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S E C R E T SECTION 01 OF 02 ASTANA 000138 
 
NOFORN 
SIPDIS 
 
STATE FOR SCA/CEN 
NSC FOR JOYCE CONNERY 
 
E.O. 12958: 11/16/2029 
TAGS: PGOV PREL PINR KNNP KZ
SUBJECT:  KAZAKHSTANI FOREIGN MINISTER'S TRIP CLEARS CTR LOGJAM 
 
Classified By: Ambassador Richard E. Hoagland:  1.4 (A), (B), (D) 
 
¶1.  (S) SUMMARY:  Over the past eight years, implementation of the 
Cooperative Threat Reduction (CTR) program, also known as the 
Nunn-Lugar Program, has been grinding along, ever more slowly, as the 
Kazakhstani bureaucracy matures.  In advance of State 
Secretary-Foreign Minister Kanat Saudabayev's February 2-4 visit to 
Washington, the Kazakhstani government, under increasing pressure 
from his office, fully engaged to start BN-350 hot runs and resolve 
implementation issues, such as value-added tax (VAT) and property tax 
exemptions.  END SUMMARY. 
 
CTR PROBLEMS ARISE 
 
¶2.  (S) The Departments of Defense and Energy currently are 
implementing several projects under the 1993 CTR Umbrella Agreement 
in Kazakhstan, which was extended in 2000 and 2007 for seven-year 
intervals.  Since 2005, both the Defense Threat Reduction Agency 
(DTRA) and DOE have struggled with the inability to receive taxation 
and customs duty exemptions for contractors and subcontractors 
working in Kazakhstan.  Additionally, property tax issues have kept 
technical assistance recipients from accepting equipment and 
facilities, most notably tens of millions of dollars of equipment for 
the transportation of spent fuel from the Aktau-based BN-350 fast 
breeder reactor to a facility south of Kurchatov.  Additionally, the 
Ministry of Energy and Mineral Resources, responsible for the BN-350 
reactor decommissioning, fell behind its original fuel-shipment 
schedule due to poor budget planning.  (NOTE:  Emergency funding from 
the Ministry of Finance was not made available until it was too late 
to obligate.  If followed, the latest schedule shows the completion 
of spent-fuel transfers by the end of 2010.  END NOTE.) 
 
LONG TRAIN RUNNING 
 
¶3.  (S) In the early evening of January 29, the first "hot" run to 
pick up spent fuel at Akatu began when the train pulled out of 
Kurchatov.  Although both State Secretary-Foreign Minister Saudabayev 
and Minister of Energy and Mineral Resources Mynbayev had promised 
Deputy Secretary of Energy Poneman that the train would be underway 
before the end of January, the realization of the plan required a 
herculean effort from very highest levels of the Kazakhstani 
government.  Because the government normally cannot obligate funding 
until at least late February, the government faced the option of 
directing its implementing agent, the National Nuclear Center (NNC), 
to spend money before it was available, which could carry serious 
penalties for unauthorized use of funds.  Alternatively, it could 
direct Kazakhstan Temir Zholy (KTZh) -- the Kazakhstan railway 
authority -- to begin operations without payment. 
 
PRESIDENTIAL BACKING 
 
¶4.  (S) As early as November 2009 when an interagency group, 
consisting of the Vice Ministers of Energy, Transportation, and 
Finance and KTZh leadership, were discussing ownership issues and 
operational financing, Saudabayev began to send representatives to 
meetings.  In December 2009, his envoy clearly articulated 
Saudabayev's seriousness to the interagency, essentially saying, 
"Saudabayev says get this done.  Figure out how you are going to do 
it, but get it done before he leaves for Washington.  This project 
has the backing of the president himself." 
 
CTR IMPLEMENTATION -- A TAXING ISSUE! 
 
¶5.  (C/NF) According to the June 2009 amendment to the CTR Umbrella 
Agreement, the Tax Committee has the authority to establish tax 
exemption procedures and allow tax exemptions for goods and services 
acquired in Kazakhstan.  Despite the proactive involvement of Daulet 
Ergozhin, 30-something former Vice Minister of Finance and current 
Tax Committee Chair (and son of former Academy of Sciences President 
Edil Ergozhin), mid-level Kazakhstani bureaucrats feared prosecution 
for granting non-standard tax exemptions and thus refused to 
implement these provisions.  In response to DOE attache's expression 
of concern that the issue be resolved in advance of Saudabayev's 
 
ASTANA 00000138  002 OF 002 
 
 
Washington trip, Ergozhin called in the head of the regional tax 
offices and demanded he report "positive results" by Monday, in time 
to provide Saudabayev with a good new story to tell in Washington. 
 
¶6.  (C/NF) As a result, local tax authorities forwarded requests to 
Post to provide confirmation of more than a dozen subcontracts for 
the Biological Threat Reduction program, calling every few hours to 
press the Embassy DTRA and DOE offices for an immediate response. 
Under this elegant solution, the Embassy takes responsibility for 
confirming that the work is in accordance with the agreements.  The 
tax authorities thus can provide a tax exemption without the onus of 
"proving" that the contracts fall within the framework of CTR, 
avoiding responsibility and liability. 
 
¶7.  (C/NF) COMMENT:  Post fully credits the direct involvement of 
Saudabayev and his office for the resolution of issues surrounding 
implementation of the CTR program.  As such, Post recommends 
high-level recognition for these efforts, especially with respect to 
the start of BN-350 hot runs.  Secretary Chu's personal involvement 
in the trip could provide a great deal of political capital, allowing 
Post to ride the wave of good will and continue to press for even 
more tangible results in advance of the Global Nuclear Security 
Summit, which President Nazarbayev plans to attend.  END COMMENT. 
 
SPRATLEN