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O 281115Z JAN 09 ZDK
FM AMEMBASSY ASTANA
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UNCLAS SECTION 01 OF 03 ASTANA 000169 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EINV ENRG EPET KS CH KZ
SUBJECT:  KAZAKHSTAN:  SOUTH KOREANS SEEKING INVESTMENTS, BUT GLOBAL 
FINANCIAL CRISIS SLOWS DOWN BUSINESS 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  Poloff met several times in January with South 
Korean Embassy First Secretary Lee Jooil and Second Secretary Lee 
Moon-bae to discuss economic relations between Kazakhstan and Korea. 
 They explained that overall bilateral economic relations are robust 
and that South Korea continues to pursue investments in Kazakhstan's 
mining and energy sectors to enhance its energy security.  However, 
they admitted that falling commodity prices and the global financial 
crisis are negatively affecting Korean business interests in the 
country.  END SUMMARY. 
 
ENERGY SECURITY IS TOP KOREAN PRIORITY 
 
¶3.  (SBU) During a January meeting with Poloff, South Korean Embassy 
First Secretary Lee Jooil said that his government's top priorities 
in Kazakhstan are energy security and improving economic ties. 
Kazakhstan's formidable energy resources and Korean President Lee 
Myung-Bak's decision to make energy security one of his 
administration's top priorities have made the Kazakhstani-Korean 
relationship more important than ever.  As an example, Lee noted 
that during Prime Minister Han Seung-soo's May 2008 visit to 
Kazakhstan, the Korea National Oil Corporation (KNOC) and 
Kazakhstan's national oil and gas company KazMunaiGas (KMG) signed 
an agreement for KNOC to purchase a 27 percent stake in Kazakhstan's 
Zhambyl oil field.  (NOTE:  According to press reports, the Zhambyl 
field is estimated to hold about 1 billion barrels of crude oil. 
END NOTE.)  Under the agreement, South Korean companies, including 
SK, Samsung, and LG, will be able to extract 270 million barrels 
over five years.  Lee also reported that South Korea has established 
the Korean Consortium for Caspian Oil Projects, in which SK, 
Samsung, and LG are the largest and companies.  (COMMENT:  The 
Korean Consortium for Caspian Oil Projects appears to be a 
combination of a government-driven project to meet Korea's energy 
needs and a cost-sharing vehicle to divide up the high expenses  of 
oil extraction in Kazakhstan among several companies.  END COMMENT.) 
 
 
KOREA REMAINS A MAJOR SOURCE OF INVESTMENT 
 
¶4.  (U) Lee Jooil noted that Kazakhstan and South Korea have had a 
robust economic relationship since Kazakhstan's independence.  For 
1993-2006, Korea ranked seventh in terms of cumulative foreign 
direct investment (FDI) in Kazakhstan, immediately behind 
Switzerland and in front of China, Canada, Russia, Japan, and 
Turkey.  In 2007, Korean companies invested $232 million in 
Kazakhstan, ranking the country twelfth in terms of FDI for the 
year.  Lee expects Korea to continue to be a significant foreign 
investor in Kazakhstan, although he noted that the global financial 
crisis is seriously affecting Korea's global FDI flows. 
 
KOREAN COMPANIES ACTIVE IN ENERGY AND MINING DEALS 
 
¶5.  (SBU) The strong bilateral economic relationship is also evident 
in the number of companies and the size of their activities in 
Kazakhstan.  Since Kazakhstan declared independence, Korean and 
Kazakhstani companies have established over 300 joint ventures.  In 
one of the largest deals, Samsung announced a $4.7 billion 
investment in May 2008 to build a coal-powered 
electricity-generating plant near Lake Balkhash.  (NOTE:  Samsung's 
large-scale involvement in Kazakhstan is not a new development.  In 
1995, Samsung acquired 75 percent of the shares of Kazakhmys, one of 
Kazakhstan's largest copper-mining companies.  However, by 2005, 
Samsung had divested itself from its entire stake.  At the time of 
its IPO on the London Stock Exchange, Kazakhmys's largest 
shareholder was Vladimir Kim, an ethnic Korean citizen of 
Kazakhstan, who held 46.52 percent of the company's stock.  Lee 
Jooil told Poloff that the Kazakhstani government pressured Samsung 
to withdraw from Kazakhmys because of its preference for domestic 
ownership of the company.  END NOTE.)  Among other recent 
significant economic deals, in March 2008, the South Korean Electric 
Power Corporation (KEPCO) signed a memorandum of understanding for a 
 
ASTANA 00000169  002 OF 003 
 
 
$500 investment to build a thermal power plant in Astana and 
increase an existing plant's capacity from 360 to 600 megawatts. 
Also in March 2008, Daewoo International and South Kazakhstan oblast 
authorities announced plans to begin construction of a power station 
in South Kazakhstan in the spring of 2009.  In May 2008, the Korea 
Resources Corporation (KOPEC) and Astana Finance concluded a 
memorandum of understanding to jointly participate in mining 
projects dealing with the exploration, extraction, and production of 
copper, zinc, tungsten, molybdenum, nickel, and rutile in 
Kazakhstan.  Also in May 2008, Korea Hydro and Nuclear Power agreed 
to buy 3,410 tons of uranium through 2017, amounting to 11 percent 
of South Korea's annual uranium consumption. 
 
CLASH OF TITANS:  KOREANS FACE OFF AGAINST THE CHINESE 
 
¶6.  (SBU) Korean Embassy official Lee Jooil explained to Poloff that 
Chinese companies are the primary competitors for South Korean firms 
in Kazakhstan.  Lee said that despite the lower operating costs of 
Chinese companies, Korean businesses continue to win tenders by 
emphasizing their comparative advantages, such as the high-quality 
of their goods, advanced technology and know-how, and openness to 
technology transfers. 
 
CONCERNS ABOUT ECONOMIC SITUATION 
 
¶7.   (SBU) Lee Jooil told Poloff that as the global financial crisis 
deepens, he is increasingly concerned about the stability of 
Kazakhstan's economy.  Lee stated that, in his personal opinion, 
"until now, Kazakhstani leaders like Prime Minister Masimov have 
used oil revenue to placate their people, but Kazakhstan may no 
longer have the resources to satisfy people's needs."  Lee said that 
some of his contacts think the tenge could be devalued by more than 
10 percent, which could severely affect Kazakhstan's foreign debt. 
Lee also expressed concern that Kazakhstan's economy is not 
diversified enough, arguing that the problem with oil and uranium is 
that the prices of such commodities fluctuate so much.  He said that 
while South Korean companies were interested in investing in 
Kazakhstan's oil and gas sector last year, when oil prices were 
higher, now that prices are down and capital is tight, extracting 
oil from the high-cost Caspian Sea environment is just not as 
attractive anymore.  Lee also noted that South Korea, which 
generates 40 percent of its power from nuclear energy, invested in 
Kazakhstan following a sharp spike in the price of uranium in 2008. 
Lee admitted to Poloff that now that uranium prices are falling 
again, Korean investors are less enthusiastic about prospective 
investments in Kazakhstan in this industry. 
 
SOME KOREAN COMPANIES PULLING OUT, CUTTING BACK 
 
¶8.  (SBU) Lee Jooil maintained that the global financial crisis is 
having its strongest effect on South Korean investments in 
Kazakhstan's banking and construction sectors.  He noted that when 
Ambassador Kim Il Soo met with Korean companies in Almaty several 
weeks ago, four of them, including one in banking and another in 
construction, announced decisions to reduce their work force in 
Kazakhstan.  According to Lee, many small and medium-sized companies 
in Korea are facing severe capitalization and cash-flow problems; 
therefore the embassy expects many more Korean businesses to scale 
back their foreign investments. 
 
¶9.  (SBU) The global financial crisis is particularly affecting the 
Kazakhstan operations of Highvill, a construction company that is 
one of Korea's flagship enterprises in the country.  The first 
building developed by Highvill in Kazakhstan is located directly 
across the river from the Presidential Administration in Astana, and 
contains a number of luxury features rare in housing complexes in 
Astana, including an indoor golf driving-range, a fitness center, 
and sauna and karaoke facilities.  Use of these facilities is 
optional for residents and costs an additional $210 per month.  The 
U.S. Embassy has two employees with residences in Highvill, and all 
the South Korean Embassy officials live there, as well as the 
Ambassador of Switzerland.  Highvill sold all of the units in its 
 
ASTANA 00000169  003 OF 003 
 
 
first block several years ago, and Lee said Highvill representatives 
told him about wealthy Kazakhstanis bringing suitcases of cash to 
buy several apartments at once.  Since the real-estate crash in 
Kazakhstan, however, Highvill has had trouble selling its remaining 
Block 2 units.  The exterior of its second tower (containing Blocks 
3 and 4) is complete, but Highvill stopped construction on the 
interior several months ago.  On December 21, South Korea's Ministry 
of Construction awarded Highvill a "B" rating, allowing it to 
continue its operations under monitoring.  (NOTE:  The Ministry of 
Construction issued one Korean construction company which has 
operations in Almaty a "B" rating, and gave another "C" rating.  A 
"C" rating will result in a government-imposed restructuring of that 
company.  END NOTE.)  Despite the temporary reprieve, Lee reported 
that Highvill executives remain concerned that they may be forced to 
further scale back, and have applied for Kazakhstani government 
assistance funds through a program to help the troubled construction 
industry.  However, Lee believes that as a foreign company, Highvill 
may have difficulty securing such assistance. 
 
HOAGLAND