KAZAKHSTAN: THE TANGLED WEB OF (NON)TRUE TRADE FINANCE AT

UNCLAS SECTION 01 OF 03 ASTANA 001628 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC PLEASE PASS USTDA AND OPIC E.O. 12958: N/A TAGS: PGOV PREL ECON EFIN KZ SUBJECT: KAZAKHSTAN: THE TANGLED WEB OF (NON)TRUE TRADE FINANCE AT ALLIANCE BANK REFTEL: ASTANA 1626 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: While ECAs represented on the BTA steering committee appear to be finding a compromise (reftel),Alliance Bank has recently reneged on a commitment to separate the restructuring options for trade finance due to pressure from creditors on its steering committee. At the center of the issue lies Alliance Bank and its creditors' efforts to distinguish between so-called "true trade finance" and "non-true trade finance." Whether a legitimate mechanism to separate ECA-guaranteed credit used in possibly fraudulent transactions, or a self-preservation tactic Alliance Bank is using to reduce its overall obligations, it poses another threat to long-term credit providers, such as the USDA Commodity Credit Corporation's future operations, in Kazakhstan. END SUMMARY. ALLIANCE BANK TAKES CENTER STAGE ¶3. (SBU) Unable to join the delegation of ECAs that traveled to Kazakhstan in early September (reftel),USDA Branch Chief for Risk and Asset Management Teri Ryan and Financial Analyst Hal Taylor again made the case for preferential trade finance conditions in Almaty and Astana September 17-24. After learning that Alliance Bank assurances for preferential trade finance treatment were in jeopardy, Ryan and Taylor focused on Alliance Bank. (NOTE: The USDA, via the Credit Commodity Corporation has over $230 million in exposure to the Kazakhstani banking sector. Of this, they have $49 million in exposure to BTA, and $85 million to Alliance Bank. END NOTE.) ¶4. (SBU) Referencing the non-binding MOU signed on July 6 to prevent imminent liquidation of the bank by the Kazakhstani Financial Supervision Agency (FSA),Director of the Department of International Relations at Alliance Bank Director Victoria Tyo explained during a September 24 meeting that Alliance and its creditor steering committee are currently negotiating in London to establish a legally-binding terms sheet. This document will include an allocation/reallocation mechanism (currently under development) to prevent creditors over-subscribing to any of the five options originally set forth in the MOU. All involved creditors must ultimately approve it in a vote expected by November 15. While not committing to the timeframe, Tyo said Alliance officials hope that the steering committee will sign the terms by October 1. ¶5. (SBU) Unlike BTA, Tyo said that Alliance Bank originally pledged to keep trade financing debt out of restructuring negotiations in order to provide preferential terms for full repayment. (NOTE: As a result, ECAs have not had direct representation on the Alliance Steering Committee. END NOTE.) However, Tyo explained that steering committee members now insist on the inclusion of trade finance in the binding terms sheet, and have put enormous pressure on Alliance for equal treatment of all creditors. She explained that they must find some form of compromise on trade finance and Alliance must now "draw a line" between categories of trade finance debt. Alliance Bank Senior Manager for Global Trade Finance Aida Amanova said that this "line" will likely be drawn according to a distinction between what they term "true trade finance," and "non-true trade finance." (NON)TRUE TRADE FINANCE? ¶6. (SBU) According to Amanova, "true trade finance" requires an underlying contract for the import of real goods to Kazakhstan and a letter of credit. In the opinion of Alliance, "non-true trade finance" transactions have no underlying trade (commodity). Rather, they represent a direct cash flow to a bank, such as Alliance or BTA. USDA Financial Analyst for Risk and Asset Management Hal Taylor emphasized the fundamental flaw in this distinction. While ASTANA 00001628 002 OF 003 on the surface, he argued, some of USDA's exposure to Alliance may not appear to be "true trade finance," every guaranteed transaction effectively had an underlying commodity exchange. ¶7. (SBU) As explained by USDA Branch Chief for Risk and Asset Management Teri Ryan, in "pure trade finance transactions," loans are characterized by short-term self-liquidating debt. In practice, an exporter unwilling to accept foreign importer repayment risk obtains a letter of credit from a bank. Once the importer receives the commodity, the bank that issued the letter of credit pays the exporter in full, and then demands repayment from the importer. These letters of credit tend to be short-term loans and normally require full repayment within 30-90 days. To assist importers without the necessary liquidity to repay within 30-90 days, often a secondary bank will honor the issued letter of credit by extending the repayment period for up to three years at a competitive refinancing rate. In accordance with its mandate to facilitate domestic exports, an ECA frequently guarantees the secondary bank's refinanced letter of credit. ¶8. (SBU) USDA via the Commodity Credit Corporation (CCC) serves as the guarantor of trade finance loans for CoBank and DeutscheBank's New York branch, which provided BTA and Alliance banks with competitive refinancing for up to three years on original letters of credit for "true trade finance" transactions (i.e. the export/import of real U.S. commodities to "Eurasia," which includes Kazakhstan). CoBank and Deutsche Banks' refinancing of original letters of credit freed obligated liquidity in the short-term for BTA and Alliance -- that they would have otherwise been obligated to repay in full in 30-90 days -- for use at their discretion. USDA refers to this common mechanism, which provides competitive financing for U.S. exports, as structured trade finance. As a matter of practice, the USDA regards any transaction that involves a letter of credit from which an actual commodity was shipped, regardless of any inclusive structured refinancing, as "true trade finance." In many cases, it is likely that BTA and Alliance used this liquidity to make additional loans, which may have included investment in assets in Russia. ¶9. (SBU) This year, both BTA and Alliance defaulted on principal repayments for the refinanced letters of credit to CoBank. This action triggered CCC guarantor (claim) payments by USDA. To date, the USDA via the CCC has paid claims on BTA and Alliance defaults of approximately $5.5 million and $9.1 million respectively. OR ARE THEY BUNGE/CARGILL SCHEMES? ¶10. (SBU) According to Amanova, members of the steering committee believe that many of the transactions potentially classified as "non-true trade finance" could also be called "Bunge or Cargill Schemes." In these schemes -- named after the large agricultural conglomerates in Argentina and the U.S. -- a collaborating exporter and importer -- such as Cargill -- approach a bank -- such as Alliance -- with an export/import transaction with a request to issue a letter of credit. Knowing that a secondary bank -- such as CoBank -- will refinance, and that an ECA likely will guarantee the credit, the agricultural company will offer to arrange the deal for a significant fee. Once the underlying contract is completed, the secondary bank pays in full the first bank, which issued the letter of credit. The first bank thus gained a short-term cash loan for the value of the initial commodity transaction, which it only needs to repay within the period of time determined by the specific refinancing -- normally within three years. In this scenario, Alliance simply used trade finance transactions as a vehicle to secure pure cash loans from ECA creditors. Therefore, many argue that the ECAs should not receive special terms. AN ACCEPTABLE ECA OPTION? ASTANA 00001628 003 OF 003 ¶10. (SBU) Clearly displeased by Alliance steering committee actions, Ryan and Taylor emphasized that ECAs cannot accept any of the current options offered in Alliance's restructuring MOU, and argued that the steering committee must include representation of trade finance interests. Ryan said USDA will press for the release of concrete definitions of "true trade finance" versus "non-true trade finance" transactions, which Alliance has not yet provided. Tyo reiterated that Alliance Bank officials fully understand the implications should ECAs not receive an acceptable option, and pledged to actively seek the support of the remaining creditors. At the conclusion of the meeting, Tyo said that this specific issue was raised already in London and mentioned current attempts to create an alternative to the proposed seven-year trade financing option. However, she could not yet disclose precise terms. According to Amanova, total ECA exposure to Alliance is approximately $136 million. However, she either would not, or could not, disclose how much of this exposure they might define as "true trade finance." SAMRUK-KAZYNA KEEPING DISTANCE FROM ALLIANCE ¶11. (SBU) Since February of this year, Samruk-Kazyna officially owns a 76% ownership stake in Alliance Bank. However, it has yet to recapitalize the bank. With no equity ownership, Samruk-Kazyna extended an initial loan for deposits to keep the bank functioning, but it is biding its time in the conversion of its loans and deposits to equity. When pressed directly on this issue by Taylor and Ryan on September 18, who asked if this signaled a possible reluctance to actually preserve the bank, Samruk Kazyna Director of Risk Management Kamilla Khairova said that past government assurances and anti-crisis measures indicate a commitment for eventual conversion. However, Khairova admitted that the conversion partly depended on the success of a restructuring agreement and the bank's subsequent liquidity requirements. (NOTE: The MOU that serves as the basis for current negotiations includes a provision requiring Samruk-Kazyna's recapitalization of the bank. END NOTE.) ¶12. (SBU) COMMENT: After an initial period of calm, the struggle between ECA and non-ECA creditors now is playing out in Alliance Bank restructuring talks. Because someone must take a loss in the end, all parties are attempting to shift blame. Arguments over the validity of distinguishing between "non-true" and "true trade finance" are simply the most recent volley. Still, like many of the financial instruments employed in the go-go days of the credit bubble, it will take significant efforts to untangle the complicated webs of trade finance. END COMMENT. HOAGLAND