VZCZCXRO5575
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 #1175/01 1940923
ZNR UUUUU ZZH
O 130923Z JUL 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5788
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 1743
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1110
RUEHKO/AMEMBASSY TOKYO 1812
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1294
RUEKJCS/SECDEF WASHDC 1211
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 2379
RUEHNO/USMISSION USNATO 2697

UNCLAS SECTION 01 OF 02 ASTANA 001175 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS USTDA FOR AND OPIC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
SUBJECT:  KAZAKHSTAN:  FATE OF LARGEST BANKS TO BE DECIDED 
IMMINENTLY (PART 2 OF 3) 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (U) This is the second 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, 2009 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 restructure of their foreign obligations to their 
international creditors.  Officials at Alliance Bank are "nervous" 
about the outcome of their restructuring plans, and feel if any 
struggling bank were to be championed by the government, it would be 
BTA.  Despite the banks' problems, depositor activity remains 
generally calm, and negotiations continue on the possible purchase 
of BTA by Sberbank of Russia.  The banking sector's problems appear 
to be countered by the country's long-term investment potential, and 
macro-economic indicators suggest modest positive growth in 
Kazakhstan's GDP before the end of the calendar year.  END SUMMARY. 
 
PROGNOSIS FOR SUCCESSFUL RESTRUCTURE UNCERTAIN 
 
¶4. (SBU) According to the Financial Supervision Agency, the three 
restructuring proposals for BTA and Alliance banks on the table 
are: 
 
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. 
 
¶5.  (SBU) ATF CEO Alexander Picker believes the three proposals are 
very wisely structured, and agrees that option three was likely 
designed for banks and international financial institutions that can 
accept nothing less than 100 percent repayment.  According to 
Citibank Kazakhstan's Dan Connelly, the general plan, should the 
need to liquidate arise, will be to first and foremost protect 
domestic depositors.   He admitted that foreign bankers understood 
the risks and said that, "In the Kazakhstanis' position, I would 
probably do the same.  They will however, ruin their reputation as 
being well regulated in the process."  Connelly does not, however, 
believe that BTAs liquidation, should it come to pass, would have 
much of a systemic impact.  "They will protect the depositors, give 
a big haircut to the foreign lenders, and then it will likely be a 
few years before the markets open to them again." 
 
¶6.  (SBU) According to Alliance Managing Director Gaziz Shakhanov, 
the outlook for Alliance is poor, and the government is not prepared 
to spend more than the $4 billion it has already allocated to 
salvage Kazakhstan's commercial banks.  Of this $4 billion, 
Shakhanov said only a small portion would be available for a needed 
capital injection into Alliance.  Detailing deposit outflows 
amounting to more than $550 million since January, and just over $75 
million in May 2009, Shakhanov described the mood at Alliance as 
"nervous."  This, he added was compounded by their view of BTA as a 
huge bank that continues to consume the government's limited 
anti-crisis resources.  Citibank's Dan Connelly is not convinced 
that Alliance's days are numbered, but admits that the situation is 
rather bleak at best.  "Their story never really jibed, but now that 
we see that the $1 billion in treasury bonds was hocked!  Deloitte 
was shocked.  This stuff was buried.  The markets were shocked by 
the news from Alliance."  In the meantime, however, it is business 
as usual for Alliance "unless you have a lot of money stuck there." 
 
¶7.  (SBU) ATF CEO Picker believes that in a best-case scenario, six 
months from now, Alliance will have received a 75% acceptance rate 
from its creditors and successfully completed its restructuring, and 
 
ASTANA 00001175  002 OF 002 
 
 
BTA will have been purchased by Russia's Sberbank.  Halyk Bank will 
still be going strong, according to Picker, and he believes that the 
political support behind NurBank will keep it solvent. 
"Kazkommertsbank (KKB) remains uncertain and I believe they too may 
soon start to default on smaller payments."  He added, "My worst 
case scenario is that Alliance will go bankrupt, BTA will follow, 
and foreign financial institutions will be blamed." 
 
CALM BEFORE THE STORM 
 
¶8.  (SBU) Despite the looming threat of liquidation, there has been 
surprisingly little public reaction.  ATF CEO Picker said that even 
though it is very hard to withdraw large assets from BTA right now, 
he is amazed at the lack of a public outcry to the recent turn of 
events.  "Three major banks have declared default and there seems to 
be no visible public reaction.  There are no queues, no pickets, and 
no lines at the banks or ATMs.   Even the international companies 
have not reacted."  KKB's Executive Director Sergey Mokroussov said 
a group of German bankers recently told him that if the same 
situation were to happen in Germany, the entire banking system would 
likely collapse from the public's response.  "In general, confidence 
in the banking sector has not diminished.  This is very interesting 
for us," He explained.   Some financial sector representatives have 
argued that the situation has not yet reached its tipping point. 
"There is some concern that if Alliance is not able to continue to 
serve its depositors, there will be a run on the banks across the 
board," said Managing Director Shakhanov. 
 
WHERE ART THOU SBERBANK? 
 
¶9.  (SBU) Questions continue to circle around the possible purchase 
of BTA by the Russian state-owned savings bank Sberbank Rossii 
(Sberbank).  Citibank's Dan Connelly believes the rumors are 
credible, given that "they can sort out BTA's Russian portfolio 
better than any others."  Others believe the issue is more political 
than economic.  ATF's CEO Picker said he believes there was a 
personal agreement made between President Nazarbayev and Sberbank 
Chairman German Greff.  "Sberbank fits the bill, but it does not 
make sense economically," he argued.  BTA's Pirmatov agreed that 
there is likely more to this deal than pure economics.  "There is 
some kind of personal connection between Sberbank's Chairman Greff 
and Kairat Kelimbetov.  Greff is originally from Karaganda, both are 
former Ministers of Economy, and the initial announcement about 
Sberbank's interest was made the same day the government acquired 
control of BTA."  Sberbank, Pirmatov added, also paid half of the 
fees for KPMG's audit of BTA.  In the event that BTA does manage to 
secure creditor acceptance to restructure its debt, KKB's Mokroussov 
predicts that Sberbank will likely buy in, and Samruk-Kazyna will 
then sell 50 percent of its ownership stake, ultimately making BTA a 
viable financial institution. 
 
MACRO CONDITIONS STABLE 
 
¶10.  (SBU) Leading indicators show that despite the fact that 
Kazakhstan's largest banks remain in financial limbo, the economy as 
a whole is holding steady and may realize positive growth later this 
year.  The National Bank of Kazakhstan reported that GDP growth for 
all of 2009 will be 0%, but this figure may be revised upward in 
August depending on oil prices.   ATF Bank's Alexander Picker said 
that there will be a 2.3% contraction for all of 2009, with a 
positive rebound of 2.3% in 2010.  Squelching rumors of a further 
devaluation of the tenge, Picker described the February devaluation 
as "necessary and reasonable," and likely to hold without further 
measures needed.  Citibank's Dan Connelly said his economists 
predict a contraction in the economy between 0.6 and 2.0 percent in 
¶2009.  However, some scenarios, he said, actually show a very slight 
amount of growth by the end of the year.  The tenge devaluation, 
according to Connelly was "spot on and holding right where they said 
it would." 
 
HOAGLAND