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