VZCZCXRO6487
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 #0068/01 0141044
ZNR UUUUU ZZH
O 141044Z JAN 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4340
INFO RUCNCIS/CIS COLLECTIVE 1034
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0433
RUEHKO/AMEMBASSY TOKYO 1139
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0607
RUEKJCS/SECDEF WASHDC 0522
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1074

UNCLAS SECTION 01 OF 04 ASTANA 000068 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN EINV KZ
SUBJECT:  KAZAKHSTAN:  GLOBAL FINANCIAL CRISIS HITS HARD, BUT 
GOVERNMENT TAKES AGGRESSIVE MEASURES TO SUPPORT ECONOMY 
 
REF: (A) 08 STATE 134459 (B) 08 ASTANA 2291 (C) 08 ASTANA 2320 (D) 
08 ASTANA 2338 (E) 08 ASTANA 2351 
 
ASTANA 00000068  001.2 OF 004 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The financial crisis continues to hit Kazakhstan 
hard, but the government has responded in a vigorous, aggressive 
manner that should maintain social stability and support modest 
economic growth in 2009, particularly if oil production increases as 
expected.  That said, there are continuing concerns about the 
transparency of the government's anti-crisis measures, the 
vulnerability of Kazakhstan's banking sector, and the ability of the 
National Bank to support the currency.  END SUMMARY. 
 
GROWTH RATE DOWN 
 
¶3.  (U) At a January 6 meeting in Almaty, the government and 
National Bank delivered a joint report to President Nursultan 
Nazarbayev on Kazakhstan's economic achievements in 2008 and 
prospects for 2009.  Prime Minister Karim Masimov informed 
Nazarbayev that according to preliminary estimates, GDP growth for 
2008 "topped 3%."  This figure is below downward-revised earlier 
estimates of 5% growth for the year and is a marked decline from the 
average annual 9.6% growth achieved during 2005-07.  Sergei 
Shatalov, World Bank Country Manager for Kazakhstan, told us on 
January 13 that the World Bank expects Kazakhstan's GDP to grow by 
5% in 2009, provided the government's expectations of a 13-15% 
increase in oil production are met.  Shatalov noted, however, that 
the IMF projects just 1% growth for Kazakhstan in 2009, primarily 
due to stagnation in non-tradable commodities. 
 
¶4.  (SBU) The sluggish growth is largely attributable to the direct 
and indirect effects of the global financial crisis.  Bank lending 
has been significantly constrained, with Kazakhstani banks unable to 
replenish their external borrowing and holding portfolios in which, 
according to government estimates, 6-7% of loans are non-performing, 
and perhaps up to 20% are "under stress" (see reftel C).  The global 
economic slowdown caused by the financial crisis has significantly 
reduced prices for key Kazakhstani commodity exports, including 
crude oil and metals. 
 
BLUE CHIPS TAKE A TUMBLE 
 
¶5.  (U) During a January 13 Cabinet meeting, Minister of Labor and 
Social Protection Berdibek Saparbayev said that due to the global 
economic crisis, 25 enterprises in Kazakhstan have gone out of 
business, costing 7,000 employees their jobs, while 234 enterprises 
were forced to reduce operations, resulting in an additional 28,000 
layoffs.  Even Kazakhstan's strongest, most well-established 
enterprises have not been immune from the crisis.  For example, from 
June 2, 2008 to January 2, 2009, the value of shares in a number of 
leading Kazakhstani companies dropped dramatically: 
 
- Global Deposit Receipts (GDRs) for KazKommertsBank were down 55%, 
from $16.30 to $7.45 per share; 
 
- GDRs for KMG Exploration and Production, a subsidiary of national 
oil and gas company KazMunaiGas, declined by 58%, from $31.40 to 
$13.20 per share; 
 
- GDRs in Alliance Bank dropped by 84%, from $5.55 to $0.89 per 
share; 
 
- shares in Eurasian Natural Resource Corporation were down 75% on 
the London Stock Exchange, from 1,444.00 pounds to 362.50 pounds per 
share; and 
 
- shares in copper giant KazakhMys fell by 85% in London, from 
1,686.71 pounds to 255.00 pounds per share. 
 
CRISIS RESPONSE PLAN 
 
 
ASTANA 00000068  002.2 OF 004 
 
 
¶6.  (U) At the January 13 cabinet meeting, Minister of Economy and 
Budget Planning Bakhyt Sultanov presented a detailed action plan to 
Prime Minister Masimov in response to the financial crisis.  As 
previously announced, approximately $10 billion for anti-crisis 
measures will be allocated from the National (Oil) Fund, which 
currently holds assets of $27.6 billion.  In total, the government 
has announced plans to inject up to $18 billion (approximately 20% 
of GDP) into the economy.  The government's crisis response plan 
includes a $4 billion investment in the financial sector, including 
the intended purchase of 25% equity stakes in Kazakhstan's four 
largest banks; $3 billion to complete housing construction projects 
and strengthen the mortgage lending system; $1 billion to bolster 
small- and medium-sized businesses; $1 billion for the agricultural 
sector; and $1 billion for infrastructure and industrial projects. 
 
 
"BILLION-DOLLAR BLACK BOXES" 
 
¶7.  (SBU) Ulf Hindstrom, senior banker for the European Bank for 
Reconstruction and Development (EBRD), told us on January 13 that 
the government's anti-crisis plan contains "a lot of billion-dollar 
black boxes," and lacks a compelling, overarching strategy to 
stabilize the economy.  Furthermore, he added, "the government 
hasn't spent any of the money yet.  They're only talking about 
spending the money."  World Bank Country Manager for Kazakhstan 
Sergei Shatalov conceded this point, but added that the government's 
repeated public pronouncements may have positive psychological 
effects on the population, if they can be convinced that the 
government is taking decisive action to address the crisis. 
 
GOVERNMENT EXPECTED TO MAINTAIN SOCIAL STABILITY 
 
¶8.  (SBU) Both the EBRD's Hindstrom and the World Bank's Shatalov 
believe that despite the crisis, the government will continue to 
honor the social contract and deliver basic social services such as 
education, health care, and housing. 
Hindstrom is optimistic about the medium- to long-term outlook in 
Kazakhstan and expects stable growth in the country's production of 
oil, uranium, coal, and grain.  In the short-term, however, he 
worries that the government has succumbed to a "temptation to enact 
populist measures" that may adversely affect economic growth.  He 
noted in particular the government's proposal to impose price 
controls for electrical power that will likely deter private 
investment in the modernization or expansion of infrastructure. 
 
INVESTMENT IN INFRASTRUCTURE A WISE CHOICE 
 
¶9.  (SBU) Hindstrom defended investments in infrastructure as a 
sound crisis response measure and noted that the government is 
willing to undertake enormous infrastructure projects (e.g., roads, 
railroads, etc.) in order to demonstrate visible results, make large 
capital investments, and create jobs.  (NOTE:  Under the aegis of 
the Central Asia Regional Economic Cooperation, the EBRD, Asian 
Development Bank (ADB), and the World Bank are co-funding one of the 
largest infrastructure investments in Kazakhstan, the multi-billion 
dollar Transport Corridor to China project.  END NOTE.)  However, 
"The problem with the government's infrastructure investments," 
according to Hindstrom, "is the penchant for funding white elephant 
projects," such as the six-lane highway from Astana to the resort of 
Borovoe, which, he argued, "has no legitimate economic 
justification." 
 
STRAIGHT A'S 
 
¶10.  (SBU) Almaty, Astana, Atryau, and Aktau will receive the 
majority of money, support, attention, and protection during the 
financial crisis, contended Shatalov, possibly at the expense of 
other cities and regions.  Prime Minister Masimov's actions seem to 
be consistent with Shatalov's prediction.  On January 13, Masimov 
ordered Kairat Kelimbetov, chairman of the Samruk-Kazyna National 
Welfare Fund, to prepare a special anti-crisis plan for Astana and 
Almaty within the next two weeks because of the "special importance" 
 
ASTANA 00000068  003.2 OF 004 
 
 
of those two cities to the economy.  Masimov noted that Astana and 
Almaty are the real estate and financial centers of Kazakhstan and 
said "the lion's share of the government's anti-crisis measures will 
be taken in those two cities." 
 
BANKING SECTOR "VULNERABLE" 
 
¶11.  (SBU) The banking sector is extremely vulnerable and heavily 
leveraged, according to Shatalov and Hindstrom.  Minister of Economy 
Sultanov seemed to acknowledge this when he told the Cabinet on 
January 13 that the government, "must urgently rehabilitate 
second-tier banks by using the Distressed Assets Fund to purchase 
problem assets as soon as possible."  The problem, according to the 
World Bank and EBRD, is that the Financial Supervision Agency (FSA) 
does not know the true value of toxic assets and has no reliable way 
to determine their value.  Hindstrom said, "We simply don't know how 
bad things really are," partly because a bank's loan portfolio is a 
fast-moving target.  A borrower's status and fiscal health can 
change rapidly, he said, particularly if a company cannot secure the 
capital needed to fund expansion or even payroll obligations. 
Shatalov said the aggregate value of Kazakhstan's "doubtful debts" 
is could be as high as $30 billion.  Both Shatalov and Hindstrom 
agreed that closer banking supervision and regulation are absolutely 
essential and they said the government is taking steps in the right 
direction, including its investment of $4 billion in the banking 
sector. 
 
RESTRUCTURING DEBT TO AVOID DEFAULT 
 
¶12.  (U) On December 9, Samruk-Kazyna Chairman Kelimbetov said 
publicly that the state is "prepared to negotiate with foreign 
investors on the restructuring of the debt of Kazakhstani commercial 
banks."  Although major banks politely declined the offer, the 
threat of forced debt restructuring remains in play.  Kazakhstani 
banks owe more than $40 billion to foreign creditors, including 
$10.6 billion due in 2009 and $7 billion due in 2010.  In his 
December 9 remarks, Kelimbetov said that the government would like 
to discuss discount terms and repayment extensions with creditors. 
Kelimbetov's comment quickly set off alarm bells in the financial 
sector and was immediately "clarified" by National Bank Chairman 
Anvar Saidenov.  The National Bank and FSA continue to downplay 
Kelimbetov's statements.  On January 13, for example, FSA Chairwoman 
Elena Bakhmutova categorically denied banks will default on their 
payments.  "We only raised the question of restructuring the banks' 
external debts.  Nobody is talking about default."  She added that 
the FSA has been talking "on a voluntary basis" with major 
creditors, but the banks have not embraced the idea of debt 
restructuring. 
 
EXCHANGE RATE IS A CANARY IN A COAL MINE 
 
¶13.  (SBU) According to the World Bank's Shatalov, "there is massive 
nervousness" about the exchange rate.  Kazakhstan unofficially 
pegged the tenge to the dollar in late 2007 and kept the exchange 
rate between 120 and 121 tenge throughout 2008.  On January 13, the 
rate broke out of the corridor, with the tenge falling to 121.12. 
Shatalov said the World Bank will monitor changes to the exchange 
rate as an early warning indicator of structural stress in the 
economy.  National Bank Chairman Saidenov is well aware of the 
importance of exchange rate stability and said on January 13 that 
Kazakhstan will keep the exchange rate of the tenge under tight 
control to protect Kazakhstan's heavily dollar-denominated economy. 
 
 
¶14.  (U) Imports have continued to increase even as overall economic 
growth has stalled.  In particular, Russian and Ukrainian imports 
are driving Kazakhstani goods from local markets, which led Minister 
of Industry and Trade Vladimir Shkolnik to call for higher duties on 
imported food products.  At the January 13 Cabinet meeting, Shkolnik 
said, "The term for low tariffs on some of the most significant 
foodstuffs imported into Kazakhstan expired on January 1, 2009. 
Unless we raise the tariffs, cheap, imported products will flood our 
 
ASTANA 00000068  004.2 OF 004 
 
 
markets and drive out local manufacturers," he warned. 
 
DOUBTS ABOUT SAMRUK-KAZYNA 
 
¶15.  (SBU) Analysts continue to debate the purpose of Samruk-Kazyna, 
the behemoth, state-owned National Welfare Fund created by the 
merger of mega-holding company Samruk and national development fund 
Kazyna (see reftel D).  The EBRD's Hindstrom said, "It is still not 
clear what the intent was behind the creation of this organization, 
or what its current strategy is."  He also said the merger might 
lead to a conflict of interest, if, for example, Kazyna was to 
provide funding for projects in which Samruk's companies are 
invested.  Prior to the merger, Samruk alone owned more than 90% of 
Kazakhstan's asset base, including 19 companies and more than 300 
legal entities in the oil and gas, mining, telecommunications, 
transportation, and training sectors.  Samruk reported more than 
$24.5 billion in revenue in 2007. 
 
¶16.  (SBU) COMMENT:  The government has taken aggressive steps to 
respond to the financial crisis and has done well to keep 
unemployment, inflation, and currency volatility in check.  One 
immediate priority appears to be maintaining social stability, which 
the government hopes to achieve by completing housing construction, 
regulating electricity and food prices, and encouraging foreign 
investors to maintain current levels of employment.  In the medium 
term, there is serious concern about the ability of banks to meet 
their outstanding obligations, with debt restructuring and industry 
consolidation both a distinct possibility.  Over the long term, 
there is a danger that the government's increased involvement in and 
ownership of the economy, especially the banking sector, will 
restrict competition and prevent the emergence of new private sector 
players.  It is not clear at this point whether the government has 
any intention of selling or divesting the assets it is acquiring and 
aggregating.  END COMMENT. 
 
HOAGLAND