KYRGYZSTAN FEARS GLOBAL FINANCIAL CONTAGION

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 001091 SIPDIS DEPT FOR SCA/CEN (GORKOWSKI) TREASURY FOR FINCEN, LARRY NORTON KYIV FOR LANIER E.O. 12958: DECL: 10/29/2018 TAGS: EFIN ECON PGOV KG SUBJECT: KYRGYZSTAN FEARS GLOBAL FINANCIAL CONTAGION BISHKEK 00001091 001.2 OF 002 Classified By: Amb. Tatiana Gfoeller, Reason 1.4 (b) and (d). ¶1. (C) Summary: According to an IMF source, Kyrgyz Central Bank officials fear that a Russian financial crisis could trigger a run on Kyrgyz banks with extensive international exposure. The Kyrgyz government is trying to determine appropriate steps to mitigate the impact of the global financial crisis, which the Central Bank views as already having steered the Kyrgyz Republic into a "recession." The dollar has appreciated 15% against the Kyrgyz som in recent weeks, and the Central Bank has limited dollar reserves to counter continued weakness in the som. While Manas Bank, closely affiliated with President Bakiyev's son Maxim, has reportedly pulled $70 million in foreign currency assets from Ukraine recently, other banking sector developments will require closer scrutiny. End Summary. Concerns about a Foreign Contagion -------------- ¶2. (C) During an October 20 discussion with Emboff, International Monetary Fund (IMF) resident representative James McHugh relayed Kyrgyz Central Bank concerns about a possible liquidity crisis in the Kyrgyz Republic. The Central Bank apparently fears that a Russian financial crisis could trigger a run on local banks with significant international exposure, such as Asia Universal Bank (AUB) or one of several banks with parent companies in Kazakhstan. The Kazakh parent banks hae not raided their Kyrgyz operations for capital, McHugh explained, due to their small size relative to their Kazakh parents. ATF Bank International Desk Director Yildirmer Tekin denied to Emboff October 21 that his bank, formerly a Kazakhstan-headquartered institution recently absorbed by the UniCredit Group, had encountered any problems with its balance sheet. A Kyrgyz Recession -------------- ¶3. (C) McHugh told Emboff that the Central Bank considers the Kyrgyz economy to be in "recession." He said Central Bank insiders expect a major Kyrgyz economic slowdown in 2009 due to Kyrgyz electricity shortfalls, decreased Kazakh economic growth, weakening export markets and declining remittances from Kyrgyz workers in Russia and Kazakhstan. In his October 17 address to assembled government officials, President Bakiyev expressed concern about the impact of global economic and financial shocks on the Kyrgyz economy. Minister of Economic Development and Trade Akylbek Japarov has apparently been tasked with developing government measures to counter these impacts. Exchange Rate Movements -------------- ¶4. (C) Since early August, the U.S. dollar has appreciated nearly 15% against the Kyrgyz som. McHugh told Emboff that local banks have limited available liquidity, but have been buying dollars, when possible, to preserve their assets. Local banks also continue to purchase Kyrgyz government securities with yields now rising to 18.3% in the latest government securities auction. Interest rates for consumer loans have surpassed 28% for those banks still extending credit in local currency. McHugh noted that the Central Bank is suffering sizeable losses due to depreciation and a limited supply of dollars on its balance sheet. This lack of dollars limits the Central Bank's ability to prevent significant weakening of the som against the dollar. Eyes on Manas -------------- BISHKEK 00001091 002.2 OF 002 ¶5. (C) Interestingly, McHugh reported that Manas Bank transferred $70 million in foreign currency assets from Ukraine to the Kyrgyz Republic in mid-October. Manas Bank is controlled by Valeriy Belokon, a close business associate of President Bakiyev's son Maxim. As Maxim Bakiyev is believed to have extensive interests in AUB and possibly other Kyrgyz banks, asset preservation by these institutions may intensify if financial conditions deteriorate. And actions by the Kyrgyz Central Bank, which has previously intervened in the banking sector to benefit Bakiyev-associated institutions such as AUB, will require scrutiny. Comment -------------- ¶6. (SBU) Recent Kyrgyz economic growth, fueled by increased remittances, transit trade and real estate investment, will likely slacken significantly in the coming year as the local economy reacts to global economic and financial slowdowns. The Kyrgyz government, like many other governments, is limited in what it can do to prevent this turn of events. GFOELLER