KAZAKHSTAN: FATE OF LARGEST PRIVATE BANK UNCERTAIN

UNCLAS SECTION 01 OF 04 ASTANA 000386

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB
STATE PLEASE PASS TO OPIC

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EFIN EAID KZ
SUBJECT: KAZAKHSTAN: FATE OF LARGEST PRIVATE BANK UNCERTAIN

REF: ASTANA 0286


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


2. (SBU) SUMMARY: During February 17-20, Department of the
Treasury Advisor Thomas Lanier held meetings in Astana and Almaty to
assess the government's response to the global financial crisis. A
key element of the government's anti-crisis program is its support
for the country's largest bank, Bank Turan Alem (BTA). On February
2, the government took a majority stake in BTA and replaced BTA
Chairman Muktar Ablyazov with Arman Dunayev, the Deputy Chairman of
Samruk-Kazyna. Decreasing global commodity prices -- particularly
for crude oil -- have severely depleted government revenue streams
and dwindling reserves may ultimately impact the government's
ability to maintain the solvency of BTA. With Western bankers and
economists encouraging Kazakhstan to liquidate BTA, it remains to be
seen whether the government can indeed save this prominent financial
institution. END SUMMARY.

BTA SUCCESS CENTRAL TO ANTI-CRISIS STRATEGY


3. (SBU) Kazakhstan's effort to rescue and stabilize Bank Turan
Alem (BTA),the largest bank in the country, is central to its
overall program to deal with effects of the global financial crisis.
An aggressive growth strategy, including excessive borrowing and
investment resulting in substantial exposure to the inflated real
estate and construction sectors, ultimately left BTA dangerously
leveraged when foreign banks stopped issuing credit to Kazakhstani
banks in August 2007. Dwindling deposit levels brought on by
decreased global commodity prices and an associated contraction in
Kazakhstan's economic growth compounded the problems facing BTA as
it struggled to raise the liquidity necessary to meets it
substantial foreign obligations. In response to the financial
crisis, the government announced in October 2008 its intention to
inject liquidity into four leading banks (BTA, Alliance, Halyk Bank,
and KazKommerts Bank) through the purchase of a 25% ownership stake
in each. However, by January 2009, the severity of the financial
problems facing the country's largest financial institutions,
specifically BTA and Alliance Bank, necessitated a much larger
infusion of cash. On February 2, the government announced the
purchase of a 78% ownership stake in BTA, followed shortly
thereafter by the transfer of approximately $2.4 billion to BTA from
the Samruk-Kazyna National Welfare Fund. The government also took a
majority stake in Alliance.

TOP LEADERSHIP IMMEDIATELY RESHUFFLED


4. (SBU) The same day that the government took a majority ownership
stake in BTA, it removed BTA Chairman Muktar Ablyazov from his
position and named Samruk-Kazyna Deputy Chairman Arman Dunayev to
replace him. Former National Bank Chairman Anvar Saidenov was later
named BTA's CEO.

ABLYAZOV - SPECULATOR OR SCAPEGOAT?


5. (SBU) In an open letter to President Nazarbayev on February 9,
ousted BTA Chairman Ablyazov claimed he was removed from his
position by the government in an attempt to consolidate state
control over private assets. Ablyazaov's claims, however, failed to
impress Kazakhstan's leading financial authorities. Financial
Supervision Agency (FSA) Deputy Chairman Kuat Kozhakmetov told
Treasury Department Advisor Thomas Lanier that the government
decided to acquire 75 percent of BTA, because the bank was poorly
managed. "(Ablyazov) is a speculator, not a banker," said
Kozhakmetov. Meder Amatov of the European Bank for Reconstruction
and Development told Lanier that Kazakhstani authorities first
attempted to work with Ablyazov, offering him $1.25 billion for a
25% ownership stake. Ablyazov apparently refused this offer and
instead said he would raise $1.25 billion on his own, in order to
become majority owner of BTA. In a separate meeting with Lanier,
National Bank Chairman Grigoriy Marchenko maintained that Ablyazov
did promise to raise the capital, but was not successful, and the

ASTANA 00000386 002 OF 004


delay this caused raised costs as the government continued to infuse
the bank with capital to keep it solvent.

BTA NOT ANOTHER YUKOS


6. (SBU) The government seems likely to keep Ablyazov out of the
financial sector. Marchenko told Lanier that Ablyazov "has
definitely committed crimes" at BTA. Marchenko also said that he
had been notified by Russian authorities that Ablyazov used
falsified customs documents to conduct over $600 million in
transactions. (NOTE: Some claim that Ablyazov's assets in
Kazakhstan are worth up to $5 billion, although Yevgeniy Vinokurov
of the Eurasian Development Bank told Lanier that Ablyazov's assets
have significantly declined in value. END NOTE.) "He is a habitual
liar," Marchenko said. "Ablyazov thinks that he is smarter and
better than everyone else," he added, warning Lanier to pass the
message that the United States "should not give him asylum," should
he request it. "You should not treat this like another Yukos." The
government of Kazakhstan is not alone in its skepticism about
Ablyazov. Several bankers also believe crimes were committed at
BTA. "I expect that they will find evidence of criminal activity at
BTA," ATF Bank CEO Alexander Picker told Lanier. Ablyazov's
whereabouts remain unknown, but it is suspected that he is in
London, where, according to Marchenko, he owns a home. Ablyazov's
allies remain convinced that his removal and the bank's takeover was
politically motivated -- a result of Ablyazov's support for the
political opposition (reftel).

EXTENT OF BTA'S FOREIGN LIABILITIES NOT KNOWN


7. (SBU) The multi-billion dollar question for new BTA Chairman
Arman Dunayev is, how much does BTA owe to foreign creditors?
Estimates range from $5-$14 billion, 80 percent of which is expected
to mature in the next three years. According to Citibank Kazakhstan
Director Daniel Connelly, many of BTA's liabilities are in Russia,
which Kazakhstani FSA authorities cannot access. "There is a $5
billion hole in BTA's balance sheet, possibly $10 billion if you
really look at the books," Connelly claimed. ABN Amro Kazakhstan
Chairman Rudi Geerdink told Lanier that the figure is more likely to
approach $14 billion. On February 26, Presidential Advisor
Yermukhamet Yertysbayev alleged to the Ambassador that Ablyazov
might have put slightly over $9 billion into "his foreign accounts."
He seemed to imply "personal accounts," but that point remained
unclear. The government may soon have to decide how severely to
deplete its own reserves, which now total approximately $45 billion,
to save the failing bank. According to Connelly, the government is
divided over whether or not to save the bank at all, which could
possibly leave BTA's foreign investors in the lurch.

DUNAYEV COMMITTED TO SAVING BTA


8. (SBU) Amid a sea of stressed employees rushing back and forth
with boxes of files, and surrounded by armed guards and camera
monitors, a tired and disheveled Arman Dunayev emerged from his
executive office on the top floor of BTA's headquarters in Almaty to
greet Lanier. Despite the difficulties he is facing, Dunayev
sounded hopeful. "The situation is very difficult and not only with
BTA," he said. "Of course, we could blame someone else for having
taken on bad debts, or we could blame the global crisis, but our
factories still work and our quality of life continues to go up."
When asked about the government's takeover of Kazakhstan's largest
banks, Dunayev sounded tired and defensive, as if he were repeating
an argument he has had to make many times before. "The government
never wanted to nationalize the banks," he said. "There was a
serious debate inside the government about this question. Even now,
the situation is very divided." Although clearly under intense
pressure, Dunayev pledged that BTA would honor its commitments and
defend the claims of its investors. "Every bank must carry out its
responsibilities, otherwise it sets a dangerous precedent" he said.
"There is no possibility of liquidation or bankruptcy of the bank,
because we must honor our responsibilities." He did however
acknowledge that BTA will work to renegotiate the terms of its

ASTANA 00000386 003 OF 004


obligations, and admitted that the government did not fully
understand the extent of BTA's liabilities when it chose to acquire
the bank. Dunayev said, however, that President Nazarbayev and
Prime Minister Masimov understand the significance of protecting the
financial sector. "The question now is, how much money do we need,
and how much will be left afterwards?" Commenting more broadly,
Dunayev said that there is no immediate plan to draw down the
National (Oil) Fund, although he indicated that the government would
carefully examine the value of state pension funds. "We cannot say
that we are happy to be in this situation. But we will keep at it
as long as it takes to stabilize the banks" said Dunayev. Sinking
ever lower in his chair towards the end of the meeting, Dunayev
sighed and asked Lanier, "Who can say for certain how much direct
government support is necessary? Did your government do the right
thing with Lehman Brothers?"

LOOKING FOR A STATEGIC RUSSIAN INVESTOR


9. (SBU) According to Samruk-Kazyna Executive Director Assel
Nussupova, the government is currently looking for a strategic
investor for BTA. Deputy FSA Chairman Kozhakmetov confirmed that
informal negotiations are ongoing with Sberbank Rossii (the Savings
Bank of Russia). According to Marchenko, Sberbank is "very
interested" in BTA. Visiting Astana in January, Sberbank Chairman
German Gref made an offer to BTA that Marchenko said was rejected at
the time "out of pride." "They should have taken it then" he said.
More recently, in early February, Sberbank representatives returned
to Astana, this time in a much stronger negotiating position. While
the position of BTA is currently unattractive, Citibank's Connelly
believes that Sberbank may be thinking long-term about a presence in
the region. In reference to Sberbank, Marchenko said, "they must do
it now, or they will never acquire anything in this country." ATF
Bank CEO Picker said that Sberbank is still interested in BTA, but
they want a $10 billion guarantee from the Kazakhstani government.
Halyk Bank CEO Umut Shayakhmetova told Lanier that Sberbank has
requested time to conduct due diligence. This, according to
Shayakmetova, may be related to BTA's significant foreign payments
due in March, and Sberbank's likely desire to see if the bank does
indeed gather the necessary resources to pay.

WILL THEY STAY OR WILL THEY GO?


10. (SBU) Regardless of the final price tag for BTA, a more
immediate concern is whether or not the Government of Kazakhstan
will keep its pledge to maintain BTA. ABN Amro's Geerdink reported
rumors of talks underway in London which may be paving the way for
the government to walk away. Reporting that depositors had already
removed from BTA as much as $700 million in the past several weeks,
Geerdink said that if this continues, "soon there will be no bank
left to buy." However, he said, if BTA fails, "it will not be good
for the country, because the government's credibility will be
questioned."

FAILURE IS AN OPTION


11. (SBU) The World Bank's chief economist in Kazakhstan, John
Litwack, told Lanier that he has advised the government that since
BTA is a private enterprise, there is no real risk to the
government's reputation, and he has recommended that they pass on
the losses. Litwack noted that the existing loans were made without
government guarantees. "They should create an environment to allow
the banks to default," he said, "then resolve the situation."
Other prominent bankers agreed. "Personally, in their place," said
Halyk Bank's CEO Shayakmetova, "I would liquidate BTA." In
Shayakkmetova's opinion, liquidation could be managed in such a way
to minimize the social impact. HSBC Kazakhstan Chairman Seymen
Munter told Lanier that he recommends that the government fully
nationalize the bank, protect consumer deposits, restructure the
debt to a minimum repayment term of seven years, and, if agreeable
terms cannot be found, move the customers to another bank and
liquidate the assets.


ASTANA 00000386 004 OF 004


THE BOTTOM LINE


12. (SBU) Kazakhstan's economic well-being is heavily dependent on
commodity prices such as oil and minerals. In 2009, government
revenue is expected to fall at least eight percent short of its
original target. While the FSA and Ministry of Finance have
promised not to cut spending for social programs, National Bank
Chairman Marchenko told Lanier that the Kazakhstani economy "cannot
hold out forever." According to Marchenko, "If oil prices hold
between $40 and $50 per barrel, we will be ok, but not booming. At
that price, our reserves will last us 18-24 months. But if
commodity prices continue to drop," he said, "things will become
more difficult." According to ATF Bank, GDP will contract 1.2% in
2009 and this will be "a very difficult year." Halyk Bank CEO
Shayakhmetova agreed, saying that Kazakhstan will see more
bankruptcies, banking consolidations, and mortgage defaults in the
first half of 2009. Over the long-term, however, forecasts are more
positive. According to ATF Bank CEO Picker, "The fundamentals of
the Kazakhstani economy are still strong. They still have oil,
metals, and wheat." Ultimately, the government will need to decide
how to spend its increasingly limited reserves, and determine what
price it is willing to pay to save the financial sector.


13. (SBU) COMMENT: The Government of Kazakhstan finds itself in a
very difficult position, having vowed to save its largest bank
without a full understanding of its massive liabilities. Decreasing
revenue streams and increasing cash demands from other sectors of
the economy will put pressure on the government to minimize its
losses from BTA, which may push it toward liquidating the bank. END
COMMENT.

HOAGLAND