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C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000159 
 
SIPDIS 
 
STATE FOR SCA/CEN, EEB 
STATE PASS TO USTDA 
 
E.O. 12958: DECL: 03/06/2059 
TAGS: PGOV PREL ECON ELTN RS TX KZ
SUBJECT:  KAZAKHSTAN:  GE EXECUTIVE DISCUSSES REGIONAL PLANS 
 
Classified By: Charge Pamela L. Spratlen, 1.4 (b), (d) 
 
¶1.  (SBU) SUMMARY:  An American executive with General 
Electric's Transportation Division visited the Embassy on 
February 3 to discuss the company's plans to assemble 
locomotives in Kazakhstan and expand into the Russian market. 
 He identified financial and political challenges the company 
faces, and said the customs union with Russia and Belarus is 
unlikely to change the conservative culture or monopolistic 
practices of Russia's state railway company.  He also said 
draft U.S. legislation to strengthen sanctions against Iran 
would be a "catastrophe" for U.S. businesses that invest 
abroad.  END SUMMARY. 
 
EXIM WANTS A SOVEREIGN GUARANTEE 
 
¶2.  (C) On February 3, Richard Herold, International 
Government Relations Leader for General Electric (GE)'s 
Transportation division, briefed acting Pol/Econ chief on 
GE's plans and prospects for assembling and manufacturing 
locomotives and diesel engines in the region.  (NOTE:  Herold 
is a former Foreign Service Officer, fluent in Chinese, who 
served primarily in Asia and Africa.  After leaving the 
Foreign Service in 1990, he joined British Petroleum, where 
he worked for 19 years, including during the acrimonious 
dispute between BP and its Russian partners in the TNK-BP 
joint venture.  END NOTE).  Herold said that GE has already 
assembled one Evolution-class locomotive at the new Astana 
plant, and plans to produce at total of 20 locomotives by the 
end of 2010.  He added that GE is in talks with National 
Welfare Fund Samruk-Kazyna, which owns national railway 
company Kazakhstan Temir Zholy (KTZh), to sell an additional 
$150 million in locomotive kits.  Herold said that the U.S. 
Export-Import Bank (EXIM) has insisted on a sovereign 
guarantee before it agrees to provide financing for the 
transaction.  However, according to Herold, Samruk-Kazyna's 
chairman Kairat Kelimbetov told GE on February 3 that he was 
reluctant to ask the government to provide a sovereign 
guarantee, saying, "our word should be good enough."  Herold 
said that negotiations with EXIM and Samruk-Kazyna were 
ongoing. 
 
GE EAGER TO ENTER RUSSIAN MARKET 
 
¶3.  (C) Herold also discussed GE's ambitions to sell its 
locomotives on the Russian market.  He said that, on paper, 
the Customs Union with Russia, Kazakhstan, and Belarus should 
give GE an opportunity to compete with Russian locomotive and 
diesel engine manufacturers.  However, he admitted that 
Russia's state-owned railway company Russian Railways (RZhD) 
has strong, monopoly control over the Russian market, and 
breaking in will not be easy.  Herold said RZhD is "a huge, 
sprawling empire.  It's worse than Gazprom."  According to 
Herold, the head of RZhD, Vladimir Yakunin, is an old friend 
of Russian Prime Minister Putin, and a "fellow member of the 
St. Petersburg mafia."  He added that Yakunin has made 
sizeable cash payments to Putin, and speculated that Putin's 
net worth is well over $10 billion.  (NOTE:  RZhD is one of 
the largest railway companies in the world, with more than 
1.2 million employees.  It accounts for nearly 4% of Russia's 
GDP and handles approximately 80% of all freight in Russia. 
Yakunin graduated from the Leningrad Institute of Mechanics 
in 1972, worked as a senior engineer in the Soviet Council of 
Ministers for Foreign Trade, and served as First Secretary of 
the USSR's Permanent Representative Office at the United 
Nations from 1985-1991.  END NOTE). 
 
PRESSURE TO INCREASE LOCAL CONTENT 
 
¶4.  (SBU) According to Herold, GE is pleased with the success 
of its locomotive assembly plant in Astana, but he said the 
company has come under increasing pressure to raise the 
percentage of local content among staff and subcontractors. 
Herold said he understood the government's position, but 
 
ASTANA 00000159  002 OF 002 
 
 
stated, "there simply is not enough talent out there now" to 
meet GE's demand for experienced managers and engineers. 
 
IRAN SANCTIONS BILL 
 
¶5.  (C) Herold also said GE was concerned about draft U.S. 
legislation that would strengthen the sanctions regime 
against Iran.  He said that if the legislation is adopted as 
currently drafted, it would sanction companies that do 
business with companies that do business with Iran.  He said 
the consequences for U.S. trade and investment would be 
"catastrophic."  For example, he noted that GE's Astana 
locomotive assembly plant is a joint venture with KTZh, and 
he said that KTZh is in detailed discussions with the 
national railway company of Turkmenistan to build a rail line 
to Iran.  Herold speculated that GE would be subject to 
sanctions under the draft U.S. law, and would lose EX-IM 
financing for future expansion projects.  (NOTE:  On February 
5, Turkmenistan's Ministry of Foreign Affairs released a 
statement following a meeting with an Iranian delegation, 
calling construction of a rail link from the city of Bereket 
to the Iranian border, "an important factor in the develop of 
an unbiased, mutually beneficial relationship with Iran." 
 
NAZARBAYEV'S HEALTH 
 
¶6.  (C) Before the meeting adjourned, Herold said that 
President Nazarbayev was scheduled to meet GE's CEO Jeff 
Immelt last summer, but cancelled the meeting "for health 
reasons."  Herold said he was told that Nazarbayev flew to an 
undisclosed location in Europe for a medical procedure. 
 
¶7.  (SBU) COMMENT:  Senior government officials often cite 
GE's investment in Kazakhstan as a perfect example of the 
type of investment they would like to attract, particularly 
as the country seeks to diversify its economy.  Certainly 
GE's locomotive assembly plant is an important investment. 
But the true test of Kazakhstan's commitment to economic 
diversification will be its support of GE's more ambitious, 
long-term plans to manufacture locally and export regionally 
its locomotives and engines, rather than simply assembling 
kits that were made in the USA.  END COMMENT. 
SPRATLEN