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O 250622Z FEB 09
FM AMEMBASSY ASTANA
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UNCLAS SECTION 01 OF 02 ASTANA 000344 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PLEASE PASS USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EINV EFIN EAID KZ
SUBJECT:  KAZAKHSTAN:  WORLD BANK OFFICIALS DISCUSS ECONOMIC 
SITUATION, EFFECTS OF CURRENCY DEVALUATION 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  The Ambassador had an introductory meeting with 
incoming World Bank Country Director for Central Asia Motoo Konishi 
on February 24.  Konishi and World Bank Country Manager for 
Kazakhstan Sergei Shatalov explained that the February 4 devaluation 
of the tenge should have a positive impact on Kazakhstan's balance 
of payments.  Shatalov said that foreign direct investment in 
Kazakhstan is likely to decline as a result of the global economic 
crisis.  The World Bank officials expected a one-time spike in 
consumer prices as a result of the tenge's devaluation and said it 
is too early to tell whether there will have to be a further 
devaluation.  Konishi said that Prime Minister Masimov needs to take 
on entrenched interests in dealing with the financial crisis.  The 
World Bank officials argued that Kazakhstan has to focus in the 
long-run on developing its human capital.  Shatalov explained that 
the Bota Foundation should be ready to disburse money this summer. 
He asked for our assistance in obtaining the U.S. Department of 
Justice's concurrence that Kazakhstan's progress on certain 
transparency-related initiatives is sufficient to enable Bota to 
move forward.  END SUMMARY. 
 
CURRENCY DEVALUATION IMPROVES BALANCE OF PAYMENTS 
 
¶3. (SBU) The Ambassador had an introductory meeting on February 24 
with incoming World Bank Country Manager for Central Asia Motoo 
Konishi, who is replacing Annette Dixon.  Konishi and World Bank 
Country Manager for Kazakhstan Sergei Shatalov told the Ambassador 
that the February 4 devaluation of the tenge would likely have a 
positive impact on Kazakhstan's balance of payments.  Shatalov 
explained that according to models run by the Bank, with a $40 per 
barrel price for crude, Kazakhstan's balance of payments deficit at 
the new exchange of around 150 tenge per dollar should be in the 
range of $4 billion.  By comparison, at the old exchange rate of 
around 120 tenge per dollar, the deficit would have been in the $15 
billion range.  The $4 billion deficit could be further reduced by 
constraining imports, with any remainder handled through management 
of currency reserves. 
 
FDI LIKELY TO DECLINE 
 
¶4. (SBU) Shatalov said that foreign direct investment (FDI) in 
Kazakhstan, especially in the energy sector, is likely to decline as 
a result of the global financial crisis.  He said specifically that 
Lukoil is planning to scale back its investments, which could impact 
expansion of the Karachaganak project.  Shatalov further claimed 
that there are rumors that first oil from Kashagan might be pushed 
out yet again, perhaps to 2015.  (NOTE:  We have not heard anything 
from U.S. companies -- ExxonMobil, Chevron, and ConocoPhilips -- 
about any plans that they might have to scale back their own 
investments, nor have we heard anything concrete about a new 
Kashagan delay.  END NOTE.)  In any event, reduced FDI might help 
the country's balance of payments situation further, because FDI, 
particularly in the energy sector, leads to imports of machinery and 
other goods, Shatalov pointed out. 
 
ONE-TIME SPIKE IN INFLATION 
 
¶5.  (SBU) Shatalov said that the World Bank expects a one-time spike 
in Kazakhstan's consumer price index as a result of the tenge's 
devaluation, but they do not believe the devaluation will have a 
continuing impact on the inflation rate.  The World Bank officials 
indicated it is too early to tell whether there will have to be a 
further devaluation of the tenge.  The National Bank releases only 
monthly -- rather than weekly -- figures on its currency reserves, 
and is slow to release even those figures, so we will not know until 
several days into March whether the National Bank stemmed its losses 
of reserves with the devaluation.  Shatalov noted that 12-month 
tenge futures are trading at 240 tenge to the dollar, but the World 
Bank officials indicated that this futures' market is open to 
speculation and manipulation, and thus we should not make too much 
 
ASTANA 00000344  002 OF 002 
 
 
of this figure.  The World Bank officials confirmed that despite 
budget pressures, the government is trying to maintain spending on 
social programs.  They noted that the Kazakhstanis had not been able 
to implement a distressed assets fund to buy up bad assets from 
commercial banks because, after discussions with the World Bank, the 
Kazakhstanis realized how difficult it would be to properly value 
such assets.  As Konishi put it, "How do you value these assets when 
there is no market for them?"  According to Shatalov, significant 
increases in credit default swap (CDS) rates indicate that the 
markets believe that both Halyk Bank and KazKommertsBank are in 
trouble. 
 
MASIMOV WOULD BE DIFFICULT TO REPLACE 
 
¶6.  (SBU) Noting rumors that Prime Minister Masimov might be removed 
and made a scapegoat for the economic situation, Shatalov said 
Masimov has proven himself a skilled economist, diplomat, and 
interlocutor with international institutions who would be difficult 
to replace.  (NOTE:  Rumors about Masimov's impending demise 
essentially date from the first day he was appointed prime minister. 
 We agree with Shatalov that it doesn't make sense to replace him 
given how adept he is at dealing with complex economic and financial 
issues -- but that doesn't make his position invulnerable.  END 
NOTE.)  Konishi said that to tackle the financial crisis, Masimov 
needs to take on entrenched interests and limit the flow of 
resources directed toward favored insiders, which might lead to 
growing pressures against him.  He pointed to the recent criminal 
proceedings launched against the prominent KUAT construction company 
as indicative of the government's desire to preserve resources, and 
where possible, recoup losses. 
 
HUMAN CAPITAL SHOULD BE LONG-TERM FOCUS 
 
¶7.  (SBU) The World Bank officials explained that Kazakhstan should 
be focusing not only on the immediate financial crisis, but also on 
developing policies to ensure Kazakhstan's economic success in a 
post-crisis world.  Konishi said that over the long-run, Kazakhstan 
must broadly develop its human capital, including through 
investments in education and health care.  Shatalov noted that the 
World Bank is providing assistance to the Ministry of Education in 
its effort to open a world-class, showcase university in Astana, 
which is currently under construction. 
 
NEXT STEPS ON THE BOTA FOUNDATION 
 
¶8.  (SBU) Shatalov also provided an update on the progress of the 
Bota Foundation.  He said the initiative enjoys the full support of 
the Kazakhstani government.  Bota has set up its team, and now has a 
representational office in Almaty with twelve program officers.  The 
Foundation would like to start disbursing money during the summer, 
but according to the 2006 MOU, the World Bank first needs the U.S. 
Department of Justice's concurrence that Kazakhstan has made 
sufficient progress on certain transparency-related initiatives, 
including the Extractive Industries Transparency Initiative (EITI) 
and the Public Finance Management Review.  Shatalov explained that 
during a recent meeting, State Secretary Kanat Saudabayev criticized 
the World Bank for dragging its feet on Bota.  He asked for our 
assistance in getting the green light from the Department of 
Justice.  Shatalov said that he would be in Washington March 22-29, 
and requested a meeting with the State Department to discuss a way 
forward. 
 
HOAGLAND