of the total procurement value.  Nick 
Olds and Shell's Country Director Campbell Keir, who also attended 
the meeting, said Nazarbayev was outraged and called the situation 
unacceptable:  "Obviously," he said, "this state of affairs does not 
satisfy the state, the oil companies, or Kazakhstani producers." 
(NOTE:  Unfortunately, the data provided to President Nazarbayev 
were incomplete and therefore inaccurate.  For example, the three 
largest investors in Kazakhstan -- Tengizchevroil, Agip KCO 
(Kashagan), and Karachaganak KPO -- were not included in the list of 
companies that use local subcontractors and employ local staff, 
despite the fact that, combined, they purchase 43% of all goods and 
services in Kazakhstan.  END NOTE). 
 
¶9.  (SBU) According to Olds and Keir, Nazarbayev pointedly reminded 
the foreign investors present that they have a contractual 
obligation to hire Kazakhstanis, invest in social projects, and 
promote the development of new industries, such as petrochemicals. 
Nazarbayev said that increasing Kazakhstan's share in foreign 
investment projects should become the government's number one 
priority, although he did acknowledge that Kazakhstani producers 
must provide competitive, quality services and products to meet the 
demand of foreign companies. 
 
¶10.  (SBU) Nazarbayev said that oil and mining companies in 
Kazakhstan purchase $18 billion in goods and services annually, 
including $10 billion in services.  He complained, however, that 
Kazakhstani companies are often unable to participate in the bidding 
processes.  "Kazakhstani producers do not have information about the 
dates, terms, and conditions of tenders for the purchase of goods 
and services," said Nazarbayev.  "If we knew what a foreign investor 
plans for the next year, or second or third year, we could prepare 
our companies for it.  Besides," he added, "some tenders are 
conducted, say, in London. It's an absolute disgrace!" 
 
KMG SINGLED OUT FOR CRITICISM 
 
¶11.  (SBU) Foreign investors were not surprised to find themselves 
criticized for not meeting the government's local content 
expectations, but they were surprised to see national oil company 
KazMunayGas singled out by Nazarbayev for "poor promotion of local 
interests in joint ventures with foreign investors."  Every year, 
the government reviews and approves KMG's plans for procurement, 
capital expenditures, and exploration and production, to ensure that 
they meet local content requirements.  According to Nazarbayev, 
however, "KazMunayGas has done nothing, or has just worked very 
poorly, and does not do enough to increase Kazakhstani interests in 
joint projects."  He ended emphatically, "The situation must be 
rectified immediately." 
 
FOREIGN INVESTORS RESPOND 
 
¶12.  (SBU) The reaction of foreign investors to the government's 
criticism was muted, partly because the data cited by the president 
were incomplete and partly because the companies themselves agree 
with the president on the need to increase investment in local staff 
and subcontracts.  Shell's Keir said, "Increasing local content in 
the purchasing of goods and services is a priority for us."  He 
added that local suppliers often know the domestic market better and 
can offer more beneficial contract terms and supply deals.  "It's 
just good business," he said.  Keir noted, however, that it is not 
always easy to meet the government's local content requirements, 
simply because there is no single, uniformly-applied formula for 
calculating the value and percentage of local content in a given 
procurement. 
 
¶13.  (SBU) Alexander Mashkevich of the Eurasian Natural Resources 
Corporation noted that domestic suppliers must be competitive and 
 
ASTANA 00002572  003.2 OF 003 
 
 
able to meet international standards on quality and timeliness if 
they expect to provide goods and services to Kazakhstan's major 
investment projects.  Mashkevich called for a new government program 
to coordinate the quality, quantity, cost, and diversity of local 
suppliers, a proposal that was not immediately endorsed by other 
foreign investors. 
 
IMPLICATIONS AND NEXT STEPS 
 
¶14.  (SBU) Nazarbayev ordered that an independent committee be 
established immediately to increase the local content of products 
and services in Kazakhstan.  He signaled the government's 
determination to enforce local content provisions, saying, "The 
government should monitor the fulfillment of obligations on local 
content, increase responsibility for noncompliance with contract 
terms, and set up a system of government control over the subsoil 
users' activities on this issue." 
 
¶15.  (SBU) Ominously, Nazarbayev also ordered the government's new 
committee to review all existing subsoil contracts in order to 
establish or increase local-content quotas and identify local 
Kazakhstani producers and suppliers.  According to press reports, 
Nazarbayev instructed the Ministry of Labor and Social Protection to 
arrange a system of assigning and distributing quotas to regions 
(oblasts) in order to monitor the extent that regions meet their 
quotas. 
 
¶16.  (SBU) The next meeting of the Foreign Investors Council will be 
held on June 12, 2009, in the city of Kostanai.  The theme will be 
"Alternative Sources of Financing for the Continued Economic 
Development of Kazakhstan in the Context of Global Changes." 
 
¶17.  (SBU) COMMENT:  American investors who attended the December 5 
meeting were pleasantly surprised by Nazarbayev's balanced, 
businesslike approach to promoting local content and his direct, 
personal engagement with the companies and his Cabinet.  Many 
observers commented that Nazarbayev was much more active and 
involved in this meeting than in previous sessions of the Foreign 
Investors Council.  In particular, investors who attended the 
meeting appreciated Nazarbayev's statement that Kazakhstani 
suppliers must become more competitive and produce quality products 
that meet international standards.  The president's passion for 
local content is partly a result of the financial crisis, which has 
hit local suppliers hard and forced even large, diverse, 
state-supported companies such as KMG to lay off as much as 10% of 
their workforce.  Although he criticized foreign companies for their 
allegedly low local content, Nazarbayev also appealed for their 
support during these troubling times:  "I do hope that your 
companies will support Kazakhstan's economy during this difficult 
period," he said.  "I have asked you before and I am asking you 
again to provide social protection for the people during this period 
and preserve and create jobs." 
 
¶18.  (SBU) COMMENT CONTINUED:  American investors were not alarmed 
by Nazarbayev's call to review and revise the local content 
provisions of existing contracts, mainly because the companies can 
in fact demonstrate a high level of local content, the president's 
claims notwithstanding.  They do, however, expect increased 
government scrutiny and closer monitoring of future procurement and 
hiring decisions.  Ultimately, government poking and prodding will 
not be necessary or even useful.  The companies themselves 
understand the economic and political business case for increased 
local content, but they believe the best way to achieve that is 
through improving the competitiveness of local suppliers, not 
through government mandates and quotas.  END COMMENT. 
 
HOAGLAND