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DE RUEHTA #0924/01 1491217
ZNR UUUUU ZZH
O 291217Z MAY 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5505
INFO RUCNCIS/CIS COLLECTIVE 1614
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0991
RUEHKO/AMEMBASSY TOKYO 1694
RUEHUL/AMEMBASSY SEOUL 0671
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1176
RUEKJCS/SECDEF WASHDC 1092
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1559

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 
 
ASTANA 00000924  001.2 OF 003 
 
 
¶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 
 
ASTANA 00000924  002.2 OF 003 
 
 
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 
 
ASTANA 00000924  003.2 OF 003 
 
 
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