VZCZCXRO7892
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW
RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW RUEHROV
RUEHSR RUEHVK RUEHYG
DE RUEHTA #2320/01 3291113
ZNR UUUUU ZZH
O 241113Z NOV 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3927
INFO RUCNCLS/SCA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 0844
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0243
RUEHKO/AMEMBASSY TOKYO 0953
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 0411
RUEKJCS/SECDEF WASHDC 0326
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2073
RUEHNO/USMISSION USNATO 2405

UNCLAS SECTION 01 OF 04 ASTANA 002320 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
 
SUBJECT:  KAZAKHSTAN:  GOVERNMENT MOVES SWIFTLY TO STABILIZE BANKING 
SECTOR (PART 1 OF 3) 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (U) This is the first in a three-part series analyzing 
Kazakhstan's response to the global financial crisis. 
 
¶3. (SBU) SUMMARY:  On October 13, President Nazarbayev announced a 
series of sweeping measures to be enacted by the Government of 
Kazakhstan in response to the global financial crisis.  To ensure 
the stability of Kazakhstani financial markets, these measures 
include the accelerated establishment and implementation of the 
Asset Stabilization Fund (ASF), the merger of the two largest asset 
generating and wealth distributing state holding companies Samruk 
and Kazyna, the Law on Financial Stability (since adopted), and the 
government's intention to purchase 25% equity stakes of the leading 
four banks sometime in the coming months.  Across the board, 
expectations are that the coming year will be more difficult than 
the current one.  Some officials remain hopeful that 2010 will mark 
the beginning of the recovery of the banking sector, while others 
believe it may take significantly longer.  On average, government 
officials expect a full recovery to take four to five years.  For 
now, with moderate pressure from the government's regulatory 
agencies, Kazakhstan's largest banks prepare to enter into a more 
intimate relationship with the state via Samruk-Kazyna in a unified 
fiscal front for reasons of self preservation and economic 
stability.  END SUMMARY. 
 
KAZAKHSTAN WELL-PREPARED FOR CRISIS MANAGEMENT 
 
¶4.  (SBU) In comparison to the scale and severity of the financial 
crisis in other parts of the globe, the situation in Kazakhstan does 
not appear as bleak.  While European Bank for Reconstruction and 
Development (EBRD) Principal Banker in Almaty Mehmet Ilkin echoed 
the industry consensus that Kazakhstan's financial institutions will 
not regain access to international credit markets soon, the 
government has repeatedly pledged not to allow any of its major 
banks to fail and is taking a notably robust course of action. 
According to Citibank-Kazakhstan CEO Dan Connelly, who noted that 
Kazakhstan's banking crisis began in August 2007, "Kazakhstan got a 
head start on this, and did everything everyone hoped they would 
do."  He added that as with other impacted industries and markets, 
some consolidation can be expected in the banking sector, but not to 
a degree that will cause any negative or long-lasting systemic 
impact. 
 
LOCAL BANKS FORECAST MODEST GROWTH 
 
¶5.  (SBU) True to form, Bank Turan Alem (BTA) Board Member George 
Iosifyan's outlook was largely positive, noting that trade relations 
would continue to develop, and that growth potential still existed, 
given that Kazakhstan, with vast oil and gas deposits, still has 
"what the world needs."  BTA grew 16% in the first quarter of 2008, 
and despite increasing threats of global stagnation, the Kazakhstani 
economy is still expected to experience 3-5% annual economic growth 
(4% GDP).  Iosifyan expects modest but continued growth in the 
Kazakhstani banking sector in 2009 of approximately 7-9%.  Officials 
at KazKommertsBank (KKB), BTA and Halyk Bank shared a positive 
outlook for recovery in the construction and real estate sectors as 
early as 2010, because of delayed demand for residential property. 
 
INTERNATIONAL BANKS AND RATINGS AGENCIES LESS OPTIMISTIC 
 
¶6.  (SBU) Independent financial institutions such as Citibank and 
the EBRD are not as optimistic as local banks, but do believe there 
is significant room for growth and investment in the Kazakhstani 
agricultural sector and related industries such as food processing 
and fertilizer production.  However, recovery and growth in 
Kazakhstani markets remain largely connected to U.S. market 
recovery, and the price for commodities such as oil, which at 
current prices below $50 is already creating havoc for Kazakhstani 
budgeting agencies.  Despite the government's actions, ratings 
 
ASTANA 00002320  002 OF 004 
 
 
agencies such as Fitch maintain a more pessimistic outlook.  On 
November 10, Fitch downgraded Kazakhstan's sovereign rating to BBB- 
and is keeping the securities on its watchlist.  Standard and Poors 
reported "no tangible signs of banking sector recovery" and believe 
that the resolution of the problems will be "a lengthy process." 
 
 
GOVERNMENT EAGER TO PUCHASE SHARES OF MAJOR BANKS 
 
¶7.  (SBU) The primary thrust of the government's stabilization 
efforts will be the infusion of approximately $5 billion in funds 
into the banking sector.  Funds derived from the National (Oil) Fund 
will be used to purchase equity stakes in the country's four largest 
banks.  The government has been actively soliciting input into this 
program from representatives of the World Bank, the IMF, and EBRD 
and is now taking concrete steps to put the plan in motion. 
Specific details, including limitations on the use of funds, are 
still being negotiated between the governmental regulatory agencies 
and the individual banks.  An announcement detailing specific facets 
of the government stabilization efforts will be made on November 25 
in accordance with a presidential decree.  This may or may not 
include details on specific arrangements made between the banks and 
the government. 
 
PURCHASE WILL AFFORD VOTING RIGHTS 
 
¶8.  (SBU) According to the Ministry of Finance, funds will be 
allocated from the National (Oil) Fund to Samruk-Kazyna, which will 
in turn purchase up to a 25% equity stake in four of the nation's 
top banks:  Alliance Bank, Halyk Bank, BTA (formerly known as Bank 
Turan Alem), and KKB.  This equity may be in the form of common 
shares, preferred shares (subject to preemptive rights held by 
majority shareholders) and possibly additional subordinated debt. 
The specific terms of the purchases remain to be determined, but it 
is clear that 25% ownership will afford the government voting rights 
in the corporate governance of the banks. (NOTE: Sources at 
EBRD-Almaty indicate ownership could exceed 30% depending on 
arrangements.  END NOTE.)  Critics, such as EBRD Senior Banker and 
Acting Head of the Representative office in Astana Ulf Hindstrom 
question the motivation of the government, asking whether or not it 
is moving to consolidate control over the financial sector by 
nationalizing a portion of the banking industry.  But most 
Kazakhstani banking representatives, including Chairman of the Board 
at BCC Vladislav Lee and Deputy Chairman of Astana Finance Yerzhan 
Tumabekov expressed optimism regarding the government's new role in 
the industry.  According to Citibank's Connelly, participation may 
or may not necessarily be in the shareholders' interests for certain 
banks, and some banks may have been pressured into participation. 
However, he is convinced that the government does not want to become 
a long-term player in the banking industry and cautioned, "Don't 
consider this a land grab to nationalize the banking sector." 
Kazyna General Manager Marat Aitenov said that Kazyna does not want 
to control the banks, but rather wants to participate in the 
strategic decision-making process to ensure the well-being of the 
institutions and the greater economy. 
 
BTA TO GET LION'S SHARE 
 
¶9.  (SBU) Early indications are that Alliance Bank will receive $370 
million, Halyk Bank $300 million, KKB $500 million, and BTA the 
lion's share of $2.3 billion.  Senior bank officials expect equity 
transfers to begin at any time.  BTA is slated to receive by far the 
largest portion of the stabilization package, a fact BTA Board 
Member Iosifyan justified by noting that it is the largest bank in 
Kazakhstan with a net value of over $3.9 billion.  He also said that 
BTA is significantly over-extended in international markets, with 
over $2.5 billion due in repayments in 2009 including Eurobonds and 
syndicated loans.  BTA is confident that it would be able to make 
these payments, but not without cutting back on domestic lending 
practices.  According to Iosifyan, the Government of Kazakhstan 
 
ASTANA 00002320  003 OF 004 
 
 
wants to support BTA's bid to become one of the world's top 10 
financial institutions and take advantage of its 30% share of the 
Kazakhstani credit market to serve as a platform for credit 
distribution of to small and medium enterprises.  Iosifyan sees the 
developing strategic partnership as "more pro than con" noting that 
he does not expect the Financial Supervision Agency (FSA) to get 
involved in daily management as long as BTA does "not add more debt 
to our balance sheets."  The government will now be BTA's largest 
single shareholder, but Iosifyan does not expect any changes to the 
leadership structure. He half-jokingly added, "If the government 
representative is professional, there should not be many changes." 
 
¶10.  (SBU) In addition to the four banks scheduled to participate in 
the government purchase program, two partially foreign-owned banks 
have been selected as potential participants.  On November 3, the 
head of the Kazakhstani Financial Supervision Agency Yelena 
Bakhmutova publicly called for both the 5th and 6th ranked banks, 
ATF-Uni Credit Bank and Bank Center Credit (partly owned by the 
South Korean Kookmin Bank), to accept the government's offer.  ATF 
has not committed to participating in the stabilization program, 
although International Department Director Maxim Utepov did admit to 
Econoff that the bank was receiving some pressure directly from the 
Prime Minister's Office to accept, which would he said would 
ultimately be up to the shareholders to decide.  According to 
Vladislav Lee, Chairman of the Board of BCC, which appears intent on 
accepting the offer, should all six banks participate in the 
program, they would collectively represent approximately 95% of the 
Kazakhstani banking sector. 
 
MOVE SEEN AS TEMPORARY - POSSIBLY TO PROTECT PRIVATE INTERESTS 
 
¶11.  (SBU) Most industry representatives see these steps as only 
temporary measures.  According to current plans, the government will 
most likely keep its shares for a minimum of three years, with an 
option to extend for an additional two years.  Deputy Governor of 
the National Bank of Kazakhstan Medet Sartbayev confirmed that this 
is "not done to control the banks" and emphasized that "the 
government will sell back the shares."  Despite growing confidence 
in the government's program to shore up the banking sector in 
response to worsening global markets, some experts wonder if the 
underlying sense of urgency is not being driven by the private 
interests of politically exposed individuals.  (NOTE:  Timur 
Kulibayev is the largest shareholder of Halyk Bank and according to 
EBRD officials, it is highly likely the interests of the president 
himself are represented in BTA.  END NOTE).  Regarding BTA, 
Principle Banker at EBRD-Almaty Mehmet Ilkin remarked that current 
bank president "Ablyazov himself is not that powerful."  EBRD's 
primary concern, according to Ulf Hindstrom, is that ultimately the 
government may want to influence where banks are making their 
investments. (NOTE: The EBRD will not work with either Nurbank or 
Halyk Bank because of their political exposure.  END NOTE). 
 
LAW STRONGLY ENCOURAGES PARTICIPATION 
 
¶12.  (SBU) The government's support to the banking sector is being 
carried out in the larger context of a newly adopted set of 
amendments to ten laws which govern the banking system, pensions, 
insurance, joint stock companies and the stock exchange, and 
portions of the criminal code.  Signed into law by the president on 
October 23, the collective package of amendments is now referred to 
as the Law on the Sustainability of the Financial System.  The Law 
enables increased regulatory oversight over the financial sector, as 
well as emergency powers to be assumed by the government in the 
event of a perceived financial crisis.  It also increases the 
maximum level of deposit insurance from 700,000 to 5 million KZT, 
significantly increasing the government's role in guaranteeing the 
savings of Kazakhstani citizens. 
 
LAW EMPOWERS FSA TO INTERVENE AS DESIRED 
 
 
ASTANA 00002320  004 OF 004 
 
 
¶13.  (SBU) To prevent the failure of banks and other financial 
institutions, representatives of the FSA now have the right to 
observe the executive and management boards of banks, but without 
interference in their operation.  Indeed, many banks now have 
designated work space for rotating representatives of the FSA.  In 
the event that deterioration, such as an encroaching violation of 
capital adequacy ratio, is detected, the FSA can demand an emergency 
action plan from the bank to ensure its stability.  If this plan is 
not deemed satisfactory, the FSA may assume sweeping authority, 
including the right to make changes to the organizational structure, 
limiting work with deposits, ceasing distribution of dividends, and 
suspension of any or all necessary banking operations as required. 
(NOTE: Previous laws required violations of established ratios prior 
to intervention.  Now the FSA need only detect a "deterioration" to 
intervene.  END NOTE.) 
 
¶14.  (SBU) Should preventative measures fail, or should the FSA not 
detect deteriorations in time to take action, provisions are now 
made for the prosecution of management and direct take-over of 
institutions. These measures include criminal proceedings against 
the heads of financial institutions who either deliberately or 
through inactivity allow bankruptcy or the forced liquidation of a 
bank.  In other words, bank presidents could be held criminally 
liable for bank failure.  The law also allows the government to buy 
out the stocks of a bank, thereby taking control of the institution 
for one-year increments, in the event of a single violation of 
regulations governing capital adequacy ratios and/or liquidity 
ratios. 
 
¶15.  (SBU)  Officially, there is no connection between the adoption 
of the amendments and the rumored agreement of the nation's top six 
banks to the stabilization program.  According to EBRD's Ulf 
Hindstrom, the banks "become offended if you even suggest they are 
being forced into this arrangement." 
 
¶16.  (SBU) COMMENT:  The government is clearly anxious to solidify 
its participation in the strategic management of the country's six 
largest banks through the purchase of 25% equity stakes.  While the 
measure is marketed officially as a temporary intervention, some 
concerns remain about the government's long-term aspirations as it 
makes concrete moves to partially nationalize the private financial 
sector, and perhaps in the future direct their resources towards 
politically motivated causes.  END COMMENT. 
 
HOAGLAND