Black, white knights eye Kazakh banks
By Charles van der Leeuw
Two major-size and one mid-size bank in Kazakhstan have already fallen into the
hands of foreign rivals. Whether remaining ones can evade the globalization
wind blowing across the steppe depends to a large extent on whether they can
make international loan repayments.
The government has warned that it claims the right to intervene either on a
management level or even on ownership levels if the present owners cannot get
Kazakhstan's banking sector out of trouble. If cautiously and wisely managed,
the process could be to the benefit of entrepreneur's most hated darlings: the
citizen-consumers.
As much as the equivalent of US$12 billion in various currencies
has to be paid back by Kazakh banks to Western and Russian creditors before the
end of the current year. One-third of that money is already in store in an
emergency fund created by the government and under control of the National Bank
of Kazakhstan.
Voicing state policy, Prime Minister Karim Massimov was recently quoted by
local news agencies as stating that the state could double its financial
back-up into the current year. But he reportedly added that if the state did
not see that money back at some stage, it preserved the right to declare
bankruptcy, which would automatically mean the state's right to sack the
management and seek new owners.
This, for all it matters, is pure mercantilism, enough to make Louis XIV and
his economic genius Jean-Baptiste Colbert smile in their graves - and very much
alive-and-kicking Vladimir Putin give a serious nod of approval. After all,
Russia's banks have largely remained aloof from the debt swamp their Kazakh
counterparts are being dragged into due to the plain fact that the state holds
controlling shares in Sberbank, the former Soviet all-union savings bank that
controls more than two-thirds of the retail market, and Vneshorgbank, number
two in terms of revenue and assets and leader in corporate client services.
Colbert was the man who in the early 17th century, virtually on his own thanks
and helped by the trust Regent-Cardinal Mazarin first and King Louis XIV of
France subsequently put in him, turned the impoverished French nation from a
mere trade post into an industrialized community. By diverting state funds from
futile spending on pomp and circumstance (including wars, most of which were
lost since they used to be by and large carried out by mercenary armies) to
investments in industrial enterprises with the opportunity to buy shares in
them for the merchant class at favorable price-settings, he virtually created
the modern republic of France, though under the banner of a monarchy, as it
exists today.
Many corporations Colbert created in this manner, such as St Gobain, prospered
well into our times. Even better: profit generated taxes, which allowed the
state of France, which up till then had never had any army or fleet to speak
of, to stand on its own feet. The fact that all went wrong mainly consisted of
revenge taken by the loser in the game: the French aristocracy. Like Russia's
boyars, the nobility cunningly had Colbert removed from his post, resulting in
a setback that led down the road to Louis' grandson's head going under the
guillotine.
In the meantime, asset values had been hollowed out, with Colbert's original
plan to have them traded on an open stock market turned into a mere caricature
- in all, the perfect recipe for a revolution that in the end inevitably came.
Nothing more than a history lesson? Perhaps, yes - but lessons and most of all
history lessons should be attended to in order to understand the present well
and the future even better.
Vague and ill-interrelated plans
As for Kazakhstan's banks, praised to heaven by international experts as the
most advanced in the entire former Soviet Union well into the new millennium,
the time-bomb had started ticking with America's "black August" in 2007, when
everybody all of a sudden "discovered" how bad the bad debts on the credit
market were. As in the US, the bomb in Kazakhstan had been put in place well
before that and it was Made-in-Kazakhstan to a much further extent than Made-in
USA.
The overall situation in Kazakhstan was, and to a large extent still is, that
money accumulated on the back of high prices for oil and non-ferrous metals
remains stuck, and so far there has not been any well-prepared package of
sustainable investment projects available to spend it on apart from vague and
ill-interrelated plans few of which could materialize in a timely manner.
Nor is there any clear picture within the public domain how exactly the cash
flows from the money received from the oil and mining produce are carried into
the nation's budget.
This leaves both foreign and domestic investors in other sectors in the dark:
hard talk is good for business but only if both sides are determined on what
they want and how they want to get what they want. This has hardly ever been
the case in most former Soviet republics, including Kazakhstan.
Billboards and television spots
Yet, in the early run-up of the emergence of the so-called subprime syndrome,
awareness of how to make much more money out of much money was on the minds of
bankers and their managers. Credit was the obvious answer. Students, the
elderly, common workers and other downmarket groups looked in amazement at the
billboards and television spots and could hardly believe how easy it was to get
credit for a car, a home, a computer, university fees and much else.
The reaction from the public was so overwhelming that banks soon found out that
even the petrodollars in store were not enough to respond to demand. By
calculating in sheer quantities rather than also taking quality into account,
Kazakh banks started borrowing from their Western peers with the country's
income on commodities as collateral. The result - the market became overcooked,
defaults appeared, the alarm sounded and people hurried to empty their deposits
and put the money back where it had come from: the old sock.
An expensive miscalculation
But demand for credit kept growing. No wonder: collateral was never properly
valued and with inflation coming close to an alarming 20% through 2007 that
collateral is most unlikely to have increased in value, but rather to the
contrary.
In the second week of this month, governor of the National Bank of Kazakhstan
Anouar Saidenov told a news conference that in 2007 the total amount of credits
given by banks to the construction and property sector had totaled 7.2 trillion
Kazakh tenge (US$58 billion) - a 54.7% increase from the previous year. Into
the new year, liabilities by domestic borrowers to Kazakh banks amounted to 1.5
trillion tenge, which accounts for 20% of the gross volume of domestic
liabilities in the country, as the Kazakhstanskaya Pravda reported on February
14.
The common people as ever
Meanwhile, credits to "individuals" through 2007 amounted to 2.5 trillion
tenge, according to the same news report. These hapless borrowers have been
worse off than their corporate counterparts, as the interest they had to pay
was based on an annual standard rate of 19.2% as opposed to corporate borrowers
whose interest base rate stood at 14.8% as of December 2007. This roughly
indicates who is paying for a startling inflation rate of 18.7% according to
Saidenov: the common people as ever, and not business bosses.
According to the National Bank's governor, retail business in terms of deposit
holders stabilized in the early winter months for Kazakh banks. Even if this is
true, the carrot put forward by bankers did it. Interest rates on current bank
accounts in Kazakhstan went up from 9.8% per annum on average in December 2007
to 11.5% in the following month of January, Saidenov stated during his
presentation. The bad news is that so-called administration costs for
retrieving money from deposits and transfers have also gone up. The National
Bank has so far failed to elaborate on this.
A takeover scenario
Overlooking the whole picture, it remains hard to believe that the "bankers'
family" of Kazakhstan as it has existed ever since the financial reforms of
1996-97 will stay in place in its present shape. A few banks have already
collapsed in the process. The latest case was the mid-size TransValyut Bank,
which is now in the process of liquidation with deposit holders hoping they get
their money back in net value without interest arrears, and investors feeling
pretty hopeless. Other banks have sought help from white knights abroad, or
even accepted the entry of black ones. This resulted in a takeover scenario
which is still in full swing.
The first "victim" was Texaca Bank, which was bought out through a friendly
takeover by Sberbank of Russia last spring. It was followed by the purchase of
ATF bank, ranking third in terms of assets and revenue, by the Bank of Austria,
in turn a subsidiary of Italy's UniCredit. At present, CenterCredit, ranking
fifth in Kazakhstan's banking world, is being taken over by Kookmin, South
Korea's largest retail banking corporation.
Who will survive the current onslaught in Kazakhstan's financial sector is hard
to tell, but there is no doubt that the banking sector, and in its shadow the
investment funds, stockbrokers, insurance companies and other fledgling sectors
of the Kazakh economy are in for a rough wake-up call.
The fact that the government is keen on overseeing the process is not entirely
bad news. True: Adam Smith would have scowled at it, believing that state
interference disrupted the "natural" process of a community striving for
welfare. By ignoring reality in favor of theory, for all his contributions to
economic history and philosophy, Smith also ignored the reality that ownership,
apart from benefits, included responsibility - although in some paragraphs of
his master work, The Wealth of Nations, he admits that the law should
have the last word, without much elaborating on it. Thereby, Smith effectively
kicked the ball into the territory first of the likes of Rousseau and
Montesquieu and into that of Proudhon, often mistaken for a socialist but in
reality the ground-layer of the notion of the citizen-investor - which is
exactly what Colbert first and Putin nowadays have in mind.
Just a history lesson? Look what happens in Central Asia today and perceive
that lessons may be lessons but are no less worth learning for that -
especially for Kazakh bankers and their country's financial policy and decision
makers.
Charles van der Leeuw is the editorial manager of Caspian Publishing
House, based in Almaty (www.caspian-publishinghouse.com) and author of (among
other books) Kazakhstan - a quest for statehood, the only concise
history of Kazakhstam available in English to date.
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