US embassy cable - 05ALMATY3607

S E C R E T  ALMATY 003607 
 
SIPDIS 
 
 
FOR THE SECRETARY FROM AMBASSADOR ORDWAY 
 
E.O. 12958: DECL: 10/05/2015 
TAGS: KZ, PGOV, PREL, POLITICAL 
SUBJECT: SCENESETTER FOR THE SECRETARY,S VISIT TO KAZAKHSTAN 
 
Classified By: Ambassador John Ordway, reasons 1.4 (B) and (D). 
 
1. (C) Summary/overview:  Your visit provides an extremely 
valuable and timely chance to consult with President 
Nazarbayev as the presidential election campaign officially 
begins.  Nazarbayev will undoubtedly share with you his 
vision of Kazakhstan's development in the wake of 
independence.  He saw the nation's first task as the 
establishment, for the first time in the history of the 
Kazakh people, of a secure and sovereign nation state.  That 
accomplished, the second was to create the fundamentals of a 
market economy.  Only with that accomplished would it be 
possible to move forward to serious democratic reform -- a 
moment that Nazarbayev says has now arrived.  His major 
policy addresses in February and September outlined a good 
approach toward political reform, albeit at a rather 
unambitious pace.  There is considerable justified 
skepticism, however, about Nazarbayev's willingness and 
ability to take the tough actions needed to realize the 
reform plan.  President Nazarbayev is clearly concerned about 
his legacy and wants to be judged favorably by history as the 
man who brought Kazakhstan to true independence.  He 
recognizes that to ensure future stability he needs to create 
a stable, sustainable democratic political system. 
Nazarbayev, however, either does not realize the destructive 
potential, or cannot overcome the corrupt interests of his 
own family and his inner political circle.  He is therefore 
torn between the need for reform, and the desire to avoid the 
short-term pain and sacrifice this would require from him, 
his family, and a large network of political and personal 
cronies.   End summary/overview. 
 
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The Political Context 
--------------------- 
 
2. (C)  With presidential elections scheduled for December 4, 
Nazarbayev is eager for as many high-level international 
contacts as possible in order to buttress his domestic image 
as the only leader capable of protecting Kazakhstan's 
interests on the world stage.  He will therefore be very 
eager to meet with you and to highlight that meeting 
publicly.  At the same time, in the wake of the "color 
revolutions," Nazarbayev has residual concerns about U.S. 
intentions.  He will be on alert for any hint that the U.S. 
believes that it is time for him to move on.  While A/S 
Fried's September 30 meeting with Nazarbayev helped assuage 
these concerns, Nazarbayev will welcome your acknowledgment 
of his historical achievements and the strong partnership 
that we have created over the past 14 years of independence 
-- and your assurances that the U.S. is interested only in a 
fair and open election process that will strengthen the 
international and domestic authority of the winner. 
 
3. (C) As the incumbent in a country experiencing 9% growth 
over the past several years and benefiting from high oil 
prices, Nazarbayev is justifiably confident that he will win 
in December.  These will be the first truly contested 
presidential elections in Kazakhstan's history.  The two 
opposition candidates, Zharmakhan Tuyakbay ("For a Just 
Kazakhstan") and Alikhan Baimenov ("Ak Zhol"), are relatively 
weak, however.  Both western polls and the GOK's own private 
polling data give Nazarbayev a wide lead -- perhaps as much 
as 70%. 
 
4. (C) Our message to Nazarbayev and his inner political 
circle has been that he will have far greater legitimacy if 
he wins a fair election with 65-70% of the vote than if he 
receives 90% and opens the door to charges of falsification. 
We have also underscored the importance to Kazakhstan's 
development and future stability of giving the opposition 
room to develop.  Nazarbayev has said all the right things 
about holding free and transparent elections; in a September 
9 decree he ordered ministries and the Central Election 
Commission (CEC) to ensure the accuracy of voter lists, equal 
access to the media for all candidates, and the accreditation 
of foreign election observers and media.  The CEC has already 
invited the OSCE to observe the elections.  The question is 
whether the political will exists to break old habits and 
insure that administrative resources are not misused and the 
vote count is not falsified.  Even if Nazarbayev is genuinely 
committed to the goal, the political structure of the country 
-- with regional leaders appointed by and loyal to the 
president -- will make it very difficult to achieve truly 
clean elections. 
 
5. (C) There is a wide range of worldviews and opinions in 
 
Nazarbayev's inner circle of advisors.  Several, including 
Presidential Administration head Dzhaksybekov and PA 
officials Mukhamedzhanov and Yertysbayev, perceive the West 
and western NGOs as threats and advise Nazarbayev to maintain 
strict control of the political environment.  There are 
others, however, such as presidential advisors Karim Masimov 
and Marat Tazhin, and FM Tokayev, who favor political reform 
and increased openness.  FM Tokayev told Ambassador Ordway in 
June that in Kazakhstan the pendulum swings back and forth 
between authoritarian and democratic tendencies.  In the 
months following the "color revolutions," those who advocate 
an authoritarian approach have had Nazarbayev's ear.  Tokayev 
was optimistic that the pendulum will soon swing back the 
other way.  Our sense is that the pendulum has probably swung 
as far as it is going to go, and there may be some small 
movement in the other direction.  However, continuous 
high-level USG engagement with Nazarbayev personally is 
important because it strengthens the hand of those in his 
inner circle who understand and agree with our message. 
 
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The Economic Environment 
------------------------ 
 
6. (C)  The Kazakhstani economy is of course dominated by the 
energy sector, which provides approximately 22% of government 
revenue.  Oil exports account for approximately 20% of GDP. 
The country produces 1.25 million barrels of oil per day. 
The GOK realizes the risks associated with an 
energy-dependent economy and has taken several wise moves to 
manage the situation, including the creation of an offshore 
National Fund to sterilize oil revenue and minimize budgetary 
fluctuations.  The energy sector is growing rapidly. 
Kazakhstan will enter the oil-producing top ten in the next 
decade, with production expected to reach 150 million tons 
annually (3 million b/pd) by 2015. 
 
7. (C) Conditions for foreign investors in the energy sector 
have changed for the worse since 2002.  Early contracts were 
exceptionally generous, recognizing the very high risk 
associated with investing in a newly independent country. 
The GOK is now taking aggressive steps to increase revenue 
and claw back equity through excessive tightening of its 
fiscal regime.  Changes to the tax code have reduced internal 
rate of return (IRR) from a peak of 16-23% to 11-12%.  While 
foreign oil majors say they are looking for at least 15% IRR 
before signing any large new deals, majors such as Shell and 
ConocoPhillips are aggressively pursuing new blocks based on 
present terms.  The GOK is also seeking a larger ownership 
share of new projects, claiming the right to take up to 50%; 
it is doubtful, however, that the government can sustain the 
required investments during the development stages.  Cash 
calls resulting from the acquisition of a share in AGIP-KCO 
(Kashagan) will constrain the GOK's ability to maintain 
ownership in other fields.  Nonetheless, there is strong 
competition for the majors.  The Chinese have demonstrated 
their willingness to overpay for assets with their proposed 
purchase of Canadian-owned PetroKazakhstan; Russian, Indian 
and other mid-tier oil companies are also eager to increase 
their presence here. 
 
8. (C) The GOK also emphasizes the need for economic 
diversification to ensure long-term economic stability. 
Although diversification features prominently in GOK 
rhetoric, there have been few concrete results to date. 
Efforts to develop non-energy related industries are hampered 
by widespread corruption at all levels of society and 
government.  The GOK has taken some steps to address the 
problem, but has not attacked it at the root or created the 
truly independent judiciary needed.  Nevertheless, the solid 
macroeconomic policies of the past decade have created many 
of the prerequisites for a more diverse economy, such as 
moderate inflation rates, an excellent banking and banking 
regulatory system, investment-grade ratings of sovereign debt 
by all agencies, and the early pay-off of all IMF debt.  We 
are close to agreement with the Kazakhstani government on 
co-funding of USAID economic development programs.  The GOK 
is also taking the necessary steps to integrate itself into 
the regional and global economy, most notably through 
membership in USTR's TIFA (Trade and Investment Framework 
Agreement) and application for WTO membership. 
 
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The Security Relationship 
------------------------- 
 
9. (S) Kazakhstan has been a loyal partner in the war on 
 
terror.  The GOK has permitted almost 3,800 no-cost 
overflights and numerous emergency diverts in support of OEF 
operations in Afghanistan.  For the past two years, it has 
also deployed a 27-member military engineer team (KazBat) to 
Iraq, which has disposed of over 3.5 million pieces of 
ordnance.  Given its size and resources, Kazakhstan could do 
more in the international arena.  The GOK declined our 2004 
request to provide a battalion for UN security operations in 
Iraq.  U/S Joseph will pitch President Nazarbayev on expanded 
PSI cooperation (i.e. interdiction of flights) when they meet 
on October 8 in Ust-Kamenogorsk.  Closer to home, cooperation 
between intelligence agencies on domestic and regional 
terrorist threats has grown dramatically.  We are 
extraordinarily pleased with the exceptionally close and 
productive operational cooperation that we now have with 
Kaakhstan. 
 
10 (S) [Deleted garbled text] 
DOE helped to decommission the 
Soviet-era BN-350 reactor, and is now addressing the issue of 
spent fuel disposition.  It has also helped Kazakhstan 
increase materials protection, accounting, and controls at a 
number of nuclear facilities and is working to convert the 
Alatau reactor from HEU to LEU use. 
 
11. (C) The signature of the Proliferation Prevention 
Initiative agreement in August has created new opportunities 
for cooperation on Caspian security.  Although Kazakhstan has 
fallen behind Azerbaijan, they now appear eager to move 
forward.  President Nazarbayev raised this cooperation with 
A/S Fried in their September 30 meeting. 
 
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Your Visit 
---------- 
 
12. (C)  I look forward to welcoming you to the rapidly 
developing capital city of Astana next Wednesday and 
introducing the staff of Embassy Almaty, the Embassy Branch 
Office in Astana, and the OBO construction team to you.  You 
can expect to find President Nazarbayev in a relaxed and 
confident mood, ready for wide-ranging and forward-looking 
discussions of the entire bilateral relationship.  With 
President Berlusconi coming to see him the following day, 
Nazarbayev is undoubtedly pleased that Kazakhstan is 
receiving the international attention he so eagerly seeks. 
ORDWAY 
 
 
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