VZCZCXRO3361
OO RUEHIK
DE RUEHTA #0010/01 0081012
ZNR UUUUU ZZH
O 081012Z JAN 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7153
INFO RUCNCIS/CIS COLLECTIVE 2316
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1678
RUEHKO/AMEMBASSY TOKYO 2384
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1873
RUEKJCS/SECDEF WASHDC 1723
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 ASTANA 000010 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/RUS, EEB 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EAGR ETRD SOCI RS KZ
SUBJECT:  NORTHERN KAZAKHSTAN WELCOMES CUSTOMS UNION 
 
ASTANA 00000010  001.2 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  During a series of visits to Kazakhstan's two 
northernmost provinces, local officials praised their regions' 
economic stability and growth potential.  Accounting for the largest 
share of Kazakhstan's 20.8 million ton grain harvest, much of which 
is exported via Russia, Kostanai and North Kazakhstan Oblasts act as 
Kazakhstan's "front door to Russia."  Local officials welcomed the 
Customs Union with Russia and Belarus, which entered into force on 
January 1.  Although few new buildings and glitzy high-rises dot 
their big cities, Kazakhstan's northernmost provinces realistically 
epitomize the country's economic accomplishments and challenges. 
END SUMMARY. 
 
KAZAKHSTAN'S DOOR TO RUSSIA 
 
¶3.  (SBU) Sharing a 2400 kilometer border with Russia, Kostanai and 
North Kazakhstan Oblasts depend economically on agriculture and 
trade with Russia.  In 2008, Kazakhstani-Russian trade turnover 
exceeded $19.9 billion.  Kazakhstan expects to export at least half 
of its 2009 grain harvest, much of which will transit through Russia 
to countries in the Commonwealth of Independent States and ports on 
the Azov, Baltic, and Black Seas.  Kostanai and North Kazakhstan 
Oblasts produce the majority of Kazakhstan's high-quality wheat, 
which often is mixed with Russian grain and milled into flour. 
 
RURAL KAZAKHSTAN 
 
¶4.  (SBU) Sparsely populated, more than 60% of these regions' 
residents live in rural areas.  Despite record harvests in recent 
years, their per capita GDPs of $5,264 (Kostanai Oblast) and $3,120 
(North Kazakhstan Oblast) are well below the national average of 
$6,870.  Officials and local residents assert that economic growth 
is steady, but inconspicuous, with capital cities noticeably 
eschewing ostentatious high-rise buildings. 
 
KOSTANAI ENTREPRENEURIAL UNIONS PREDICT ECONOMIC GROWTH 
 
¶5.  (SBU) On December 28, Peter Sukhinin, President of the 
Association for the Support of Entrepreneurial Activity in Kostanai 
Oblast, told PolOff the region follows the national trajectory, with 
steady improvements to its business climate.  He particularly 
highlighted the national and regional governments' allocation of 
significant sums of money to promote development.  Sukhinin noted 
the economy could grow even faster, but is still restrained by the 
dominance of large industrial conglomerates, with small and medium 
business generating only 20% of tax revenue.  Sukhinin highlighted 
Kostanai's large ore-extraction enterprises in Lisakovsk and Rudny, 
aluminum production in Arkalyk, and the agricultural conglomerate, 
Ivolga Holding. 
 
¶6.  (SBU) Sukhinin drew a parallel between the expansion of his 
association, which includes a large number of businesses in a wide 
array of sectors (e.g., services, publishing, trade, and 
agricultural processing), and Kostanai's continued growth. 
According to Sukhinin, his organization supports small and 
medium-sized businesses holding regular meetings with entrepreneurs 
and authorities, and by publishing business brochures with the local 
government.  He credited his visit to the United States with giving 
him the idea for the brochures, the most popular of which concern 
how to handle licensing and inspection processes.  Its cooperation 
with other NGOs includes its recent assistance to an organization of 
disabled persons to publish 1000 books. 
 
¶7.  (SBU) Another affiliated entrepreneurial organization, the Union 
of Individual Entrepreneurs of Kostanai Oblast, provides a forum for 
consultation on common problems -- such as tax issues -- about which 
it then lobbies the local and national government.  (NOTE:  Tatyana 
Zueva, the Akimat's Internal Policy Department representative, 
confirmed the active dialogue with entrepreneurs, which she claimed 
gradually is improving the legal code.  END NOTE.)  In addition, 
Chairwoman Gulnara Uralova highlighted the fund established in 2003 
to provide small loans to entrepreneurs through a second-tier bank 
at a constant rate of 14% -- in contrast to typical commercial bank 
 
ASTANA 00000010  002.2 OF 003 
 
 
interest rates of 25-30%. 
 
OFFICIALS AND BUSINESSPEOPLE PRAISE BUSINESS CLIMATE 
 
¶8.  (SBU) According to Roza Goryannaya, Director of the 
Entrepreneurship Section of Kostanai Oblast's Department of 
Industry, half of Kostanai's small businesses are trade-oriented. 
She expressed hope for small- and medium-sized enterprise growth, 
especially in the industrial sector, but admitted such development 
requires significant capital investments. 
 
¶9.  (SBU) Nikolai Fast, owner of the Lux-Voda company, described a 
paucity of qualified lawyers and accountants, frequent legislation 
changes, and problems with banking services as challenges.  The 
quiet-spoken, middle-aged Fast also complained about tax problems 
and government inspections lasting up to four months.  Fast 
acknowledged entrepreneurial associations' value in pooling 
resources to hire well-qualified accountants and attorneys, whose 
services would otherwise be prohibitively expensive.  He noted 
steady improvement in business conditions, and, with hearty assent 
from all the other roundtable participants, favorably compared 
Kostanai's business climate to that of Russia and other Kazakhstani 
regions. 
 
¶10.  (SBU) Marina Byt, an elegantly dressed middle-aged clothing 
importer, recounted the start to her career in outdoor bazaars in 
the 1990s and her expansion courtesy of Kazakhstan's first loans. 
Today, local entrepreneurs are struggling to survive the economic 
crisis, she said, especially in light of the credit crunch and 
diminished demand.  Byt welcomed a Japanese-government grant for a 
business-development workshop and South Korean business-promotion 
assistance.  As the Chairperson of the Supervisory Council of the 
Union of Individual Entrepreneurs, Byt attended in Israel a December 
international workshop for businesswomen, and invited a business 
expert to visit Kostanai under an Israeli program.  Byt highlighted 
international trade fairs' utility for Kazakhstani entrepreneurs, 
and called for expanded interaction with U.S. business experts. 
 
NORTH KAZAKHSTAN OFFICIALS PRAISES ECONOMIC GROWTH 
 
¶11.  (SBU) In North Kazakhstan, Erlik Zhandildin, Director of the 
Oblast Akimat's Internal Policy Department, described the overall 
economic situation in North Kazakhstan as excellent, and emphasized 
the oblast's production of half of Kazakhstan's 2009 wheat harvest. 
Quoting an old Soviet adage, "as long as there will be bread, there 
will be song," Zhandildin said good salaries, reliable pensions, 
large harvests, and development have made the region popular, 
including for many ethnic Russians and Germans who previously 
emigrated abroad. 
 
¶12.  (SBU) Zhasulan Shaymerdenov, Director of the Industrial 
Division, highlighted North Kazakhstan Oblast's significant 
industrial potential, especially in the production of grain 
products, including bio-ethanol.  The oblast manufactures 
biochemical products and heavy-industry machinery, including mobile 
drill rigs for KazMunaiGas (KMG) and specialized railcars for grain 
and machinery for Kazakhstan's national railway Temir Zholiy (KTZh). 
 Other enterprises include a joint Kazakhstani-Turkish elevator 
venture, a flour refinery, and candy, pasta, and dairy-product 
companies.  Since several small and medium-sized sausage companies 
operate in the region, Shaymerdenov called meat production a 
promising field. 
 
¶13.  (SBU) Under President Nursultan Nazarbayev's policy of 
industrialization, Shaymerdenov said his department had to design 
and implement by January 1 a new development plan, for which the 
government will provide credit.  The region's administration soon 
will ratify 23 agricultural and industrial projects worth over $1 
million, including a pasta-production program.  The region also is 
building a plant to produce locomotive-security and 
railroad-communication equipment for KTZh. 
 
¶14.  (SBU) Shaymerdenov underlined North Kazakhstan Oblast's overall 
economic stability, noting physical output of GDP increased steadily 
 
ASTANA 00000010  003.2 OF 003 
 
 
despite the financial crisis and corresponding decreases in 
investments.  Shaymerdenov, who grew up in an agricultural village 
in the region, attributed this steadiness to the region's history as 
a land of farmers, where people tend to be cautious.  "We do not 
boast too much when times are good.  We just buy something new, such 
as a tractor, or more land." 
 
CAUTIOUS OPTIMISM IN KOSTANAI ABOUT CUSTOMS UNION 
 
¶15.  (SBU) PolOff's interlocutors in Kostanai do not expect any 
immediate economic effect from the Customs Union.  Nikolay Fast 
stated that only the Customs code will change on January 1.  He said 
Kazakhstani Customs Services have become "the most professional on 
the border," but complained that other agencies, such as Sanitary 
and Epidemiological, Border Guard, and Immigration Services, make 
border crossings long and difficult.  Fast asserted it takes about 
12 hours for his trucks to complete border-crossing and inspection 
procedures, and welcomed service and transparency improvements 
potentially generated by the Customs Union, especially in relation 
to sanitation inspections.  Byt expressed hope that the Customs 
Union will boost trade and lift tight restrictions on fur imports, 
which value-added-tax issues have also complicated. 
 
¶16.  (SBU) Sukhinin and Goryannaya highlighted the lengthy 
harmonization process required by differences in the economic and 
legal systems of Kazakhstan, Russia, and Belarus.  However, they 
still hailed the Customs Union as "a step forward" due to increased 
competition and an expanded market.  He conveyed his optimism that 
many Kostanai businesses will outperform their Russian counterparts 
and benefit from the Customs Union given the cooperation of Kostanai 
entrepreneurs with each other and local authorities. 
 
OFFICIALS IN NORTH KAZAKHSTAN LOUDLY PRAISE CUSTOMS UNION 
 
¶17.  (SBU) Zhandildin predicted the Customs Union's "very positive 
results" on North Kazakhstan Oblast due to its integration with 
Russia.  (NOTE:  Flights from Petrapavlovsk to Astana are offered 
only twice per week, and take an hour and a half, whereas Omsk is 
located only three hours by car or train.  END NOTE.)  Zhandildin 
highlighted the similarities of Kazakhstan's and Russia's 
agricultural industries and processing systems.  He asserted that 
consumers will benefit from the Customs Union, because it will force 
competition and encourage quality improvements.  Although he 
acknowledged difficulties in the initial post-implementation phases, 
Zhandildin highlighted Kazakhstani companies' competitiveness in 
selling steel, non-ferrous metals, copper, zinc, aluminum, and 
wheat. 
 
¶18.  (SBU) COMMENT:  Local businesspeople and officials in Kostanai 
and North Kazakhstan Oblasts are proud of their region's steady 
economic growth, and cautiously optimistic about the Customs Union's 
likely effect.  The trends found in Kazakhstan's northernmost 
provinces -- where oil and gas income does not skew growth like in 
Atyrau, Almaty, and Astana -- realistically epitomize Kazakhstan's 
economic development and its reliance on heavy industry and 
agriculture.  END COMMENT. 
 
HOAGLAND