US embassy cable - 05ALMATY933

UNCLAS  ALMATY 000933 
 
SIPDIS 
 
 
DEPARTMENT FOR EUR/CACEN JMUDGE, EUR/ACE JMCKANE 
TREASURY FOR CENTRAL ASIA DESK OFFICER MGAERTNER 
COMMERCE FOR CENTRAL ASIA DESK OFFICER DSTARKS 
BERLIN FOR TAX ATTACHE 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, KZ, ECONOMIC 
SUBJECT: AMBASSADOR ORDWAY'S MEETING WITH FINANCE MINISTER 
DUNAYEV 
 
REFTEL: 04 ALMATY 5022 
 
1. (U) Ambassador Ordway met with Kazakhstani Minister of 
Finance Arman Dunayev March 2 in Astana.  The Ambassador 
pressed Dunayev for progress on ratification of the U.S.- 
Kazakhstan Bilateral Assistance Agreement and for prompt 
payment of the $10 million award to AIG by an international 
arbitration body.  Dunayev told the Ambassador that 
discussions were underway about possible compromises in the 
tax case against Parker Drilling and provided additional 
details about the GOK's revised concept for utilizing the 
National Fund.  The latter subject prompted the Ambassador 
to encourage Dunayev to consider participating in the 
Extractive Industries Transparency Initiative (EITI.)  End 
Summary. 
 
2. (U) Also attending from the Finance Ministry were Deputy 
Chairman of the Tax Committee Asiya Bazarbekova and the head 
of the Department for International Taxation Murat 
Dzheksembin. 
 
3. (SBU) Ambassador Ordway first raised the question of 
Kazakhstan's ratification of the 1992 Bilateral Assistance 
Agreement, and emphasized the principled U.S. position that 
no form of assistance funds should be subject to taxation. 
Ratification of the Agreement will commit Kazakhstan to this 
principle as well.  Dunayev maintained that this question is 
the responsibility of the Ministry of Economy and Budget 
Planning.  However, he did in the end acknowledge that the 
International Taxation Department's delay in producing an 
Implementing Memorandum that had been requested by the 
Ministry of Foreign Affairs was holding the process up.  The 
Implementing Memorandum, after several extensions, is now 
due March 15. 
 
4. (SBU) The Ambassador also pressed Dunayev to weigh in 
with his Ministerial colleagues to speed the process of 
payment to AIG of the $10 million awarded in arbitration. 
He urged Dunayev to consider the serious effects that 
Kazakhstan's intransigence would have on its credit rating 
and international reputation if it persists in refusing to 
pay.  Dunayev claimed to have no influence on this issue 
either, stating that the Ministry of Justice would not allow 
him to interfere -- although he clearly understood the 
potential threat to Kazakhstan's credit rating.  He did say 
that the government has funds available within the budget to 
pay judgments of this type. 
 
5. (SBU) Dunayev also mentioned that the Finance Ministry 
was in contact with U.S.-based Parker Drilling about a 
possible compromise in the company's  tax troubles.  Dunayev 
said that the Ministry was in contact with the company's 
lawyers and "American tax authorities." 
 
Background: Parker Drilling operates a large floating oil 
rig called "Sunkar" that had a contract to provide services 
to the Kashagan consortium.  The rig was brought to 
Kazakhstan free of customs duties because of its involvement 
with the consortium.  The rig remained at the port of 
Bautino after the contract's completion in November 2003. 
In the spring of 2004, the authorities of Mangystau oblast 
(which contains Bautino) confiscated the rig and obtained a 
judgment against Parker for over $6 million, arguing that 
the rig was subject to duties the moment the contract 
expired.  Parker agreed to pay the $6 million in November 
2004.    End Background. 
 
6. (U) Finally, Dunayev updated Ambassador Ordway on the 
GOK's progress in implementing the new concept of the 
National Fund (reftel).  Dunayev said that full 
implementation of the new concept may take until 2007 due to 
the significant changes it will require in the Budget Code. 
In addition to the information provided Reftel, he stated 
that the National Fund's contribution to the "development" 
budget will be organized as a three-year appropriation 
indexed to the consumer price index; and confirmed that the 
Fund would still be used to finance budget sequestration if 
necessary.  Dunayev opined that the new concept will make 
 
 
the Fund substantially more transparent and enable it to 
contribute to the development of the non-oil sector.  The 
Ambassador again recommended to Dunayev that the GOK 
consider joining the Extractive Industries Transparency 
Initiative (EITI) as part of the implementation of the new 
concept. 
 
7. (SBU) Comment:  We sought this meeting primarily to 
encourage the Finance Ministry to use its influence to 
effect ratification of the Bilateral Assistance Agreement 
and to create movement on the compensation issue for AIG. 
On the former issue, we believe the message was communicated 
on the urgency of completing the Implementing Memorandum, 
but we expect to get better traction by meeting with 
Minister of Economy and Budget Planning Kelimbetov.  With 
respect to AIG, the Finance Ministry may understand the 
risks the GOK is taking with its current course but appears 
stymied by the Justice Ministry.  We will likely need to 
advocate above the Ministerial level in order to prod the 
GOK into taking the necessary action.  End comment. 
 
Ordway 
 
 
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