Earlier this week Kazakhstan showed its hand as leaning more towards its old Communist self, than as a Central Asian state that might turn East, to China, for help.
Kazakhstan took over its biggest lender, BTA, and also began negotiations with Russia to sell assets. The nation's Samruk-Kazyna, the sovereign wealth fund handling bank bailouts, said it would buy 78.14% of BTA for $2.06 billion. This priced BTA at 0.2% of its book value.
The government was able to do this thanks to the Financial Stabilisation Law, which it passed on October 23, in the hope of strengthening the stability and resilience of the country's financial system in the face of the global financial crisis. The law gave the government the right to force a bank to issue shares to the government without the consent of its shareholders. The government can exercise this right if the bank violates the applicable capital adequacy ratio or liquidity ratio (even once), or if it violates any other "prudential requirements two or more times during any consecutive 12-month period".
Soon after passing that law, the government announced that it was prepared to make a capital injection of up to $5 billion into certain major Kazakh banks. It had a pretty good idea that banks were going to need help, seeing how they borrowed extensively from global lenders when capital was cheap. This was to fund the consumer and construction boom underway from its business capital Almaty to its caviar-rich centre Atyrau. (Well, once caviar-rich, now largely only mafia-rich, as the over-fishing of sturgeon since the collapse of the Soviet Union has made the precious fish more rare and caused economic and social problems, thanks to a lack of any real law, other than the mafia's.) As of the middle of last year, Kazakh banks had racked up $45 billion in foreign debt, $11 billion of which is due to roll-over this year.
And so the government's first step this week was to purchase 78% of BTA, which was not presented as an option for shareholders or the bank. BTA's chairman Mukhtar Ablyazov and his deputy Zhaksylyk Zhirembetov were both fired and accused of breaking the law.
The government said intervention in BTA was "essential to protect the interests of depositors and creditors and guarantee the stability of the bank". After all, BTA's profits fell 74% last year to KT12.7 billion ($103 million) thanks largely to bad loans it has made.
The state is also intervening in other banks, including: Kazkommertsbank, Kazakhstan's second-biggest lender; Halyk Savings Bank, the country's third-largest lender; and its fourth-largest lender, Alliance Bank. The closing of these injections is anticipated in March or April, according to lawyers at Baker & McKenzie in Almaty.
Profit at Kazkommertsbank dropped 99.5% to KT229 million. Kazkommertsbank said on Monday that it would sell a 25% stake to the state for KT36 billion.
Halyk, which is controlled by President Nursultan Nazarbayev's daughter and son-in-law, recorded a profit of KT9.7 billion, down 70% from the year earlier. It has received KT120 billion in state funds.
And Samruk-Kazyna is expected to buy a 76% stake in London-traded Alliance Bank, from its parent company Seimar Alliance Financial Corporation for the symbolic price of KT100. Profits fell 93% last year at Alliance Bank to KT2.6 billion, according to the Financial Supervision Agency.
The government has stated that it does not intend to remain a shareholder in these banks for the long-term and that it will give the banks' shareholder a four-year option to buy back the purchased shares. Furthermore, it intends to sell the shares when the situation in the international financial markets improves.
To that end, Samruk-Kazyna said it was in preliminary talks with Sberbank, the Russian state savings bank, about the possible sale of BTA shares. This should come as no surprise, for while businessmen in Almaty have strengthened ties for manufactured goods with China (ie: the markets are flooded with everything from Made in China thermoses to televisions), the more natural cultural fit for most businessmen is their former Communist parent.
Most businessmen are fluent in Russian, not Mandarin, and prefer to finalise deals with vodka. In my trips to Almaty, I've found businessmen comfortable with my Polish family name, but wary that my home is Hong Kong. And so it's not surprising that the government has looked to Russia first for strategic investments in its banks. Stay tuned to see if it is willing to broaden its horizons and ask China to become a strategic investor in struggling banks as well, as that might indicate a stronger, new relationship with its neighbour to the East.