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UNCLAS SECTION 01 OF 03 ASTANA 000613 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
PLEASE PASS TO USTDA DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
SUBJECT:  KAZAKHSTAN:  ECONOMIC AND ENERGY UPDATE, MARCH 15-28 
 
ASTANA 00000613  001.2 OF 003 
 
 
¶1. (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2. (U) SUMMARY:  This information is drawn primarily from the 
Kazakhstani local press and has not been verified for accuracy. 
 
-- Adjusted Macroeconomic Forecast and Budget 
-- "Wartime" Economy 
-- Government to Issue Domestic Bonds in 2009 
-- Astana Finance Interested in Kazakhstan Subsidiary of RBS 
-- Criticism of Bloated Structure of KazMunaiGas 
-- Serik Burkitbayev Sentenced to Six Years 
-- Foreign Investments in Electric Power Industry 
-- Energy Statistics 
 
END SUMMARY. 
 
ADJUSTED MACROECONOMIC FORECAST AND BUDGET 
 
¶3. (SBU) On March 24, the Kazakhstani government adjusted its 
macroeconomic forecast and national budget for 2009.  The GDP growth 
projection was decreased from 2.7% to 1%; the inflation forecast was 
increased to 11%.  The projected world price of oil remained 
constant at $40 per barrel.  Budget revenues were adjusted to 2,837 
billion tenge (or $18.9 billion), a 23.5 billion tenge decrease from 
the plan approved earlier.  The two major sources of revenue are 
1,529 billion tenge (about $10.2 billion) of non-oil taxes and 
non-tax revenues and 1,292 billion of transfers from the National 
(Oil) Fund and local budgets.  Expenditures will be cut by 21.2 
billion tenge to 3,411 billion tenge (about $22.74 billion).  The 
budget deficit will thus increase by 2.3 billion tenge to 573.6 
billion tenge (approximately $3.8 billion), though its share of GDP 
will remain the same, at 3.4%.  The Ministry of Economy and Budget 
Planning continues to make assurances that no social expenditures 
will be cut.  (COMMENT:  The government, however, is feeling the 
pinch.  Samruk-Kazyna National Welfare Fund officials confirmed to 
us that they are reducing staff and MFA sources state that there is 
a freeze on vehicle and furniture purchases.  A senior expat advisor 
to Samruk-Kazyna was observed driving a government-supplied Toyota 
Camry -- quite a step down from the usual Land Cruiser.  END 
COMMENT.) 
 
¶4. (U) The government proposed the allocation of additional 
resources from the National (Oil) Fund for anti-crisis measures. 
The government will transfer 348 billion tenge (approximately $2.3 
billion), in addition to the earlier approved 843 billion tenge 
(about $5.57 billion).  The additional amount is expected to be 
spent to create jobs and improve conditions for post-crisis 
development.  The Ministry of Economy and Budget Planning 
anticipates that the National Fund will receive 1,193 billion tenge 
(about $7.88 billion) in revenue in 2009. 
 
¶5. (U) Oraz Zhandosov -- a well-known economist, former chairman of 
the National Bank, and former co-chairman of the opposition Azat 
party -- wonders why the new budget uses the same forecast for the 
price of crude -- $40 per barrel -- as the old budget.  He questions 
whether the government understands how the Kazakhstani economy has 
been impacted by the low price of hydrocarbons.  To all appearances, 
the government was simply sitting and naively waiting for an oil 
price hike, Zhandosov claimed.  He also expressed doubt that 
Kazakhstan's economy will experience positive growth in 2009. 
According to Zhandosov, if oil prices continue to fluctuate between 
$40 and $50 per barrel and the state maintains its bailout program, 
Kazakhstan can expect zero GDP growth in 2009. 
 
"WARTIME" ECONOMY 
 
¶6. (U) Speaking at a Cabinet meeting on March 26, Prime Minister 
Masimov announced that until the end of 2009, the government is 
switching to "manual management" of the economy.  "I do not see any 
other solution to the crisis; the market is not working as it 
should."  The Prime Minister added that active intervention on the 
part of the government has become necessary not just in Kazakhstan 
 
ASTANA 00000613  002.2 OF 003 
 
 
but in all countries affected by the crisis.  "If a crisis is a war, 
then now we will live by wartime rules," the Prime Minister 
concluded. 
 
GOVERNMENT TO ISSUE DOMESTIC BONDS IN 2009 
 
¶7. (U) According to a high-ranking official at the Ministry of 
Finance, the government is considering borrowing on the domestic 
market and issuing government bonds worth 780 billion tenge 
(approximately $5 billion) this year.  A share of the bonds worth 
about 15 to 20 billion tenge ($99 million to $132.2 million) could 
be issued especially for the public.  According to the official, 
government bonds could be a good alternative to bank deposits, whose 
credibility has been undermined in the last months.  While it does 
not guarantee a high yield, the Finance Ministry promises "absolute 
liquidity" of the bonds. 
 
ASTANA FINANCE INTERESTED IN KAZAKHSTAN SUBSIDIARY OF RBS 
 
¶8. (U) Astana Finance Bank has submitted an offer to Royal Bank of 
Scotland to purchase its Kazakhstani subsidiary, Interfax reported. 
Should the transaction proceed, Astana Finance is expected to 
refocus the bank on retail banking, away from its current emphasis 
on corporate banking.  The price and the timing of the deal have not 
been specified, and RBS itself refused to give an official comment. 
Astana Finance Bank is part of the Kazakhstan-based investment group 
Astana Finance.  The Government of Kazakhstan and Samruk-Kazyna 
National Welfare Fund together own about 25% of the shares in Astana 
Finance. 
 
CRITICISM OF BLOATED STRUCTURE OF KAZMUNAIGAS 
 
¶9. (U) In an article titled "Goodbye, KazMunaiGas!," the newspaper 
"Megapolis" criticized the non-transparent organization of the 
national oil and gas company KazMunayGas (KMG).  With KMG having 
numerous non-core assets and a complex structure of subsidiaries, 
the author compared the conglomerate to a set of Russian nesting 
dolls.  The article calls on the owner of KMG, the Samruk-Kazyna 
National Welfare Fund, to radically restructure KMG.  To support 
this view, "Megapolis" cites a memorandum, reportedly written for 
President Nursultan Nazarbayev by Nurlan Balgimbayev, his energy 
advisor.  Balgimbayev purportedly wrote, "KMG has four vice 
presidents, plus 12 managing directors with authorities similar to 
those of first deputies.  Moreover, managing directors supervise 11 
executive directors.  Decisions are delayed for months due to 
internal procedures, the efficiency of operational management is 
worsening, and the responsibility of executive officers has been 
diffused." 
 
¶10. (U) KMG president Kairgeldy Kabyldin revealed plans to boost 
KMG's transportation capacity to 170 million tons of crude oil and 
180 billion cubic meters of gas within the next ten years.  He said 
that by 2013, KMG aims to reduce the number of its subsidiaries by 
more than half, boost corporate governance, streamline its decision 
making processes, and shed non-core unprofitable assets.  After 
having revised its 2009 revenues and budget expenditures, KMG 
expects a net profit of 88 billion tenge ($581.58 million) in 2009. 
Kabyldin also said that the company may acquire assets in Central 
Asia and other CIS member states. 
 
SERIK BURKITBAYEV SENTENCED TO SIX YEARS 
 
¶11. (U) The media reported on March 24 that former KMG president 
Serik Burkitbayev was sentenced to six years in prison by a closed 
military tribunal for providing technical equipment used by former 
Nazarbayev son-in-law Rakhat Aliyev to eavesdrop on Nazarbayev and 
other senior government officials.  The investigation of this case 
was conducted by the Committee for National Security (KNB), but the 
Financial Police are also investigating Burkitbayev for the 
embezzlement of $20 million from the Kazakh Institute of Oil and 
Gas, where he was director from 2003 to 2007. 
 
 
ASTANA 00000613  003.2 OF 003 
 
 
FOREIGN INVESTMENTS IN ELECTRIC POWER INDUSTRY 
 
¶12. (U) The European Bank for Reconstruction and Development (EBRD) 
is acquiring a 18% stake in Central Asian Electric Power Corporation 
(CAEPCo), a subsidiary of Central Asian Power Energy Company 
(CAPEC), for 9.2 billion tenge ($61.3 million).  CAEPCo plans to use 
the funds to invest in modernizing its power transmission and 
generation assets in Astana, Petropavlovsk, and Pavlodar by 2013. 
In 2007, CAEPCo received a $30-million loan to modernization the 
Pavlodar coal-fired plant TETs-3. 
 
¶13. (U) According to a March 25 agreement, the Korean Electric Power 
Corporation and Samsung Corporation acquired a 75% share of the 
Balkhash coal-fired power plant (TETs).  The remaining 25% of 
outstanding shares belong to Samruk-Energo, a 100% subsidiary of the 
Samruk-Kazyna National Welfare Fund.  The first two 660-megawatt 
blocks of the Balkhash TETs are planned to be launched in 2014, and 
the other two in 2016-2017.  The first two blocks will cover a 
one-gigawatt power deficit in southern Kazakhstan, and the remaining 
blocks will replace the Zhambyl power plant, which serves as a 
back-up power-generator in the winter.  The construction of the 
Balkhash TETs costs $4.5 billion. 
 
ENERGY STATISTICS 
 
¶14. (U) During January and February, Kazakhstan produced 10.01 
million tons of crude oil and 5.74 billion cubic meters of natural 
gas, an increase of 7.5% and 3.4%, respectively, over the same 
period in 2008.  In January, Kazakhstan exported 4.45 million tons 
of crude oil and gas condensate, valued at $1.37 billion, marking a 
9.3% decrease in export volume and a 56.1% decrease in export value 
compared to the same period last year.  In the first two months of 
2009, Kazakhstan's coal production decreased 20% year-on-year to 
15.9 million metric tons.  Power generation similarly decreased 9.6% 
year-on-year to 14.23 billion kilowatt-hours. 
 
HOAGLAND