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Cablegate: Northern Kazakhstan Welcomes Customs Union

VZCZCXRO3361
OO RUEHIK
DE RUEHTA #0010/01 0081012
ZNR UUUUU ZZH
O 081012Z JAN 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7153
INFO RUCNCIS/CIS COLLECTIVE 2316
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1678
RUEHKO/AMEMBASSY TOKYO 2384
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1873
RUEKJCS/SECDEF WASHDC 1723
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL

UNCLAS SECTION 01 OF 03 ASTANA 000010

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EUR/RUS, EEB

E.O. 12958: N/A
TAGS: PGOV PREL ECON EAGR ETRD SOCI RS KZ
SUBJECT: NORTHERN KAZAKHSTAN WELCOMES CUSTOMS UNION

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1. (U) Sensitive but unclassified. Not for public Internet.

2. (SBU) SUMMARY: During a series of visits to Kazakhstan's two
northernmost provinces, local officials praised their regions'
economic stability and growth potential. Accounting for the largest
share of Kazakhstan's 20.8 million ton grain harvest, much of which
is exported via Russia, Kostanai and North Kazakhstan Oblasts act as
Kazakhstan's "front door to Russia." Local officials welcomed the
Customs Union with Russia and Belarus, which entered into force on
January 1. Although few new buildings and glitzy high-rises dot
their big cities, Kazakhstan's northernmost provinces realistically
epitomize the country's economic accomplishments and challenges.
END SUMMARY.

KAZAKHSTAN'S DOOR TO RUSSIA

3. (SBU) Sharing a 2400 kilometer border with Russia, Kostanai and
North Kazakhstan Oblasts depend economically on agriculture and
trade with Russia. In 2008, Kazakhstani-Russian trade turnover
exceeded $19.9 billion. Kazakhstan expects to export at least half
of its 2009 grain harvest, much of which will transit through Russia
to countries in the Commonwealth of Independent States and ports on
the Azov, Baltic, and Black Seas. Kostanai and North Kazakhstan
Oblasts produce the majority of Kazakhstan's high-quality wheat,
which often is mixed with Russian grain and milled into flour.

RURAL KAZAKHSTAN

4. (SBU) Sparsely populated, more than 60% of these regions'
residents live in rural areas. Despite record harvests in recent
years, their per capita GDPs of $5,264 (Kostanai Oblast) and $3,120
(North Kazakhstan Oblast) are well below the national average of
$6,870. Officials and local residents assert that economic growth
is steady, but inconspicuous, with capital cities noticeably
eschewing ostentatious high-rise buildings.

KOSTANAI ENTREPRENEURIAL UNIONS PREDICT ECONOMIC GROWTH

5. (SBU) On December 28, Peter Sukhinin, President of the
Association for the Support of Entrepreneurial Activity in Kostanai
Oblast, told PolOff the region follows the national trajectory, with
steady improvements to its business climate. He particularly
highlighted the national and regional governments' allocation of
significant sums of money to promote development. Sukhinin noted
the economy could grow even faster, but is still restrained by the
dominance of large industrial conglomerates, with small and medium
business generating only 20% of tax revenue. Sukhinin highlighted
Kostanai's large ore-extraction enterprises in Lisakovsk and Rudny,
aluminum production in Arkalyk, and the agricultural conglomerate,
Ivolga Holding.

6. (SBU) Sukhinin drew a parallel between the expansion of his
association, which includes a large number of businesses in a wide
array of sectors (e.g., services, publishing, trade, and
agricultural processing), and Kostanai's continued growth.
According to Sukhinin, his organization supports small and
medium-sized businesses holding regular meetings with entrepreneurs
and authorities, and by publishing business brochures with the local
government. He credited his visit to the United States with giving
him the idea for the brochures, the most popular of which concern
how to handle licensing and inspection processes. Its cooperation
with other NGOs includes its recent assistance to an organization of
disabled persons to publish 1000 books.

7. (SBU) Another affiliated entrepreneurial organization, the Union
of Individual Entrepreneurs of Kostanai Oblast, provides a forum for
consultation on common problems -- such as tax issues -- about which
it then lobbies the local and national government. (NOTE: Tatyana
Zueva, the Akimat's Internal Policy Department representative,
confirmed the active dialogue with entrepreneurs, which she claimed
gradually is improving the legal code. END NOTE.) In addition,
Chairwoman Gulnara Uralova highlighted the fund established in 2003
to provide small loans to entrepreneurs through a second-tier bank
at a constant rate of 14% -- in contrast to typical commercial bank

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interest rates of 25-30%.

OFFICIALS AND BUSINESSPEOPLE PRAISE BUSINESS CLIMATE

8. (SBU) According to Roza Goryannaya, Director of the
Entrepreneurship Section of Kostanai Oblast's Department of
Industry, half of Kostanai's small businesses are trade-oriented.
She expressed hope for small- and medium-sized enterprise growth,
especially in the industrial sector, but admitted such development
requires significant capital investments.

9. (SBU) Nikolai Fast, owner of the Lux-Voda company, described a
paucity of qualified lawyers and accountants, frequent legislation
changes, and problems with banking services as challenges. The
quiet-spoken, middle-aged Fast also complained about tax problems
and government inspections lasting up to four months. Fast
acknowledged entrepreneurial associations' value in pooling
resources to hire well-qualified accountants and attorneys, whose
services would otherwise be prohibitively expensive. He noted
steady improvement in business conditions, and, with hearty assent
from all the other roundtable participants, favorably compared
Kostanai's business climate to that of Russia and other Kazakhstani
regions.

10. (SBU) Marina Byt, an elegantly dressed middle-aged clothing
importer, recounted the start to her career in outdoor bazaars in
the 1990s and her expansion courtesy of Kazakhstan's first loans.
Today, local entrepreneurs are struggling to survive the economic
crisis, she said, especially in light of the credit crunch and
diminished demand. Byt welcomed a Japanese-government grant for a
business-development workshop and South Korean business-promotion
assistance. As the Chairperson of the Supervisory Council of the
Union of Individual Entrepreneurs, Byt attended in Israel a December
international workshop for businesswomen, and invited a business
expert to visit Kostanai under an Israeli program. Byt highlighted
international trade fairs' utility for Kazakhstani entrepreneurs,
and called for expanded interaction with U.S. business experts.

NORTH KAZAKHSTAN OFFICIALS PRAISES ECONOMIC GROWTH

11. (SBU) In North Kazakhstan, Erlik Zhandildin, Director of the
Oblast Akimat's Internal Policy Department, described the overall
economic situation in North Kazakhstan as excellent, and emphasized
the oblast's production of half of Kazakhstan's 2009 wheat harvest.
Quoting an old Soviet adage, "as long as there will be bread, there
will be song," Zhandildin said good salaries, reliable pensions,
large harvests, and development have made the region popular,
including for many ethnic Russians and Germans who previously
emigrated abroad.

12. (SBU) Zhasulan Shaymerdenov, Director of the Industrial
Division, highlighted North Kazakhstan Oblast's significant
industrial potential, especially in the production of grain
products, including bio-ethanol. The oblast manufactures
biochemical products and heavy-industry machinery, including mobile
drill rigs for KazMunaiGas (KMG) and specialized railcars for grain
and machinery for Kazakhstan's national railway Temir Zholiy (KTZh).
Other enterprises include a joint Kazakhstani-Turkish elevator
venture, a flour refinery, and candy, pasta, and dairy-product
companies. Since several small and medium-sized sausage companies
operate in the region, Shaymerdenov called meat production a
promising field.

13. (SBU) Under President Nursultan Nazarbayev's policy of
industrialization, Shaymerdenov said his department had to design
and implement by January 1 a new development plan, for which the
government will provide credit. The region's administration soon
will ratify 23 agricultural and industrial projects worth over $1
million, including a pasta-production program. The region also is
building a plant to produce locomotive-security and
railroad-communication equipment for KTZh.

14. (SBU) Shaymerdenov underlined North Kazakhstan Oblast's overall
economic stability, noting physical output of GDP increased steadily

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despite the financial crisis and corresponding decreases in
investments. Shaymerdenov, who grew up in an agricultural village
in the region, attributed this steadiness to the region's history as
a land of farmers, where people tend to be cautious. "We do not
boast too much when times are good. We just buy something new, such
as a tractor, or more land."

CAUTIOUS OPTIMISM IN KOSTANAI ABOUT CUSTOMS UNION

15. (SBU) PolOff's interlocutors in Kostanai do not expect any
immediate economic effect from the Customs Union. Nikolay Fast
stated that only the Customs code will change on January 1. He said
Kazakhstani Customs Services have become "the most professional on
the border," but complained that other agencies, such as Sanitary
and Epidemiological, Border Guard, and Immigration Services, make
border crossings long and difficult. Fast asserted it takes about
12 hours for his trucks to complete border-crossing and inspection
procedures, and welcomed service and transparency improvements
potentially generated by the Customs Union, especially in relation
to sanitation inspections. Byt expressed hope that the Customs
Union will boost trade and lift tight restrictions on fur imports,
which value-added-tax issues have also complicated.

16. (SBU) Sukhinin and Goryannaya highlighted the lengthy
harmonization process required by differences in the economic and
legal systems of Kazakhstan, Russia, and Belarus. However, they
still hailed the Customs Union as "a step forward" due to increased
competition and an expanded market. He conveyed his optimism that
many Kostanai businesses will outperform their Russian counterparts
and benefit from the Customs Union given the cooperation of Kostanai
entrepreneurs with each other and local authorities.

OFFICIALS IN NORTH KAZAKHSTAN LOUDLY PRAISE CUSTOMS UNION

17. (SBU) Zhandildin predicted the Customs Union's "very positive
results" on North Kazakhstan Oblast due to its integration with
Russia. (NOTE: Flights from Petrapavlovsk to Astana are offered
only twice per week, and take an hour and a half, whereas Omsk is
located only three hours by car or train. END NOTE.) Zhandildin
highlighted the similarities of Kazakhstan's and Russia's
agricultural industries and processing systems. He asserted that
consumers will benefit from the Customs Union, because it will force
competition and encourage quality improvements. Although he
acknowledged difficulties in the initial post-implementation phases,
Zhandildin highlighted Kazakhstani companies' competitiveness in
selling steel, non-ferrous metals, copper, zinc, aluminum, and
wheat.

18. (SBU) COMMENT: Local businesspeople and officials in Kostanai
and North Kazakhstan Oblasts are proud of their region's steady
economic growth, and cautiously optimistic about the Customs Union's
likely effect. The trends found in Kazakhstan's northernmost
provinces -- where oil and gas income does not skew growth like in
Atyrau, Almaty, and Astana -- realistically epitomize Kazakhstan's
economic development and its reliance on heavy industry and
agriculture. END COMMENT.

HOAGLAND

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