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

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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
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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
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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
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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
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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
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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