US embassy cable - 05ALMATY607

UNCLAS  ALMATY 000607 
 
SIPDIS 
 
 
DEPARTMENT FOR EUR/CACEN JMUDGE, EB/TPP/IPE SWILSON, JURBAN, 
 
 
EB/TPP/BTA/EWH ELUFTMAN 
COMMERCE FOR DAS STEWART, CENTRAL ASIA DESK OFFICER DSTARKS 
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER 
PLEASE PASS TO USTR KKUHLMANN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, EIND, KZ, ECONOMIC 
SUBJECT: COMMERCE DAS ERIC STEWART VISITS ASTANA, DISCUSSES 
INVESTMENT CLIMATE, IPR, INVESTMENT DISPUTES 
 
REF: (A) 04 ALMATY 5022 
     (B) ALMATY 304 
 
1.  (SBU) Summary:  Department of Commerce DAS Eric Stewart 
(Market Access and Compliance-Europe) visited Astana 
February 8 and met with several key contacts in Kazakhstani 
ministries.  DAS Stewart told the Kazakhstani officials 
that, on balance, the economic and trade relationship 
between the two countries is positive.  However, he 
identified several areas, such as taxation procedures, 
contract sanctity and respect for arbitration as causes of 
doubts in the minds of U.S. investors.  DAS Stewart also 
pressed Kazakhstani officials for action to resolve the 
specific cases of AIG and Flight Director.  While positively 
judging Kazakhstan's progress in improving its IPR 
environment, he expressed concern about several aspects of 
Kazakhstan's record on enforcement.  End Summary. 
 
2. (SBU) Background: AIG Silk Road, a subsidiary of AIG, is 
attempting to enforce an arbitral award from the 
International Center for the Settlement of Investment 
Disputes (ICSID).  The $10 million dollar judgment arose 
from the government's expropriation of AIG's interest in an 
Almaty real estate deal in 1998.  AIG recently obtained 
(protect) a judgment from a British court that it could 
attach the UK assets of Kazakhstan's National Fund to 
enforce the award. 
 
3. (SBU) Flight Director is a U.S. company that provided 
equipment to the now-bankrupt national airline "Air 
Kazakhstan".  The goods provided are valued at about 
$160,000.  Flight Director was assigned a low priority among 
creditors at the bankruptcy proceedings, but the government 
assured the Ambassador (Ref A) that it would at least be 
able to recover $45,000 in yet-unused equipment.  The 
company has been unable to do so, and its local attorney has 
challenged the low priority assigned to its claim.  End 
Background. 
 
4.  (U) DAS Stewart met with senior officials at the 
Ministries of Finance, Industry and Trade, Energy and 
Mineral Resources and Justice in Astana. 
 
Finance Ministry 
---------------- 
 
5. (SBU) DAS Stewart met at the Ministry of Finance with 
Vice Minister Aidar Arifkhanov.  Arifkhanov's portfolio is 
mainly the management of government debt.  DAS Stewart 
raised both the AIG and Flight Director cases.  On AIG, he 
offered several of the arguments advanced by the Ambassador 
in earlier meetings (Ref B) for the government to pay the 
arbitral award, particularly the effect that publicity over 
their refusal could have on their bond ratings.  Arifkhanov 
said that the trouble was figuring out who is responsible, 
the city akimat of Almaty or the national government.  He 
also told DAS Stewart that any payment would come from the 
Ministry of Justice, which has funds assigned to it for the 
purpose of paying judgments.  While Arifkhanov admitted that 
AIG was entitled to compensation, he said that the national 
government would not pay for something the City of Almaty is 
responsible for. 
 
6. (SBU) With respect to Flight Director, Arifkhanov had 
little to offer.  DAS Stewart told him that not only was the 
company unable to recover the $45,000 in equipment that was 
promised to be returned because of red tape, but also that 
their lawyers at Baker McKenzie are ready to challenge 
Flight Director's status as a "fifth line" creditor of Air 
Kazakhstan.  Arifkhanov made no offer to act, but did 
mention that Air Astana was considering bidding at auction 
for seven Boeing 757s formerly operated by the now-bankrupt 
U.S. airline ATA. 
 
7. (U) Finally, DAS Stewart commended the Finance Ministry 
for its efforts to introduce electronic filing of 
taxes/government procurement and mentioned that Cisco 
Systems was interested in pursuing contracts to work on the 
new system. 
 
 
Ministry of Industry and Trade 
------------------------------ 
 
8. (U) DAS Stewart met with Vice Minister Bolat Smagulov and 
representatives from the Trade and Investment Committees. 
Smagulov spoke first and cited finalizing the amendments to 
the law "On Investments" and WTO accession as the Ministry's 
priorities for this year.  He asked DAS Stewart to 
investigate why certain Kazakhstani exports of metals are 
subject to high tariffs in the U.S.  He cited high tariffs 
(extra 15 ) on titanium and very high (243-247 ) tariffs on 
steel.  Smagulov suggested that Kazakhstan's market economy 
status should mean that it is not subject to these kinds of 
defensive measures.  DAS Stewart said that to his knowledge 
all protective tariffs on steel were lifted, but that he 
would find out if the Kazakhstanis were justified in their 
complaint. 
 
9. (SBU) DAS Stewart, for his part, praised the Ministry for 
its work in trying to create a better environment for small 
and medium enterprises.  He again raised both the AIG and 
Flight Director cases.  He said that he has been approached 
by several large U.S. companies in the telecom, construction 
and aerospace industries about investing in Kazakhstan, but 
that situations like AIG make it difficult to present 
Kazakhstan in a very positive light.  Smagulov did not seem 
very well informed on AIG.  However, on Flight Director, he 
was much more helpful, and offered to broker a meeting in 
Astana with one of his assistants, Air Kazakhstan, the 
Customs Committee, the Ministry of Transport and Baker- 
McKenzie to discuss the issue.  Smagulov suggested having 
the meeting before Feb. 11, when he is leaving on a business 
trip.  (Note: Baker-McKenzie was unable to agree to a 
meeting so soon because they did not have the client's 
concurrence.  We will attempt to organize the meeting when 
Smagulov is available.  End Note.) 
 
10. (U) Finally, DAS Stewart cited two areas of concern in 
the bilateral trade relationship: sanctity of contracts and 
taxation.  Smagulov said that Kazakhstani investment laws 
guarantee stability of contracts and that the concerns of 
the investor community have been met by the interaction of 
the President and the Foreign Investors' Council.  Stewart 
suggested that speeding the implementation of electronic 
filing of taxes would help to improve the investment 
climate. 
 
11. (U) Smagulov and Stewart agreed in principle to organize 
an Informal Commercial Exchange (ICE) between top officials 
from the Ministry and the Department of Commerce. 
 
Ministry of Energy and Mineral Resources 
---------------------------------------- 
 
12. (U) DAS Stewart met with Vice Minister Lyazzat Kiinov 
and spoke about contract sanctity and the investment climate 
generally.  He said that based on his meetings with 
ChevronTexaco, Conoco Philips and Exxon Mobil, he had the 
impression that U.S. companies do not regret their 
investments in Kazakhstan, nor do they intend to leave. 
However, their concerns about the government's intentions 
leave them questioning whether to invest more in Kazakhstan. 
 Further, he said that other major companies (Cargill, 
Caterpillar) have been considering investments in 
Kazakhstan, and look to the situation of oil companies to 
predict how they will fare.  Stewart also urged Kazakhstan 
to stay committed to diverse export routes and to move 
forward on joining BTC and the expanded CPC. 
 
13. (SBU) Kiinov said that he felt the investment climate 
was very good, especially because President Nazarbayev 
instituted the Foreign Investors' Council and its oil and 
gas working group.  He said Kazakhstan was the only country 
in the world where the President maintains this kind of 
dialogue with the foreign investment community.  He defended 
Kazakhstan's assertiveness and new preemptive legislation by 
saying that Kazakhstan needed to retain the ability to 1) 
keep undesirable companies out, and 2) prevent, if 
 
 
necessary, one or two countries and their companies from 
buying up too much of Kazakhstan's oil resources.  He stated 
that contracts are inviolable, and no existing contracts 
will be violated; and that Kazakhstan would certainly yield 
if it were outbid while trying to preempt the sale of a 
share. 
 
Ministry of Justice 
------------------- 
 
14.  (U) During DAS Stewart's meeting at the Ministry of 
Justice with Dr. Nurgaysha Sakhipova, Chairperson of the IPR 
Committee, Sakhipova delivered a long recitation of MOJ's 
accomplishments in the struggle against piracy and in 
modernizing Kazakhstan's IPR regime.  She cited the 
ratification of the WIPO Digital Treaties and the amendment 
to the Copyright Law extending protection to pre-existing 
works and shared statistics demonstrating far stricter 
enforcement.  She claimed a sixfold increase in the amount 
of fines collected in administrative proceedings, and about 
a fourfold increase in the number of people fined (the 
average fine is about $40.)  She also said that 35 and 29 
people, respectively, had been charged with criminal 
violations of copyrights and trademarks. 
 
15. (U) Sakhipova said the ministry is now pushing 
Parliament to amend the Criminal Code to make criminal 
violation of copyrights easier to prove.  The amendments 
would replace the need of the prosecutor to demonstrate 
"significant harm" to a copyright holder in order to gain a 
conviction.  The amendment would make the question of 
criminality turn on the amount of pirated material that is 
seized from the accused.  The draft amendment envisions a 
lower threshold of 500 monthly calculation indexes (about 
$3500.)  Sakhipova also expressed the hope that Kazakhstan's 
efforts would be sufficient to merit the country's removal 
from the Special 301 Watch List. 
 
16. (U) In response to Sakhipova's discussion of MOJ 
activities, Sakhipova was very complimentary and told 
Sakhipova that Kazakhstan appeared to be far ahead of other 
countries in the region in its efforts on IPR protection. 
However, he also engaged her in a dialogue about the number 
of convictions and fines that have been handed down as a 
result of IPR violations.  He noted that the aggregate 
numbers and actual penalties assessed did not appear to be 
very high. 
 
17. (SBU) Comment.  DAS Stewart's meetings with Kazakhstani 
officials were a much-needed step in deepening cooperation 
with the GOK on commercial issues, particularly in the areas 
of market access and commercial dispute resolution.   This 
visit resulted in an agreement in principle to begin an 
Informal Commercial Exchange (ICE) with the Ministry of 
Industry and Trade, and was an opportunity to present 
frankly US concerns about taxation practices, contract 
sanctity and the investment climate.  DAS Stewart pointedly 
called for action in the AIG and Flight Director cases and - 
in the case of AIG - made it clear to each Ministry that 
they all have a vested interest in the government meeting 
its obligation to pay the award.  End comment. 
 
18. (U) DAS Stewart did not have an opportunity to clear 
this cable. 
 
19. (U) Minimize for Dushanbe considered. 
 
Ordway 
 
 
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