EBRD FEEDBACK REFLECTS POLITICIZED KYRGYZ BANKING

C O N F I D E N T I A L SECTION 01 OF 02 BISHKEK 000557

SIPDIS

DEPT FOR SCA/CEN (GEHRENBECK),EEB
TREASURY FOR FINCEN
KYIV PASS TO LANIER

E.O. 12958: DECL: 05/30/2018
TAGS: EFIN ECON PGOV KG
SUBJECT: EBRD FEEDBACK REFLECTS POLITICIZED KYRGYZ BANKING
ENVIRONMENT

REF: A. 07 BISHKEK 1155

B. BISHKEK 086

C. BISHKEK 194

D. BISHKEK 385

E. BISHKEK 386

BISHKEK 00000557 001.2 OF 002


Classified By: Amb. Marie L. Yovanovitch, Reason 1.4 (b) and (d).


1. (C) Summary: The Kyrgyz central bank has postponed for
six months any decision on ProCredit Bank's license
application. ProCredit Bank, which operates in 22 countries,
has EBRD backing for its plan to open in Kyrgyzstan. The
EBRD resident representative told us that the central bank
provided "trivial" excuses for the delay, and ProCredit staff
reportedly believe that the postponement arose from political
considerations and was not based on the merits of the
application. The EBRD representative also indicated that the
EBRD would turn down a financing request from the
Kyrgyzstan-based Asia Universal Bank. During the recent EBRD
general meeting in Kyiv, he noted that EBRD officials
highlighted Kyrgyz investment climate difficulties to the
Kyrgyz delegation. The ProCredit delay is disappointing, but
it underscores questions about the growing intersection of
banking and Bakiyev family interests in the Kyrgyz financial
sector. End summary.

Delaying Tactics on ProCredit
--------------


2. (C) Local European Bank for Reconstruction and
Development (EBRD) representative Kenji Nakazawa (please
protect) advised Emboff May 23 that the National Bank of the
Kyrgyz Republic (NBKR ) the Kyrgyz central bank) had
postponed for six months a decision regarding ProCredit
Bank's license application. (Note: The NBKR issues
commercial banking licenses. End note.) ProCredit, which
operates independently in 22 countries and focuses on
small-scale lending, has EBRD backing for its plan to
establish operations in the Kyrgyz Republic. Nakazawa told
Emboff the NBKR provided "trivial" excuses regarding
technical and management issues before citing a recently
passed Kyrgyz law requiring new banks to be open stock
companies. The NBKR explanation indicated that another six
months would be needed to review ProCredit's application in
conjunction with this law.


3. (C) ProCredit personnel reportedly told Nakazawa that
NBKR staff advised them "not to be difficult as there is
little the NBKR can do; this is a political decision." This
comment mirrors feedback (ref D),which Mercy
Corps-affiliated staff provided to Embassy in early April
about senior political interference in NBKR decision-making.
Nakazawa added that ProCredit personnel were advised to
consider instead purchasing a (bankrupt) local bank through
which President Bakiyev's son Maxim could then gain a
representative interest in the ProCredit operation. Nakazawa
reasoned that the local bank purchase suggestion proved that
there was nothing technically wrong with ProCredit's license
application. He mentioned that ProCredit would be "knocking
on lots of doors" to make its case to Kyrgyz government
officials, but believed that this approach might not
presently aid ProCredit's license application. Given that
the EBRD Board has already backed ProCredit's Kyrgyz plans,
Nakazawa noted that Kyrgyz officials should be aware that
"blocking" the ProCredit project would become "public."

Expressing Views on AUB
--------------


4. (C) As Nakazawa had previously informed Embassy that an
Asia Universal Bank (AUB )- a Kyrgyz bank) request for EBRD

BISHKEK 00000557 002.2 OF 002


financial support had been forwarded to EBRD's London
headquarters, Nakazawa reflected on AUB's previous
questionable activities and reasoned that insufficient time
had passed to be sure that AUB's efforts to change had been
successful. (Note: Nakazawa knew of AUB's similar request to
the U.S. Overseas Private Investment Corporation. See ref E
for more background on AUB's past. End note.) He intimated
that EBRD would turn down AUB's request, using this
rationale. (Note: AUB is rumored to be linked with President
Bakiyev's son, Maxim. End note.)

Kyrgyz Exposure
--------------


5. (C) Having just returned from the EBRD's annual meeting
in Kyiv, Nakazawa said that the EBRD's bilateral meetings
with Kyrgyz representative (and Minister of Economic
Development and Trade) Akylbek Japarov emphasized the need to
improve the investment climate for broader EBRD lending in
the Kyrgyz Republic. Nakazawa viewed Kyiv as an excellent
venue for Japarov to see the rapid transformation that
accompanied significant EBRD and international financial
support for Ukraine. Despite 200 million euros of total EBRD
lending since the EBRD opened its operations in the Kyrgyz
Republic, the EBRD is currently having difficulty locating
suitable projects and only lent firms operating in the Kyrgyz
Republic 12 million euros in 2007. Nakazawa said Japarov was
advised that the local investment climate made it difficult
for EBRD to provide much more lending.


6. (SBU) Nakazawa told Emboff that the EBRD has approved
only a handful of requests in 2008 in the Kyrgyz Republic.
Namely, he identified a Swiss-backed cheese factory, a
travertine quarry, a residential construction project and
renewed lending to previous recipients.

Comment
--------------


7. (C) The NBKR may view the six-month delay on the
ProCredit bank license application as the best outcome
possible )- it preserves current conditions for the
expanding Bakiyev-linked banking enterprise network while
staving off stronger EBRD complaints about a negative
decision on Pro Credit. As we engage with Kyrgyz officials
on business and investment issues, we will advise them that
we are monitoring the ProCredit license application with the
expectation that uniform and fair application of banking
regulatory procedures will be applied. As the apparently
politically-motivated NBKR delay underscores questions about
the growing intersection of banking and Bakiyev family
interests, Embassy will continue to track developments.
YOVANOVITCH