KAZAKHSTAN: FATE OF LARGEST BANKS TO BE DECIDED

UNCLAS SECTION 01 OF 02 ASTANA 001175

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC
STATE PLEASE PASS USTDA FOR AND OPIC

E.O. 12958: N/A
TAGS: PGOV PREL ECON EFIN KZ
SUBJECT: KAZAKHSTAN: FATE OF LARGEST BANKS TO BE DECIDED
IMMINENTLY (PART 2 OF 3)


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


2. (U) This is the second in a three-part series analyzing recent
developments in Kazakhstan's banking sector, the possible future
liquidation of its assets, and potential implications for
international export credit agencies.


3. (SBU) SUMMARY: U.S. Department of Treasury Advisor Tom Lanier
and International Economist in the Office of Europe and Asia Larry
Norton visited Almaty and Astana June 10-13, 2009 to assess current
conditions and trends in Kazakhstan's economy and the overall health
of its financial sector. Lanier and Norton's interlocutors reported
that Kazakhstan's Financial Supervision Agency (FSA) has ordered the
country's largest private banks -- Alliance and BTA -- to submit
proposals for the restructure of their foreign obligations to their
international creditors. Officials at Alliance Bank are "nervous"
about the outcome of their restructuring plans, and feel if any
struggling bank were to be championed by the government, it would be
BTA. Despite the banks' problems, depositor activity remains
generally calm, and negotiations continue on the possible purchase
of BTA by Sberbank of Russia. The banking sector's problems appear
to be countered by the country's long-term investment potential, and
macro-economic indicators suggest modest positive growth in
Kazakhstan's GDP before the end of the calendar year. END SUMMARY.

PROGNOSIS FOR SUCCESSFUL RESTRUCTURE UNCERTAIN


4. (SBU) According to the Financial Supervision Agency, the three
restructuring proposals for BTA and Alliance banks on the table
are:

Option A - 20% immediate cash repayment at an 80% discount;
Option B - 50% repayment over seven years with 7% interest; and
Option C - 100% repayment over 15 years with 5% interest.


5. (SBU) ATF CEO Alexander Picker believes the three proposals are
very wisely structured, and agrees that option three was likely
designed for banks and international financial institutions that can
accept nothing less than 100 percent repayment. According to
Citibank Kazakhstan's Dan Connelly, the general plan, should the
need to liquidate arise, will be to first and foremost protect
domestic depositors. He admitted that foreign bankers understood
the risks and said that, "In the Kazakhstanis' position, I would
probably do the same. They will however, ruin their reputation as
being well regulated in the process." Connelly does not, however,
believe that BTAs liquidation, should it come to pass, would have
much of a systemic impact. "They will protect the depositors, give
a big haircut to the foreign lenders, and then it will likely be a
few years before the markets open to them again."


6. (SBU) According to Alliance Managing Director Gaziz Shakhanov,
the outlook for Alliance is poor, and the government is not prepared
to spend more than the $4 billion it has already allocated to
salvage Kazakhstan's commercial banks. Of this $4 billion,
Shakhanov said only a small portion would be available for a needed
capital injection into Alliance. Detailing deposit outflows
amounting to more than $550 million since January, and just over $75
million in May 2009, Shakhanov described the mood at Alliance as
"nervous." This, he added was compounded by their view of BTA as a
huge bank that continues to consume the government's limited
anti-crisis resources. Citibank's Dan Connelly is not convinced
that Alliance's days are numbered, but admits that the situation is
rather bleak at best. "Their story never really jibed, but now that
we see that the $1 billion in treasury bonds was hocked! Deloitte
was shocked. This stuff was buried. The markets were shocked by
the news from Alliance." In the meantime, however, it is business
as usual for Alliance "unless you have a lot of money stuck there."


7. (SBU) ATF CEO Picker believes that in a best-case scenario, six
months from now, Alliance will have received a 75% acceptance rate
from its creditors and successfully completed its restructuring, and

ASTANA 00001175 002 OF 002


BTA will have been purchased by Russia's Sberbank. Halyk Bank will
still be going strong, according to Picker, and he believes that the
political support behind NurBank will keep it solvent.
"Kazkommertsbank (KKB) remains uncertain and I believe they too may
soon start to default on smaller payments." He added, "My worst
case scenario is that Alliance will go bankrupt, BTA will follow,
and foreign financial institutions will be blamed."

CALM BEFORE THE STORM


8. (SBU) Despite the looming threat of liquidation, there has been
surprisingly little public reaction. ATF CEO Picker said that even
though it is very hard to withdraw large assets from BTA right now,
he is amazed at the lack of a public outcry to the recent turn of
events. "Three major banks have declared default and there seems to
be no visible public reaction. There are no queues, no pickets, and
no lines at the banks or ATMs. Even the international companies
have not reacted." KKB's Executive Director Sergey Mokroussov said
a group of German bankers recently told him that if the same
situation were to happen in Germany, the entire banking system would
likely collapse from the public's response. "In general, confidence
in the banking sector has not diminished. This is very interesting
for us," He explained. Some financial sector representatives have
argued that the situation has not yet reached its tipping point.
"There is some concern that if Alliance is not able to continue to
serve its depositors, there will be a run on the banks across the
board," said Managing Director Shakhanov.

WHERE ART THOU SBERBANK?


9. (SBU) Questions continue to circle around the possible purchase
of BTA by the Russian state-owned savings bank Sberbank Rossii
(Sberbank). Citibank's Dan Connelly believes the rumors are
credible, given that "they can sort out BTA's Russian portfolio
better than any others." Others believe the issue is more political
than economic. ATF's CEO Picker said he believes there was a
personal agreement made between President Nazarbayev and Sberbank
Chairman German Greff. "Sberbank fits the bill, but it does not
make sense economically," he argued. BTA's Pirmatov agreed that
there is likely more to this deal than pure economics. "There is
some kind of personal connection between Sberbank's Chairman Greff
and Kairat Kelimbetov. Greff is originally from Karaganda, both are
former Ministers of Economy, and the initial announcement about
Sberbank's interest was made the same day the government acquired
control of BTA." Sberbank, Pirmatov added, also paid half of the
fees for KPMG's audit of BTA. In the event that BTA does manage to
secure creditor acceptance to restructure its debt, KKB's Mokroussov
predicts that Sberbank will likely buy in, and Samruk-Kazyna will
then sell 50 percent of its ownership stake, ultimately making BTA a
viable financial institution.

MACRO CONDITIONS STABLE


10. (SBU) Leading indicators show that despite the fact that
Kazakhstan's largest banks remain in financial limbo, the economy as
a whole is holding steady and may realize positive growth later this
year. The National Bank of Kazakhstan reported that GDP growth for
all of 2009 will be 0%, but this figure may be revised upward in
August depending on oil prices. ATF Bank's Alexander Picker said
that there will be a 2.3% contraction for all of 2009, with a
positive rebound of 2.3% in 2010. Squelching rumors of a further
devaluation of the tenge, Picker described the February devaluation
as "necessary and reasonable," and likely to hold without further
measures needed. Citibank's Dan Connelly said his economists
predict a contraction in the economy between 0.6 and 2.0 percent in

2009. However, some scenarios, he said, actually show a very slight
amount of growth by the end of the year. The tenge devaluation,
according to Connelly was "spot on and holding right where they said
it would."

HOAGLAND