VZCZCXRO8587
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHTA #0442/01 0720830
ZNR UUUUU ZZH
O 130830Z MAR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4886
INFO RUCNCIS/CIS COLLECTIVE 1349
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0728
RUEHKO/AMEMBASSY TOKYO 1431
RUEHUL/AMEMBASSY SEOUL 0415
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0910
RUEKJCS/SECDEF WASHDC 0823
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 ASTANA 000442 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN EINV EPET ETRD IT KZ

SUBJECT:  KAZAKHSTAN:  ITALY REMAINS A MAJOR INVESTOR, ACTIVE IN 
SEVERAL KEY SECTORS OF THE ECONOMY 
 


¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 


¶2.  (SBU) SUMMARY:  PolOff met on February 17 with XXXXXXXXXXXX at the Italian Embassy in Astana, to discuss the Kazakhstan-Italy relationship.  XXXXXXXXXXXX characterized the overall Kazakhstan-Italy relationship as positive and robust, and said that both sides looked forward to President Nazarbayev's planned visit to Italy sometime during 2009. XXXXXXXXXXXXX told PolOff that the Italian government's top priority in Kazakhstan is pursuing energy security, followed by strengthening other commercial ties.  Italy remains one of the major sources of foreign direct investment in Kazakhstan, and several Italian companies remain active in the construction, 
property management, construction materials, fashion, and alcohol 
sectors, despite the effects of the global financial crisis. 
Italian companies in the construction sector complain of pressure 
and delayed payments from local and central authorities, while 
fashion and wine exporters complain that profits are primarily being 
captured by customs and local retailers.  XXXXXXXXXXXXX told PolOff that he did not expect finalization in the near future of an EU-Kazakhstan agreement on Kazakhstan's WTO accession.  END SUMMARY. 
 


NAZARBAYEV PLANS TO VISIT ITALY 
 


¶3.  (SBU) XXXXXXXXXXXX characterized the overall Kazakhstan-Italy 
relationship as very positive and robust.  Italy's Prime Minister, 
Silvio Berlusconi, visited Kazakhstan briefly in 2008. (NOTE:  He 
was supposed to make a technical refueling stop, but President 
Nazarbayev invited him into town, and they had a lengthy meeting and 
windshield tour of Astana.  END NOTE.)  XXXXXXXXXXXX said that Nazarbayev had planned to visit Italy in March, but also wanted to call on the Pope.  Since the Pope expects to be abroad in March, the Nazarbayev trip was postponed to ""later in 2009.""  XXXXXXXXXXXX expressed some relief at the postponement, noting that the Kazakhstani side hopes to sign a range of commercial agreements which will take time to prepare. 



TOP PRIORITY IS ENERGY SECURITY 


¶4.  (SBU) XXXXXXXXXXXX said the Italian government's top priority in 
Kazakhstan is pursuing its energy security, since Italy is a major 
importer of Kazakhstani crude oil.  However, XXXXXXXXXXXX explained that the Italian Embassy's role is primarily one of quiet support, since policy is made at the EU-level.  XXXXXXXXXXXX also maintained that oil-related issues are not really a ""bilateral"" EU issue with Kazakhstan, but also involve the EU-Russia relationship.  ""Without Russia, it is impossible to generate agreement,"" XXXXXXXXXXXX claimed. 
 




¶5. (SBU) XXXXXXXXXXXX reminded PolOff that the most important Italian company with a presence in Kazakhstan is Italy's national oil 
company Eni.  However, he said that much of Eni's investment is 
channeled through the Netherlands, which results in a statistical 
understatement of Italy's importance as a foreign investor in 
Kazakhstan.  XXXXXXXXXXXX maintained that that Eni, along many other Western oil companies, finds it very difficult to meet local content 
requirements. XXXXXXXXXXXX asked, ""Where can you find certain goods made in Kazakhstan?  Local content requirements are a huge problem for our companies in the oil sector.""   At the same time, XXXXXXXXXXXX said that many Italian companies complain that Eni does not favor Italian companies enough, but XXXXXXXXXXXX explained that for items Eni cannot procure from local suppliers, Eni typically uses the same diverse international network of suppliers it relies on for projects in other countries. 


ITALY REMAINS A MAJOR SOURCE OF INVESTMENT 
 

¶6.  (SBU) XXXXXXXXXXXX said that Kazakhstan and Italy have had a robust economic relationship since Kazakhstan became independent.  In 2008, total trade between Kazakhstan and Italy amounted to over $13 billion, including over $11 billion worth of Kazakhstan exports to 
Italy (primarily oil) and more than $1 billion in Kazakhstani 
imports.  Italy officially ranks fourth in terms of cumulative 
foreign direct investment (FDI) in Kazakhstan, behind the United 
States, the Netherlands, and the United Kingdom.  XXXXXXXXXXXX expects Italy to continue to be a significant foreign investor in Kazakhstan, 
although he noted that Italian investment outside of the oil sector 
has been declining since 2006.  XXXXXXXXXXXX attributes the decline to a fall in Kazakhstani demand and an increase in competition.  For example, during the 1990s, many Italian companies moved quickly into the newly open Kazakhstani construction market and used their expertise to build high quality buildings cheaply and quickly.  As more local and foreign companies entered the market, it became saturated, and Italian construction companies withdrew or moved into the property management business. 


PROBLEMS WITH CEMENT FACTORY INVESTMENT 
 

¶7.  (SBU) Italy's second largest commercial investor in Kazakhstan 
is Italcementi, the world's fifth largest cement-producer, which 
acquired the Shymkent cement factory in 1998.  According to XXXXXXXXXXXX, the Shymkent factory's operations have been problematic because of pressure from local authorities.  Cement prices in Kazakhstan are controlled by the government, but actual free-market prices are much higher, which creates a lucrative trade for intermediaries.  XXXXXXXXXXXX told PolOff that the factory's production is frequently stopped by local authorities, who claim that the company does not have the ""necessary permits.""  This is a pretext for demanding bribes or other compensation.  Such problems were particularly egregious during the spike in world cement demand in 2007.  Kazakhstan was particularly affected by China's demand for cement and other construction materials in the run-up to the Summer 2008 Olympics, which also coincided with building booms in Astana and Almaty, XXXXXXXXXXXX argued. 
 

MINISTRY OF TRANSPORTATION DELAYS PAYMENT 
 


¶8.  (SBU) Other Italian companies have also faced problems with 
Kazakhstani authorities.  The large Italian company Grupo Todini, 
controlled by prominent Italian politician Luisa Todini, has been 
active in construction and road-building in Kazakhstan for 12 years, 
and completed two roads in western Kazakhstan, one from Atyrau to 
Aktau and one from Atyrau to Samara, Russia.  XXXXXXXXXXXX told PolOff that the Kazakhstani Ministry of Transport paid the company approximately $8 million less than the amount due.  Although the company has the right to take the case to international arbitration and is confident it would win, XXXXXXXXXXXX said Grupo Todini is reluctant to take this step for fear that it could endanger future deals.  The company is currently completing one-fifth of the road from Astana to the resort of Borovoye; the other four sections are being completed by one Iranian and three Kazakhstani companies.  According to XXXXXXXXXXXX, all of the companies, including Todini, were forced to purchase materials at prices at least seven times the officially set rates, without being able to recover payment from the Ministry of Transportation. 
 

PROPERTY MANAGEMENT MORE LUCRATIVE 
 


¶9.  (SBU) Despite the hardships several larger Italian companies 
face doing business in Kazakhstan, several medium-sized firms have 
successfully carved out niches, especially in property management. 
XXXXXXXXXXXXXXX told PolOff that Renco is well-established in property management in Kazakhstan.  The company's largest market is Armenia, where it dominates the construction sector, whereas in Kazakhstan it is a medium-sized, but highly successful company.  According to XXXXXXXXXXXX, Renco, which was started by an Eni employee, moved successively from oil services to construction and then to property management, and now manages a large number of the buildings it constructed, including the office building in Almaty where USAID is located, the Astana Renco building which houses a number of diplomatic missions, and several hotels located adjacent to oil 
fields.  XXXXXXXXXXXX said that the company wisely moved out of the Kazakhstani construction market after the 1990s just as lower-cost 
firms entered it.  Renco then used its brand and its knowledge of 
basic Western service standards to become successful in property 
management. 


GLOBAL FINANCIAL CRISIS TAKES ITS TOLL ON BANKING INVESTMENT 

¶10.  (SBU) XXXXXXXXXXXX admitted that the global financial crisis is having a negative effect on Kazakhstan-Italy commercial relations. 
Italy-based Unicredit bought Kazakhstan's ATF bank in 2007, but this 
acquisition has lost 90 percent of its value.  XXXXXXXXXXXX also expressed concern over the Kazakhstani government's reorganization and nationalization of banks as an anti-financial crisis measure.  XXXXXXXXXXXXsaid that the Director of the Italian Trade Delegation in Almaty believes ""the nationalization of Alliance Bank is a big scam.""  XXXXXXXXXXXX said that the government take-over of BTA Bank was ""not a positive step.""  BTA, XXXXXXXXXXXX claimed, was well-known even outside of Kazakhstan as a sound financial institution.  XXXXXXXXXXXX admitted that he had even put some of his own money in BTA, judging it to be the safest of the Kazakhstani banks, and that he had been one of the many people who 
had rushed to the bank to withdraw money after the nationalization. 
(NOTE:  International financial institution and Western 
private-sector bankers have told us the opposite --that BTA was 
badly over-extended and frequently cooked its books.  END NOTE.) 
 

ITALIAN COMPANIES CONTINUE COMMERCE IN FASHION AND WINE 
 


¶11.  (SBU) Despite the financial crisis, XXXXXXXXXXXX expects small and medium-sized Italian firms to continue to develop their markets in 
Kazakhstan, particularly in the fashion and wine industries in which 
Italian firms have been highly successful.  XXXXXXXXXXXX told PolOff that Italian exporters have used their reputation for high quality 
fashion to capture large parts of the high-end clothing market, 
especially for lucrative fur goods.  At a November exposition in 
Almaty, one businessman sold his entire stock, worth $50,000, on the 
first day.  (NOTE:  Prominent Kazakhstani businessman Nurlan 
Kapparov, who heads the Lancaster Group holding company, is the 
chairman of the Kazakhstan-Italy Business Council.  His wife 
reportedly owns many boutiques featuring Italian brand-name products 
such as MaxMara and Dolce and Gabbana.  END NOTE.) 



¶12.  (SBU) Many small Italian companies continue to be active 
exporters of wine to Kazakhstan.  According to XXXXXXXXXXXX, however, Italian wine exporters have failed to build a strong lobby, and 
therefore, lack collective bargaining power.  Most Italian wine 
exporters, except for larger companies like Martini, are unable to 
effectively capture the profits from their products.  For a bottle 
of wine that costs $10 in Italy, Kazakhstani retailers can get $20 
or more, but most of the mark-up goes into the pockets of local 
retailers or is taken by customs in the form of import duties. 
 

ROME WAS NOT BUILT IN A DAY 
 

¶13.  (SBU) XXXXXXXXXXXX explained that for Italy, Kazakhstan's accession to the WTO is an EU-level issue -- and one that involves Russia. According to XXXXXXXXXXXX, the EU would like to have an accession agreement with Russia before Kazakhstan joins the WTO, and therefore XXXXXXXXXXXX does not expect quick finalization on an EU-Kazakhstan accession agreement.  Regarding the proposed customs union among Kazakhstan, Russia, and Belarus, XXXXXXXXXXXX expressed doubts it would soon come to 
fruition -- despite claims from the three participating countries 
that it will.  As XXXXXXXXXXXX put it, ""Developing a customs union is very complicated.  It took 12 years for the EU to come together."" 
 
HOAGLAND