VZCZCXRO5456
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 #1628/01 2710200
ZNR UUUUU ZZH
O 280200Z SEP 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6353
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 1978
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1347
RUEHKO/AMEMBASSY TOKYO 2046
RUEHUL/AMEMBASSY SEOUL 0998
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1533
RUEKJCS/SECDEF WASHDC 1409
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2504
RUEHNO/USMISSION USNATO 2818

UNCLAS SECTION 01 OF 03 ASTANA 001628 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
PLEASE PASS USTDA AND OPIC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
SUBJECT:  KAZAKHSTAN:  THE TANGLED WEB OF (NON)TRUE TRADE FINANCE AT 
ALLIANCE BANK 
 
REFTEL:  ASTANA 1626 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  While ECAs represented on the BTA steering 
committee appear to be finding a compromise (reftel), Alliance Bank 
has recently reneged on a commitment to separate the restructuring 
options for trade finance due to pressure from creditors on its 
steering committee.  At the center of the issue lies Alliance Bank 
and its creditors' efforts to distinguish between so-called "true 
trade finance" and "non-true trade finance."  Whether a legitimate 
mechanism to separate ECA-guaranteed credit used in possibly 
fraudulent transactions, or a self-preservation tactic Alliance Bank 
is using to reduce its overall obligations, it poses another threat 
to long-term credit providers, such as the USDA Commodity Credit 
Corporation's future operations, in Kazakhstan.  END SUMMARY. 
 
ALLIANCE BANK TAKES CENTER STAGE 
 
¶3.  (SBU) Unable to join the delegation of ECAs that traveled to 
Kazakhstan in early September (reftel), USDA Branch Chief for Risk 
and Asset Management Teri Ryan and Financial Analyst Hal Taylor 
again made the case for preferential trade finance conditions in 
Almaty and Astana September 17-24.  After learning that Alliance 
Bank assurances for preferential trade finance treatment were in 
jeopardy, Ryan and Taylor focused on Alliance Bank.  (NOTE:  The 
USDA, via the Credit Commodity Corporation has over $230 million in 
exposure to the Kazakhstani banking sector.  Of this, they have $49 
million in exposure to BTA, and $85 million to Alliance Bank.  END 
NOTE.) 
 
¶4.  (SBU) Referencing the non-binding MOU signed on July 6 to 
prevent imminent liquidation of the bank by the Kazakhstani 
Financial Supervision Agency (FSA), Director of the Department of 
International Relations at Alliance Bank Director Victoria Tyo 
explained during a September 24 meeting that Alliance and its 
creditor steering committee are currently negotiating in London to 
establish a legally-binding terms sheet.  This document will include 
an allocation/reallocation mechanism (currently under development) 
to prevent creditors over-subscribing to any of the five options 
originally set forth in the MOU.  All involved creditors must 
ultimately approve it in a vote expected by November 15.  While not 
committing to the timeframe, Tyo said Alliance officials hope that 
the steering committee will sign the terms by October 1. 
 
¶5.  (SBU) Unlike BTA, Tyo said that Alliance Bank originally pledged 
to keep trade financing debt out of restructuring negotiations in 
order to provide preferential terms for full repayment.  (NOTE:  As 
a result, ECAs have not had direct representation on the Alliance 
Steering Committee.  END NOTE.)  However, Tyo explained that 
steering committee members now insist on the inclusion of trade 
finance in the binding terms sheet, and have put enormous pressure 
on Alliance for equal treatment of all creditors.  She explained 
that they must find some form of compromise on trade finance and 
Alliance must now "draw a line" between categories of trade finance 
debt.  Alliance Bank Senior Manager for Global Trade Finance Aida 
Amanova said that this "line" will likely be drawn according to a 
distinction between what they term "true trade finance," and 
"non-true trade finance." 
 
(NON)TRUE TRADE FINANCE? 
 
¶6.  (SBU) According to Amanova, "true trade finance" requires an 
underlying contract for the import of real goods to Kazakhstan and a 
letter of credit.  In the opinion of Alliance, "non-true trade 
finance" transactions have no underlying trade (commodity).  Rather, 
they represent a direct cash flow to a bank, such as Alliance or 
BTA.  USDA Financial Analyst for Risk and Asset Management Hal 
Taylor emphasized the fundamental flaw in this distinction.  While 
 
ASTANA 00001628  002 OF 003 
 
 
on the surface, he argued, some of USDA's exposure to Alliance may 
not appear to be "true trade finance," every guaranteed transaction 
effectively had an underlying commodity exchange. 
 
¶7.  (SBU) As explained by USDA Branch Chief for Risk and Asset 
Management Teri Ryan, in "pure trade finance transactions," loans 
are characterized by short-term self-liquidating debt.  In practice, 
an exporter unwilling to accept foreign importer repayment risk 
obtains a letter of credit from a bank.  Once the importer receives 
the commodity, the bank that issued the letter of credit pays the 
exporter in full, and then demands repayment from the importer. 
These letters of credit tend to be short-term loans and normally 
require full repayment within 30-90 days.  To assist importers 
without the necessary liquidity to repay within 30-90 days, often a 
secondary bank will honor the issued letter of credit by extending 
the repayment period for up to three years at a competitive 
refinancing rate.  In accordance with its mandate to facilitate 
domestic exports, an ECA frequently guarantees the secondary bank's 
refinanced letter of credit. 
 
¶8.  (SBU) USDA via the Commodity Credit Corporation (CCC) serves as 
the guarantor of trade finance loans for CoBank and DeutscheBank's 
New York branch, which provided BTA and Alliance banks with 
competitive refinancing for up to three years on original letters of 
credit for "true trade finance" transactions (i.e. the export/import 
of real U.S. commodities to "Eurasia," which includes Kazakhstan). 
CoBank and Deutsche Banks' refinancing of original letters of credit 
freed obligated liquidity in the short-term for BTA and Alliance -- 
that they would have otherwise been obligated to repay in full in 
30-90 days -- for use at their discretion.  USDA refers to this 
common mechanism, which provides competitive financing for U.S. 
exports, as structured trade finance.  As a matter of practice, the 
USDA regards any transaction that involves a letter of credit from 
which an actual commodity was shipped, regardless of any inclusive 
structured refinancing, as "true trade finance."  In many cases, it 
is likely that BTA and Alliance used this liquidity to make 
additional loans, which may have included investment in assets in 
Russia. 
 
¶9.  (SBU) This year, both BTA and Alliance defaulted on principal 
repayments for the refinanced letters of credit to CoBank.  This 
action triggered CCC guarantor (claim) payments by USDA.  To date, 
the USDA via the CCC has paid claims on BTA and Alliance defaults of 
approximately $5.5 million and $9.1 million respectively. 
 
OR ARE THEY BUNGE/CARGILL SCHEMES? 
 
¶10.  (SBU) According to Amanova, members of the steering committee 
believe that many of the transactions potentially classified as 
"non-true trade finance" could also be called "Bunge or Cargill 
Schemes."  In these schemes -- named after the large agricultural 
conglomerates in Argentina and the U.S. -- a collaborating exporter 
and importer -- such as Cargill -- approach a bank -- such as 
Alliance -- with an export/import transaction with a request to 
issue a letter of credit.  Knowing that a secondary bank -- such as 
CoBank -- will refinance, and that an ECA likely will guarantee the 
credit, the agricultural company will offer to arrange the deal for 
a significant fee.   Once the underlying contract is completed, the 
secondary bank pays in full the first bank, which issued the letter 
of credit.  The first bank thus gained a short-term cash loan for 
the value of the initial commodity transaction, which it only needs 
to repay within the period of time determined by the specific 
refinancing -- normally within three years.  In this scenario, 
Alliance simply used trade finance transactions as a vehicle to 
secure pure cash loans from ECA creditors.  Therefore, many argue 
that the ECAs should not receive special terms. 
 
AN ACCEPTABLE ECA OPTION? 
 
 
ASTANA 00001628  003 OF 003 
 
 
¶10.  (SBU) Clearly displeased by Alliance steering committee 
actions, Ryan and Taylor emphasized that ECAs cannot accept any of 
the current options offered in Alliance's restructuring MOU, and 
argued that the steering committee must include representation of 
trade finance interests.   Ryan said USDA will press for the release 
of concrete definitions of "true trade finance" versus "non-true 
trade finance" transactions, which Alliance has not yet provided. 
Tyo reiterated that Alliance Bank officials fully understand the 
implications should ECAs not receive an acceptable option, and 
pledged to actively seek the support of the remaining creditors.  At 
the conclusion of the meeting, Tyo said that this specific issue was 
raised already in London and mentioned current attempts to create an 
alternative to the proposed seven-year trade financing option. 
However, she could not yet disclose precise terms.  According to 
Amanova, total ECA exposure to Alliance is approximately $136 
million.  However, she either would not, or could not, disclose how 
much of this exposure they might define as "true trade finance." 
 
SAMRUK-KAZYNA KEEPING DISTANCE FROM ALLIANCE 
 
¶11.  (SBU) Since February of this year, Samruk-Kazyna officially 
owns a 76% ownership stake in Alliance Bank.  However, it has yet to 
recapitalize the bank.  With no equity ownership, Samruk-Kazyna 
extended an initial loan for deposits to keep the bank functioning, 
but it is biding its time in the conversion of its loans and 
deposits to equity.  When pressed directly on this issue by Taylor 
and Ryan on September 18, who asked if this signaled a possible 
reluctance to actually preserve the bank, Samruk Kazyna Director of 
Risk Management Kamilla Khairova said that past government 
assurances and anti-crisis measures indicate a commitment for 
eventual conversion.  However, Khairova admitted that the conversion 
partly depended on the success of a restructuring agreement and the 
bank's subsequent liquidity requirements.  (NOTE:  The MOU that 
serves as the basis for current negotiations includes a provision 
requiring Samruk-Kazyna's recapitalization of the bank.  END NOTE.) 
 
¶12.  (SBU) COMMENT:  After an initial period of calm, the struggle 
between ECA and non-ECA creditors now is playing out in Alliance 
Bank restructuring talks.  Because someone must take a loss in the 
end, all parties are attempting to shift blame.  Arguments over the 
validity of distinguishing between "non-true" and "true trade 
finance" are simply the most recent volley.  Still, like many of the 
financial instruments employed in the go-go days of the credit 
bubble, it will take significant efforts to untangle the complicated 
webs of trade finance.  END COMMENT. 
 
HOAGLAND