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OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK RUEHYG
DE RUEHTA #1174/01 1940923
ZNR UUUUU ZZH
O 130923Z JUL 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5785
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 1740
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1107
RUEHKO/AMEMBASSY TOKYO 1809
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1291
RUEKJCS/SECDEF WASHDC 1208
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2376
RUEHNO/USMISSION USNATO 2694

UNCLAS SECTION 01 OF 03 ASTANA 001174 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS USTDA AND OPIC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
SUBJECT:  KAZAKHSTAN:  FATE OF LARGEST BANKS TO BE DECIDED 
IMMINENTLY (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 recent 
developments in Kazakhstan's banking sector, the possible future 
liquidation of its assets, and potential implications for 
international export credit agencies. 
 
¶3.  (SBU) SUMMARY:  U.S. Department of Treasury Advisor Tom Lanier 
and International Economist in the Office of Europe and Asia Larry 
Norton visited Almaty and Astana June 10-13 to assess current 
conditions and trends in Kazakhstan's economy and the overall health 
of its financial sector.  Lanier and Norton's interlocutors reported 
that Kazakhstan's Financial Supervision Agency (FSA) has ordered the 
country's largest private banks - Alliance and BTA - to submit 
proposals for the restructuring of their foreign obligations to 
their international creditors.  The fate of BTA and Alliance, 
according to the FSA, is entirely contingent upon the level of 
investor acceptance of the proposed restructuring.  Should creditors 
reject the offers, the FSA will be forced to liquidate the banks' 
assets, with no promises of preferential treatment for predominantly 
western Export Credit Agencies (ECA).  END SUMMARY. 
 
THREE DEBT RESTRUCTURING OPTIONS 
 
¶4.  (SBU) Financial Supervision Agency (FSA) deputy head Kuat 
Kozhakhmetov told Lanier and Norton that both BTA and Alliance Banks 
are now seeking to restructure their external debt of around $33 
billion. 
 
¶5.  (SBU) According to the FSA, Alliance Bank will be the first to 
offer three possible options to its international creditors: 
 
Option A - 20% immediate cash repayment at an 80% discount; 
Option B - 50% repayment over seven years with 7% interest; and 
Option C - 100% repayment over 15 years with 5% interest. 
 
The response of international creditors to Alliance's offer is 
expected to serve as a litmus test for BTA's subsequent debt 
restructuring. 
 
ALLIANCE UNDER THE MICROSCOPE 
 
¶6.  (SBU)  According to the FSA's Kozhakhmetov, Alliance is in a 
more precarious position than BTA due to the poor quality of its 
assets and the increasing likelihood that the Kazakhstani government 
will not come to its rescue, should the debt restructuring plan 
fail.  Kozhakhmetov said that there is currently a $1.1 billion 
deficit in the Alliance Bank balance sheet, which is likely linked 
to the discovery of a $1 billion contingent liability that had been 
secured by U.S. Treasury bonds.  The Managing Director for 
International Relations at Alliance Bank, Gaziz Shakhanov, told 
Lanier and Norton that the bank's recent discovery of its 
"shockingly bad asset quality" was confirmed in a recent report to 
the FSA showing that the bank has a negative equity balance. 
According to Shakhanov, Alliance Bank is now operating under a 
"special regime" (i.e., the first stage of bankruptcy according to 
FSA regulations) but he remains guardedly optimistic that the bank 
may recoup its equity by either restructuring its debt, or by 
receiving a significant capital injection from the Samruk Kazyna 
National Welfare Fund.  With the possibility that there may be other 
hidden liabilities, the goal is to determine the bottom line for 
Alliance.  "We need to show the size of the hole," said Shakhanov. 
 
BTA HOLDING ITS BREATH 
 
¶7.  (SBU) The First Deputy Chairman of the BTA Management Board, 
Galymzhan Pirmatov, told Lanier and Norton that the much anticipated 
KPMG audit of BTA has been completed, and the results were 
unofficially shared during a BTA conference call on June 4.   At 
this point, said Pirmatov, BTA is awaiting official shareholder and 
FSA approval before going public with the final numbers.  According 
 
ASTANA 00001174  002 OF 003 
 
 
to the CEO of ATF Bank Alexander Picker, the results are likely to 
show that BTA now has a negative equity of at least $7 billion. 
 
ASSET QUALITY IN CRITICAL CONDITION 
 
¶8.  (SBU) European Bank for Reconstruction and Development (EBRD) 
Senior Banker Tatyana Tyo said that she is "very concerned" about 
the declining asset quality and increasing percentages of 
non-performing loans (NPL) in loan portfolios.  She added that many 
of the banks that have participated in the Kazakhstani government's 
anti-economic crisis program to provide relief to small and medium 
enterprises (SME) have simply dispersed the funds allocated by 
Samruk Kazyna by refinancing existing loans.  As she sees it, funds 
designated for needed SME support to kick-start the economy are 
largely being used to adjust the terms of non-performing loans by 
refinancing them at a 1-2% discounted interest rate, and granting 
6-12 month grace periods.  In essence she said, this will only 
extend the loan period, but "they will eventually surface." 
 
¶9.  (SBU) The biggest risk for most Kazakhstani banks with 
non-performing loans in their portfolios remains their exposure to 
the real estate markets.  Alliance's Shakhanov said that Alliance 
has "significant exposure to the real estate market, particularly 
for the construction of elite residential complexes."  Describing 
the banking sector as a whole, Astana Finance Chairman of the Board 
Ketal Islamov said, "the situation overall is being described more 
optimistically than it is in reality."  Astana Finance is heavily 
exposed to the "frozen" real estate market, Islamov said that he 
expects no increases or improvements in the value of its mortgage 
portfolio.  He believes that government anti-crisis support for the 
market is largely inadequate and has only allowed for the 
refinancing of existing loans. 
 
CREDITORS MAKE THE CALL 
 
¶10.  (SBU) According to the FSA, Kazakhstan's banks have little time 
to develop detailed plans for debt restructuring (which must be 
acceptable to their international creditors) and present them to the 
Kazakhstani financial authorities.  The FSA's Kozhakhmetov said 
Alliance must complete its restructuring by July 15, and BTA by 
August 1.  He believes that by offering several options, different 
types of investors/creditors will find one of the three options 
acceptable.  However, if the debt restructuring is not accepted by 
creditors, then the next phase will be to place the bank into a 
conservatorship and move forward with the liquidation of assets. 
The work of the court appointed liquidator "ideally would go 
quickly, because I understand that the faster you liquidate, the 
more value you recover" said Kozhakhmetov. 
 
ALLIANCE REPORTS MOU WITH CREDITORS 
¶11.  (SBU) In a recent positive development, Alliance Bank reported 
in a press release dated July 8 that it had signed a Memorandum of 
Understanding with the committee of creditors, which includes the 
Asian Development Bank, HSBC Bank, and Wachovia Bank to name a few. 
 According to the agreement, Alliance Bank expects to offer a cash 
payout of as much as $500 million to some of its creditors, in 
return for their acceptance of a 77.5 percent haircut.  While 
details regarding the specific creditors and exact timeline have not 
been fully specified, it as apparent that Alliance Bank stands to 
retire $1.85 billion in debt as a result.  The restructuring plan 
will be sent for official review by the FSA on July 15. 
 
PRIORITIES IN REPAYMENT UNDER LIQUIDATION 
 
¶12.  (SBU) Should it come to liquidation for either or both Alliance 
and BTA, FSA Control Department Director Mukhtar Bubeyev, says 
liquidated assets will be used, in priority order, to pay:  a) 
salaries; b) fines; c) individuals with deposits under $5 million; 
4) individuals with deposits over $5 million; and 5) corporate 
deposits.  According to Bubeyev, the current intention of the FSA is 
to treat all trade finance the same as any other international 
 
ASTANA 00001174  003 OF 003 
 
 
creditor.  As for groups like EBRD, "personally, I think they should 
be put at the very bottom of the list because they are a development 
bank" he said. 
 
¶13.  (SBU) According to FSA Deputy Chairman Kozhakhmetov, despite 
the fact that the Government of Kazakhstan has put $1.8 billion in 
equity, and $2.2 billion in deposits into the banking sector to 
date, it would "stand in line with everyone" in the event of 
liquidation.  This point was corroborated by the FSA's Bubeyev, who 
said that even if the National Bank of Kazakhstan (NBK) has given 
funds to a bank which fails, it will not be the first creditor in 
line for repayment, but rather would be grouped with other 
creditors. 
 
PREFERENTIAL TREATMENT FOR EXPORT CREDIT AGENGIES? 
 
¶14.  (SBU) EBRD Senior Banker Tatyana Tyo claimed that there will be 
no special treatment for export credit agencies (ECAs), despite 
reports that the WTO has reportedly sent letters to Samruk-Kazyna 
specifically describing the long-term credit risk to Kazakhstan of 
not offering preferential conditions.  "We want to treat everyone 
equally.  If we do give preferential treatment to BTA's $3.5 billion 
in trade finance, it will cause more pain to the creditors," said 
BTA First Deputy Chairman Pirmatov.  However, Pirmatov acknowledged 
that this may depend on the Kazakhstani government's strategic 
priorities, for example, the future importation of critical 
industrial equipment. 
 
¶15.  (SBU) Several Kazakhstani bank representatives agreed that the 
situation may become problematic if export credit agencies (ECAs) 
are not given preferential treatment.  "It will create a risk to the 
system if the export banks are treated the same as other creditors" 
said KazKommertsBank Executive Director Sergey Mokroussov.  Option 
Three, he believes, may have been specifically designed for such 
Western agencies. 
 
¶16.  (SBU) Samruk Kazyna Managing Director Abay Iskanderov delivered 
a slightly different message to Lanier and Norton that distanced the 
government from the plight of the banks, while still trying to 
reassure ECAs that they would likely be offered beneficial terms. 
"When it comes to the ECAs, everyone knows who you are messing with. 
 There will probably be no haircut to the ECAs, but very likely the 
repayment timeline will be extended. However, it will be the 
government's decision whether or not to treat the ECAs differently." 
  Further elaborating Samruk-Kazyna's position, he said "the 
government is not a historic partner to BTA and the other banks, and 
most of the negotiation now will have to be between the banks and 
the creditors."  Iskanderov explained that the decisions by 
Samruk-Kazyna regarding the banks had been made in close 
consultation with the National Bank, the FSA, the Ministry of 
Finance, and the Prime Minister's office, and said, "It is clear now 
that the government will not supply all the capital needed."  With 
$18 billion in outstanding loans, including $11.5 billion in 
non-performing loans, the government cannot be expected to assume 
all of these liabilities, he concluded. 
 
¶17.  (SBU) According to the EBRD, some large depositors (over $5 
million) are already reporting difficulties in retrieving assets 
from both BTA and Alliance.  For smaller depositors, EBRD also says 
it is highly unlikely that the Kazakhstani Deposit Insurance Scheme 
would realistically be able to repay them in the event of 
liquidation.  Tyo cited as an example the continued failure of the 
Deposit Insurance Scheme to repay in full customers of Valut Transit 
Bank, which was liquidated by the FSA starting in December 2007. 
(NOTE:  According to the Chairwoman of the Deposit Insurance Fund, 
96% of all depositors with guaranteed deposits less than or equal to 
700,000 tenge -- approximately $4670 -- were repaid in full by 
December 2008.  END NOTE.) 
 
HOAGLAND