Kazakhstan's financial system is under severe strain, but fortunately Astana has ample reserves to fall back on. Nevertheless, in a move that took some market watchers by surprise, Kazakhstan's government has assumed controlling stakes in two of the country's largest banks. The National Bank then devalued the currency that it had long been propping up, allowing the tenge to slide against the dollar.
On February 2 the government announced a state purchase of stakes of over 75 percent in BTA Bank, Kazakhstan's largest, and Alliance Bank, the fourth largest. The scope of the government takeover surprised many economic analysts, given that last November the state hammered out a deal to buy just 25 percent stakes in four core banks. [For background see the Eurasia Insight archive].
"I think that investors have more or less expected nationalization in the banking sector," Maria Disenova, an analyst at the Institute for Economic Strategies-Central Asia, told EurasiaNet. "However, given that the shares of the two banks have plummeted on KASE [the Kazakhstan Stock Exchange] following the nationalization rumours, the takeover of control by the government was a surprise." KASE had suspended trading in BTA shares on January 30 after the price dropped by 40 percent amid uncertainty over the bank's future.
The takeover of Alliance Bank was instigated by its main shareholder, while the purchase of 78.14 percent of BTA Bank for some $2 billion was recommended by the Agency for Regulation and Supervision of the Financial Market and Financial Organizations (AFN) after BTA started having trouble meeting liquidity regulations. That made it "necessary to defend the interests of the bank's investors and creditors and ensure the stability of the bank and the banking system," a February 2 joint statement by the government, the National Bank and the AFN stated. The government had been propping BTA up for months to prevent a default, National Bank Chairman Grigoriy Marchenko told a cabinet meeting the same day.
Meanwhile, Alliance Bank had "quite complex financial instruments in its portfolio that could give rise to problems," Finance Minister Bolat Zhamishev told the cabinet in remarks quoted by Interfax-Kazakhstan. As a result, the bank's main shareholder, Seimar Alliance Financial Corp., asked the state to buy 76 percent of shares for the symbolic price of 100 tenge ($0.70).
Disenova suggested the state had timed the move well: "I think that the government has seized a good moment to buy large stakes in the two banks. This will allow the state to dominate in the banking sector and to have better control over it. And, of course, the state represents certain powerful interested parties who may have thought that BTA and Alliance banks were too good to be missed."
Officials denied that the moves to shore up Kazakhstan's ailing banking system -- which suffers from high levels of foreign borrowing obtained in the days of easy, cheap credit -- amounted to nationalization. The takeover of Alliance Bank "is not nationalization, since the share acquisition is taking place at the initiative of the main shareholder," the joint statement said. Meanwhile, the purchase of a majority stake in BTA "is not nationalization, [since] according to existing legislation it bears a temporary nature." Russia's Sberbank and Kazakhstan's Eurasian Bank have expressed an interest in acquiring stakes in BTA.
Officials rushed to calm nervous markets, but Disenova questioned whether investors would welcome the move. "This decision of the government will not reassure investors given the nature of the takeover of BTA," she said. "The banking system has shown itself as volatile and exposed to external risks. The recent moves by the government are not temporary but permanent and mean that the state is to stay in the banking sector and become a dominant player."
This, she added, creates "unfair conditions for private banks" given the greater resources at the disposal of state banks: "Private banks will have problems with repaying their debt given the external funding situation and the devaluation of tenge since most of their debt is in foreign currency, and some of them may also be taken over by the state."
The BTA takeover was marked by controversy over the dismissal of Chairman of the Board Mukhtar Ablyazov and his deputy, Zhaksylyk Zharimbetov, whose actions were "not in line with the interests of the bank's investors and creditors and the requirements of existing legislation," Masimov said. Ablyazov -- who was jailed in 2002 on corruption charges he said were politically motivated and pardoned the following year -- attacked the deal, describing it as "abuse and state raiding" in a February 2 statement. [For background see the Eurasia Insight archive].
Two days after the takeovers, the National Bank announced a devaluation of the tenge. It said it had spent $6 billion supporting the currency since October, $2.7 billion in January alone, and cited "the need to maintain the current level of gold and currency reserves and support the competitiveness of national manufacturers." The tenge closed at 149 to the dollar on KASE on February 4, with average trading at 143.98, down from 122.32 the previous day. Rates at exchange offices in the commercial capital, Almaty, fluctuated wildly and many closed temporarily in the face of uncertainty. The National Bank said it expects the tenge to trade at around 150 tenge to the dollar.
The bank takeovers and devaluation came as the government pushed ahead with its 2.2 trillion tenge crisis package (now worth some $15.3 billion). It had already purchased 25 percent stakes in Halyk Bank (Kazakhstan's third largest) and Kazkommertsbank (the second largest), and on January 30 deposited $1 billion in each, partly to purchase the stakes and partly to inject liquidity.
On February 2, Masimov pledged an immediate injection of $1.7 billion into BTA, $200 million for Alliance, and an additional $1 billion through "certain banks for small and medium-sized businesses," implying a total cash injection of $5 billion in the past few days.
Some $10 billion has been pledged from the National Fund for the economic assistance package. In early February, the government reported that the fund's assets now total 3.26 trillion tenge, worth some $22.7 billion after the devaluation that the government hopes will set the battered economy back on course.
Joanna Lillis is a freelance writer who specializes in Central Asian affairs.