VZCZCXRO8724
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0167/01 0281107
ZNR UUUUU ZZH
O 281107Z JAN 09 ZDK
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4469
INFO RUCNCIS/CIS COLLECTIVE 1102
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0500
RUEHKO/AMEMBASSY TOKYO 1206
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0675
RUEKJCS/SECDEF WASHDC 0591
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1142

UNCLAS SECTION 01 OF 03 ASTANA 000167 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/ACE, F 
STATE PLEASE PASS TO USAID 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EAID ECON KZ
SUBJECT:  KAZAKHSTAN:  REQUEST FOR APPROVAL OF EXTENSION OF PROGRAM 
FOR ECONOMIC DEVELOPMENT 
 
REF:  ASTANA 0150 
 
ASTANA 00000167  001.2 OF 003 
 
 
¶1. (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2. (U) This is an Action Request.  Please see para 3. 
 
¶3.  (SBU) SUMMARY AND ACTION REQUEST:  According to the USAID 
Economic Contagion Tracker released in January, Kazakhstan is one of 
only three CIS countries that is listed as a Red (highest risk) 
Watch Country, characterized by high financial exposure, sovereign 
debt downgrade, and high inflation.  Fueling these risks is a 
significant falloff in GDP growth -- from 8.7% in 2007 to under 4% 
in 2008 and a predicted 1% in 2009 -- which has already had a 
significant impact on unemployment.  The Kazakhstani government is 
aware of these risks and is taking steps to address the crisis. 
During a January 23 meeting with the Ambassador, Minister of Economy 
and Budget Planning Bakhyt Sultanov praised the impact of the 
U.S.-Kazakhstan funded Program for Economic Development (PED), and 
requested an extension of the program for an additional three years, 
beyond FY 2009, when it was supposed to end (see reftel).  Post 
requests approval to formally offer to the Kazakhstani government a 
three-year program extension based on a 20% U.S. government, 80% 
Kazakhstani government split in financing (currently we provide 60% 
of the financing, and the Kazakhstanis 40%).  Post requests that on 
top of the currently planned $1 million a year for REMAP, an 
additional $1 million a year be made available per year for a 
three-year extension of PED from FY 2010 through FY 2012.  Post 
requests a timely response in light of the Kazakhstani government's 
budget cycle.  END SUMMARY AND ACTION REQUEST. 
 
ECONOMIC GROWTH PHASE-OUT PLANS REVISITED 
 
¶4.  (SBU) The economic situation in Kazakhstan today is dramatically 
different than when a Sub-PCC on the Phase-Out of U.S. Economic 
Growth Assistance to Kazakhstan met on August 30, 2007.  The 
Embassy's policy piece for the Sub-PCC affirmed the phase-out plan 
by pointing towards continued progress in phase-out indicators, 
noting an improvement in two indicators, as a result of which 
Kazakhstan met 9 of the 16 Monitoring Country Progress (MCP) 
economic reform and performance benchmarks for phase out (defined as 
the average of Romania/Bulgaria in 2002).  The Embassy's report 
struck a hopeful tone, noting that continued improvement could be 
expected in economic diversification and trade. 
 
¶5.  (SBU) The global financial crisis has hit Kazakhstan hard, and 
the impact was felt beginning in August 2007.  In accordance with 
the phase-out guidance issued by the Office of the Coordinator of 
U.S. Assistance to Europe and Eurasia (EUR/ACE), a recent assessment 
of Monitoring Country Progress indicators estimates that the 
economic reform gap in Kazakhstan is unlikely to be closed before 
2020 and that little or no progress is expected in the near term due 
global economic pressures.  With respect to economic performance, 
the report highlights Kazakhstani dependence on commodity exports, 
its undersized small and medium enterprise (SME) sector, and large 
economic disparities between rich and poor Kazakhstanis.  The 
problems have been magnified by the global economic crisis.  Of all 
the E&E countries and comparators in the report, only Kazakhstan and 
Chile exhibit high vulnerability with respect to both their 
financial and trade sectors.  For 2009, the expected decrease in 
economic growth from the long-term trend in Kazakhstan is 7.5%, as 
compared to a global average drop of 2.8%. 
 
RESOURCES ARE AVAILABLE BUT CAPACITY REMAINS THIN 
 
¶6.  (SBU) The Kazakhstani government is clearly taking the slump and 
ongoing risks seriously.  Over the past half a year, the government 
has allocated $21 billion, including money from its National (Oil) 
Fund, to implement anti-crisis measures.  Support for the financial 
sector, the construction sector, and agriculture, and even a billion 
for small and medium enterprise development, have complemented 
ongoing budget support, including social payments.  An additional 
positive sign is the recent reappointment of Grigoriy Marchenko to 
 
ASTANA 00000167  002.2 OF 003 
 
 
head the National Bank.  Marchenko is highly respected and oversaw a 
period of rapid growth in the financial sector and complex 
regulatory reforms in the 1990's.  Regardless of whether Marchenko 
will seek to bring broader financial sector supervision -- now the 
responsibility of the Financial Supervision Agency (FSA) -- under 
control of the National Bank, as some analysts speculate, his deep 
knowledge and banking sector experience (not to mention the fact 
that he has the ear of President Nazarbayev) should have a positive 
influence on ensuring appropriate use of anti-crisis funds for the 
financial sector. 
 
¶7.  (SBU) USAID worked closely with Marchenko, one of the chief 
architects of Kazakhstan's modern financial sector, during the 
1990's and he often credits USAID assistance with much of the 
success in establishing a successful national bank and currency, 
ensuring effective financial sector supervision, creating a viable 
capital market, and supporting pension reform.  USAID is already 
currently providing assistance to FSA to strengthen capacity across 
a range of supervision issues of importance to the currently fragile 
banking sector, as well as continuing to support the National Bank 
in its inflation modeling and forecasting. 
 
¶8.  (U) In the past year, USAID provided key advice on the new 
Budget Code, which adopted parameters for implementation of a 
multi-year budgeting system consistent with international best 
practices in results-based monitoring and evaluation.  Building 
effective capacity to ensure that this system brings benefits is 
itself a multi-year task, which entails developing approved 
methodologies for selecting, monitoring and evaluating investment 
programs (including public-private partnerships); improving 
accounting and reporting in state institutions in line with 
international standards to prepare consolidated statements on 
national and local budget execution; and improving both internal and 
external audits. 
 
¶9.  (SBU) The Government clearly recognizes that it needs continued 
assistance during this critical period.  There have been numerous 
instances in which PED government counterparts have praised PED's 
quality technical assistance in economic policy development and 
implementation. 
 
KAZAKHSTAN IS A KEY PARTNER IN CENTRAL ASIA 
 
¶10.  (SBU) Kazakhstan is the most progressive state in Central Asia 
-- a beacon of stability and reform in a region of great strategic 
importance to the United States.  The country is on the path to 
becoming one of the world's top 10 petroleum exporters in the coming 
years, and will assume the chairmanship of the OSCE in 2010 -- the 
first CIS country to do so, and its most visible role in global 
leadership to date.  Kazakhstan is a major investor in the Central 
Asia region, and has supported U.S. policy in Afghanistan, with an 
expressed willingness to do even more to support Afghanistan's 
stabilization and economic development.  Thus, promoting further 
economic reform in Kazakhstan has an impact well beyond the 
country's borders. 
 
EXTENSION OF THE PROGRAM FOR ECONOMIC DEVELOPMENT 
 
¶11.  (SBU) The August 30, 2007 Sub-PCC on the Phase-Out of U.S. 
Economic Growth Assistance to Kazakhstan cited the strategic value 
of limited, targeted assistance in the energy sector of $1 million 
per year beyond the FY 2009 phase-out date of the PED.  The 
Sub-PCC's Summary of Conclusions also stated that the United States 
should explore continued Kazakhstani funding of economic growth 
assistance, building on the successful PED partnership agreement. 
 
¶12. (SBU) Building on the Sub-PCC recommendations outlined above, 
Post recommends that on top of the $1 million a year for REMAP, an 
additional $1 million per year be made available for a three-year 
extension of PED for FY 2010 through FY 2012.  With the $6 million 
over the three-year period ($1.5 million of which would be used for 
program support costs), USAID would be able to leverage an 
 
ASTANA 00000167  003.2 OF 003 
 
 
additional $18 million from the Kazakhstani government.  A 
three-year $22.5 million extension of PED would be a very 
significant instrument for policy reform. 
 
¶13. (SBU) During a January 23 meeting with the Ambassador, Minister 
of Economy and Budget Planning Bakhyt Sultanov praised the impact of 
the PED, stating that his Ministry would like to continue to fund 
the program and requesting to extend PED for an additional three 
years through FY 2012.  The Embassy believes that the Kazakhstani 
government would accept a 20% U.S. government, 80% Kazakhstani 
government split in financing for program costs.  It is important 
that the U.S. government respond in a timely manner to this request. 
 The Kazakhstani government's 2010 budget cycle is already well 
underway and a number of steps need to be taken in order for both 
sides to be able to amend and extend the PED agreement. 
 
HOAGLAND