KAZAKHSTAN: BTA SAGA CONTINUES

UNCLAS SECTION 01 OF 03 ASTANA 000924

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: PGOV ECON EPET EINV EFIN KZ
SUBJECT: KAZAKHSTAN: BTA SAGA CONTINUES

REF: ASTANA 0386

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

2. (SBU) SUMMARY: Questions remain about how BTA, Kazakhstan's
fourth largest commercial bank which is already in partial default,
and its self-exiled former chairman, Mukhtar Ablyazov, managed to
wind up in such dire straits. Foreign investors and government
officials alike anxiously await the results of a KPMG audit, hoping
that it will shed some definitive light on the seemingly bottomless
pit that is BTA's balance sheet. The Government of Kazakhstan,
which has purchased almost 80 percent of the bank since January,
remains hopeful that once the bottom line for BTA has been
established, the price will be right for a sale to Sberbank Rossii
(the Russian Savings Bank). In the last month, several
international banks including Morgan Stanley have tipped BTA into
partial default. Other international creditors have closed ranks
hoping to prevent the Kazakhstani government, represented by
National Welfare Fund Samruk-Kazyna, from abandoning BTA. However,
should the ultimate price of saving BTA prove too high,
Samruk-Kazyna may resort to "Plan B" -- the dismantling and
stripping of BTA assets to protect domestic clients. Although this
plan may be the most cost effective measure in the short-term, it
would likely impair aspirations for resumed rapid domestic economic
development in the coming years. According to one analyst, in the
end, Kazakhstan must "ultimately decide for itself whether it wants
to be like Turkey or Ecuador." END SUMMARY.
VAGUE ALLEGATIONS AGAINST ABLYAZOV PERSIST

3. (SBU) Questions continue to linger about how BTA, Kazakhstan's
fourth-largest commercial bank, and its beleaguered former chairman,
Mukhtar Ablyazov, managed to wind up in such dire straits (reftel).
Ablyazov has a history of alternating between cooperation with and
opposition to Nazarbayev's regime. Most recently, he has been
indicted for criminal fraud. Ken Hessel, Senior Analyst for
Emerging Markets at ING Investment Management, believes that
Ablyazov committed massive fraud over the last two years, during
which more than $10 billion was stolen from the bank. Hessel said
that under the scheme, BTA would provide loans to an offshore
entity, which would in turn lend to a second, and then possibly a
third offshore entity. Eventually, more investment capital would
make its way to BTA, allowing the bank to make more loans. Hessel
called Ablyazov and his colleagues "criminals running a ponzi
scheme." On the other hand, Larissa Ostrovsky, Managing Director
for the CIS at Wells Fargo, does not think things are that simple.
"There are many questions, and very few people know the answers.
Keep in mind that Ablyazov is now in open conflict with the state
and the head of state. In Kazakhstan, there are so many more layers
in a case like this than there would be in other countries. This
will never be black and white. We have no idea if his actions
constitute fraud. We don't know, and we may never know."
ANXIOUS FOR AN AUDIT

4. (SBU) Investors and government officials alike are anxious for
the results of a KPMG audit that may shed some light on BTA's
balance sheet. (NOTE: According to a March 1 BTA press release, the
results of the KPMG audit will be announced in "two months or so."
END NOTE.) Medley Global Investors Director Kaan Nazli told Econoff
on April 20 that the audit is far easier said than done. According
to Nazli, the majority of BTA's loans were special purpose vehicles
used to invest in Russian real estate, which were then used to
collateralize additional loans. "Had the Russian real estate market
not tanked, with a 30-40 percent correction, BTA would have been
fine," he said. Describing the audit results as a moving target,
Nazli said that as the value of BTA's collateral continues to
decrease, so increases the hole in BTA's balance sheet. Hessel told
Econoff on April 29 that BTA historically reported to ING that
approximately 20 percent of its assets were in Russian real estate.
Now, he said, it appears that Russian real estate represented 50-55
percent of BTA's portfolio. "Honestly," said Hessel, "no one knows
how big the hole is."
SBERBANK TO THE RESCUE?

5. (SBU) Sberbank has expressed interest in purchasing BTA from
National Welfare Fund Samruk-Kazyna, and this may be the bank's best
option. Wells Fargo's Ostrovsky said that Samruk-Kazyna would love
to see Sberbank buy BTA. Considering the bank's difficulties, she

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said, "I don't think Samruk-Kazyna will be able to convince any
western investors to buy in." ING's Hessel believes that once the
audit is complete, Samruk-Kazyna will sell BTA to Sberbank, which he
said will assume liability for "a couple billion dollars" in
exchange for a solid foothold in Kazakhstan's financial sector.
According to Hessel, unless BTA's liabilities greatly exceed current
estimates of $10-15 billion, the Russian government, via Sberbank,
will happily absorb the short-term cost of such a long-term
strategic investment. In contrast, Nazli believes that interaction
between BTA and Sberbank will be limited to the management of
co-financed assets in Russia. "I do not believe that Sberbank
really wants to buy into this mess," said Nazli. Recently in London
to conduct BTA debt restructuring talks, Samruk-Kazyna Chairman
Kairat Kelimbetov said in a press interview on May 18 that "in my
mind, the restructuring will be clarified in June or July. August
will be time for Sberbank to make a decision."
MORGAN STANLEY'S CHALLENGE

6. (SBU) After having acquired majority ownership in BTA and
Alliance banks, the government of Kazakhstan, through Samruk-Kazyna,
has been careful to distance itself from the mounting liabilities of
the banks. The search for a strategic investor has also been
accompanied by repeated statements from Samruk-Kazyna that any
attempt by creditors to accelerate repayment would likely force the
Kazakhstani government to abandon its support for the banks
(reftel). Much to the dismay of creditors such as Wells Fargo,
several international banks including Morgan Stanley have recently
challenged this position and intentionally pushed for accelerated
repayment. (NOTE: Wells Fargo has combined outstanding facilities
with Alliance, the other majority government-owned struggling bank,
and BTA of approximately $50 million. END NOTE.) Moscow-based
French Financial Counselor for the CIS Clelia Chevrier told the
Charge on May 27 that "it is unclear what game Morgan Stanley is
playing," but that it was likely they "had gambled and lost." In
reference to recent Morgan Stanley filings, Wells Fargo's Ostrovsky
said, "the world is not happy about continued U.S.-inspired
volatility." Wells Fargo Vice President Yeliz Lambson echoed this
sentiment, and added that Morgan Stanley's recent move to tip BTA
into partial default, and thereby cash in on its credit default
swaps, was "shocking" and "threatened to set a precedent in emerging
markets, which could put creditors at risk."

7. (SBU) In an effort to prevent the government from walking away
from the banks, Wells Fargo joined a group of international
creditors committed to maintaining dialogue with BTA. The goal is
to recoup some of their initial investment by encouraging BTA's
management "to distinguish between bond holders and commercial
creditors." However, opinions are divided as to whether the
government should ultimately honor the contingent liabilities of the
private banks in which they now own equity, regardless of the issue
of acceleration. According to World Bank country director for
Kazakhstan Sergey Shatalov, the government should under no
circumstances assume these liabilities. During a May 7 meeting with
Energy Officer, Shatalov said that BTA and Alliance owe a combined
$16 billion to foreign creditors, which is "due immediately."
(NOTE: The comment was likely made in reference to the possible
default of BTA and Alliance, and represents their total estimated
foreign liabilities. END NOTE.) However, Shatalov said that
despite the partial default of BTA, "I don't see any systemic
implications" for Kazakhstan's economic stability. "There is
sufficient diversity, controls, and safeguards to mitigate greater
damage to the economy," he added.
PLAN B

8. (SBU) Shatalov's words may yet resonate deep within the halls of
government. During a May 6 meeting with the Charge, Wells Fargo
Managing Director Dilek Mutus described concerns that officials at
Samruk-Kazyna had shared with her earlier that day. According to
Mutus, Kazakhstani officials appreciate the gravity of the
situation, and acknowledged that as the banks' largest creditor, the
Government of Kazakhstan via Samruk-Kazyna stood to lose as much as
$30 billion in the event of total collapse. However, Wells Fargo's
Ostrovsky believes that Samruk-Kazyna has already developed "Plan B"
to deal with the worst case scenario of accelerated default. Under

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this scenario, BTA would be dismantled and stripped of its assets,
which would then be used to protect its Kazakhstani clients.
Ostrovsky said that the government understands that there would be
significant fallout as a result, but she believes that in the end,
they may have little choice. "They recognize that there will be
isolationist consequences. Samruk-Kazyna says, 'We are trying to
play by the rules, but the international creditors are not, so we
may need to go to plan B.'"
IMF PACKAGE A LAST RESORT

9. (SBU) According to Ostrovsky, developments over the next 30-60
days will determine BTA's fate and influence the government's
decision whether or not to seek additional resources. The
government continues to insist that it has the resources it needs to
weather the financial crisis. On April 9, President Nazarbayev
announced in Almaty that, "Until now, Kazakhstan has not approached
anyone for credit -- not the IMF or the World Bank -- to resolve its
issues. And we will continue to work like this." However, during a
mid-May regional investment meeting for the European Bank for
Reconstruction and Development in London, National Bank Chairman
Grigoriy Marchenko did not rule out the possibility of future loans
from the IMF, should the country's economic situation deteriorate.
"If there is a third stage of the global financial crisis, [a loan
from the IMF] cannot be excluded, but it is not part of the agenda
now, with current commodity prices," said Marchenko. Following a
mission to Kazakhstan in May, the IMF released a report on May 15
suggesting that Kazakhstan will be in for a difficult year. "Our
expectation is that the economy will contract by two percent this
year, before recovering modestly in 2010," the report read in part.
When asked by the Charge if Kazakhstan should take an IMF loan,
Wells Fargo Vice President Lambson nodded, saying, "That would be
good."
TURKEY OR ECUADOR?

10. (SBU) Most financial analysts interviewed believe that the
long-term prognosis for Kazakhstan remains healthy. Short-term
issues such as the solvency of the largest banks and the
government's willingness to honor debts to foreign creditors are
most immediate. ING's Hessel believes that officials and analysts
alike are concerned that a loss in confidence in BTA could lead to
significant investor anxiety at the other major banks, including
KazKommertsBank, BankCenterCredit, and Halyk Bank. Hessel also
believes the Kazakhstani government is intentionally keeping word of
the seriousness of the banking crisis out of the press. "The
government is doing everything it can to keep it quiet to prevent a
run on the banks," he said. Representatives from Wells Fargo
agreed, but they believe the situation is relatively stable. For
them, the greater risk is to the investment climate writ large,
particularly if the government walks away from the liabilities of
the banks in which it owns equity. Wells Fargo's Mutus said, "These
are challenging times, but compared to other countries in the
region, Kazakhstan is still doing very well. The long-term
prospects are good and the base is large." Despite her
disappointment with the government's lack of transparency, Mutus
said that she was "very encouraged that Kazakhstani negotiators are
travelling to Turkey" to discuss that country's previous experience
with financial instability. Kazakhstan, she said, "can't withdraw
from the world financial system altogether. In the end, Kazakhstan
must think about positioning itself for future growth and ultimately
decide for itself to be either a Turkey or an Ecuador."
MILAS