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DE RUEHTA #0147/01 0261045
ZNR UUUUU ZZH
O 261045Z JAN 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4444
INFO RUCNCIS/CIS COLLECTIVE 1089
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0487
RUEHKO/AMEMBASSY TOKYO 1193
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RUEKJCS/SECDEF WASHDC 0578
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RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1120

UNCLAS SECTION 01 OF 02 ASTANA 000147 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EINV EFIN EAGR EPET ENRG KZ
SUBJECT:  KAZAKHSTAN:  ENTREPRENEUR NURLAN KAPPAROV DESCRIBES 
ECONOMIC SITUATION, BUSINESS OPPORTUNITIES 
 
ASTANA 00000147  001.2 OF 002 
 
 
¶1. (U) Sensitive but unclassified.  Not for public Internet. 
¶2. SUMMARY:  During a January 22 meeting with the Ambassador, 
Kazakhstani entrepreneur Nurlan Kapparov stressed the need for 
further banking-sector reforms and signaled his approval of the 
recent appointment of Grigoriy Marchenko to head the National Bank. 
Kapparov expects a devaluation of the tenge.  He named agriculture, 
real estate and construction, oil services, and renewable energy as 
sectors of the economy with great potential for development over the 
long-run.  Kapparov defended Kazakhstan's stringent work permits 
system for foreigners as necessary to ensure that foreign 
enterprises train local workers to take over positions in their 
companies.  He said that the Lancaster Group that he heads has plans 
to build a plant in Astana to manufacture polysilicon for solar 
panels, but has had difficulty thus far in attracting the necessary 
financing.  END SUMMARY. 
BANKING SECTOR NEEDS FURTHER REFORM 
 
¶3. (SBU) Kazakhstani entrepreneur Nurlan Kapparov -- the 
38-year-old, Harvard-educated, head of the Lancaster Group holding 
company -- told the Ambassador on January 22 that the government's 
financial assistance to the banking sector (which is aimed at 
mitigating the effects of the global financial crisis) will be 
wasted if further banking reforms are not implemented.   The banking 
sector's problems, he argued, go beyond the financial crisis, but 
"no one paid attention" when concerns were raised earlier about the 
quality of the country's top banks.  Kapparov suggested that bank 
oversight is made more difficult by the fact that the Financial 
Supervision Agency (FSA), which is responsible for bank regulation, 
is independent and does not report to the National Bank.  He 
signaled his approval of the recent appointment of banker Grigoriy 
Marchenko to be chairman of the National Bank.  Kapparov described 
Marchenko -- who previously served as National Bank head during 
1999-2004 -- as uniquely qualified for the job, having been the lead 
figure in establishing Kazakhstan's banking sector a decade ago.  He 
maintained that Marchenko is likely to have unofficial control over 
the FSA, pointing out that FSA head Yelena Bakhmutova is a Marchenko 
protege.  This could be the first step toward a merger of the two 
agencies, Kapparov added. 
 
TENGE DEVALUATION EXPECTED 
 
¶4. (SBU) The Ambassador asked Kapparov whether he believes the tenge 
will be devalued relative to the dollar.  Kapparov first noted that 
he has his own direct experience in banking, since the Lancaster 
Group holds a majority stake in KazInvestBank.  (NOTE:  The EBRD and 
Citibank hold the remaining shares.  END NOTE.)  He said he expects 
a devaluation, arguing that the government cannot sustain the 
current exchange rate for much longer.  Kapparov pointed out that 
the currencies of several of Kazakhstan's major trading partners, 
notably the Russian ruble, have fallen in value recently, worsening 
Kazakhstan's terms of trade.  This fact in particular, he contended, 
argues for the tenge's devaluation. 
 
GREAT POTENTIAL IN AGRICULTURE 
 
¶5.  (SBU) In response to a question from the Ambassador, Kapparov 
enumerated several sectors of the economy which he believes have 
great long-term potential for development.  Agriculture, he said, 
should be a particular focus for the country.  According to 
Kapparov, the agricultural sector is already "quite strong," with 
several billion-dollar companies, including some that control vast 
agricultural land tracts.  With the introduction of new technology 
to raise productivity, the country's agricultural output could be 
increased two-fold or more, he maintained.  Unlike energy 
consumption, which fluctuates with economic conditions, food 
consumption is relatively stable.  In China, increasing urbanization 
is leading to growing food demand that domestic production cannot 
keep up with, Kapparov contended.  He noted that Arab investors, 
often a bellwether, have made large investments in Kazakhstani 
agriculture through private equity funds, and are considering 
additional acquisitions. 
 
 
ASTANA 00000147  002.2 OF 002 
 
 
BULLISH ON REAL ESTATE AND CONSTRUCTION 
 
¶6. (SBU) Kapparov is also bullish about real estate and construction 
over the long-term, but admitted that recovery of those sectors 
ultimately depends on the world economy.  He pointed out that 
following the fall of the Soviet Union, half-finished construction 
projects sat idle for years.  Once the economy picked up in the late 
1990s, a lot of those projects were finally finished off.  Kapparov 
predicted that within three or four years, currently idle projects 
will be completed. 
 
DEFENSE OF WORK PERMITS SYSTEM 
 
¶7. (SBU) Kapparov believes that the oil services sector has great 
potential for domestic Kazakhstani companies, in particular because 
of the government's local content requirements.  He pointed out that 
ERSAI Caspian Contractor, a joint venture between Lancaster and 
Italy's Saipem, is Kazakhstan's largest oil services company, with 
major contracts to provide support to the Kashagan project.  The 
Ambassador explained that Western companies are concerned about 
local content requirements, as well as Kazakhstan's stringent work 
permits system that can make it difficult to bring in necessary 
expatriate personnel.  Kapparov, however, insisted that the work 
permits system is essential in pushing companies to train locals so 
that they have the skills to ultimately take over positions in 
foreign companies.  He indicated that he has put this into practice 
at ERSAI:  the company, which was established in 2003, currently has 
1500 employees, only 100 of whom are expats, and is training a 
Kazakhstani to take over as CEO in two years. 
 
PLANS FOR POLYSILICON PLANT 
 
¶8. (SBU) Kapparov cited renewable sources of energy as another 
sector with great potential for Kazakhstan.  He explained that the 
Lancaster Group has developed a project to build a $400 million 
polysilicon plant in Astana, but is struggling to come up with the 
financing.  According to Kapparov, the plant would manufacture four 
percent of the world's supply of polysilicon for solar panels, using 
industrial polysilicon produced by factories in Karaganda and 
Taldykorgan.  He had already met with Prime Minister Masimov the 
previous day to discuss the project, and is working with the 
Samruk-Kazyna National Welfare Fund to attract debt financing. 
Unfortunately, the government itself is strapped for funds, he 
explained.  According to Kapparov, the Lancaster Group was offered 
the opportunity to build the plant in Abu Dhabi, but made a 
political decision to construct it in Astana to support the 
development of a domestic renewable energy sector.  This plant is 
the first step in developing a domestic solar industry.  In the 
future, Kazakhstan could be home to solar energy farms providing 
electricity for domestic usage, as well for export to neighboring 
countries, including both China and Russia, Kapparov explained. 
 
HOAGLAND