Kazakh banker in hiding as defaults punish all investors

Bloomberg

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From his secret hideaway, BTA Bank’s former Chairman Mukhtar Ablyazov says Kazakhstan’s government caused the default of the nation’s largest lender. Kazakh prosecutors want him for allegedly embezzling the bank’s money.

The biggest losers in the dispute may be investors who poured into the former Soviet state as crude oil rose to a record and the economy grew 10 percent annually for eight years. Now, with petroleum prices down and the recession starving banks of credit, Kazakhstan’s image as a beacon of rising capitalism is being shattered by three banking defaults in six weeks.

"Once you lose the confidence of investors, people don’t trust you anymore," said Harald Oberkirch, a travel-company operator on the Spanish island of Majorca, who bought $300,000 worth of BTA’s bonds as part of a more than $1 million investment in Kazakh bank debt. "Bankruptcy is near."

Ablyazov, 46, fled in February before the government issued an arrest warrant, alleging he stole from the bank. Bloomberg spoke to him on a call organized by his public-relations firm.

"All stakeholders in BTA, including international lenders ... have been victims of the Kazakhstan government’s criminal recklessness," Ablyazov said. "The tragedy is that these huge losses could and should have been avoided. All the foreign markets are closed to Kazakh companies and will remain closed to them for up to five years."

President Nursultan Nazarbayev’s government initiated a takeover of BTA in February, using cash from the state’s National Wellbeing Fund Samruk-Kazyna to buy a 75.1 percent stake. That sparked charges and counter-charges between the administration and the bankers who were pushed out.

The crisis in Kazakhstan is a legacy of banks that piled on debt as the economy soared and couldn’t repay when credit dried up. Gross domestic product shrank 2.2 percent in the first quarter. Foreign investors are drawing back capital as their favorable terms with lenders evaporate, said Kieran Curtis of Aviva Investors in London.

Kazakh banks must repay almost 40 percent of their $41 billion in debt in the next 12 months, data compiled by Bloomberg show. Moody’s Investors Service said last week that it may cut the ratings of five Kazakh financial companies on concern the government won’t help stave off default. The benchmark stock index dropped 57 percent in the past year.

The long wait

BTA bondholders have been waiting more than a month for details of a debt restructuring. In addition, Almaty-based Alliance Bank, Kazakhstan’s fourth-largest lender, and Astana Finance, owned in part by the government, have stopped making creditor payments.

"Kazakhstan was the great hope for pro-Western investments," said Lauren Goodrich, an analyst at Stratfor. "Now those aspirations are being picked off one by one, and the country is less and less a great hope."

Investment in Kazakhstan increased 25 percent last year, to $10.7 billion, the fifth-biggest gain among 21 developing nations tracked by New York-based CEIC Data. Only South Africa, Hungary, Russia and India grew faster.

"The appeal was simple," said Aivaras Abromavicius, a Moscow-based portfolio manager for East Capital Asset Management. "With oil at $100 and rising, it was very clear that anyone involved in the production of that commodity would benefit massively."

And they did. Almaty-based BTA sold $350 million of U.S. dollar-denominated 10-year bonds at 4.59 percentage points over Treasuries in January 2005 compared with 3.17 percentage points for high-yield or emerging-market debt at the time, according to Merrill Lynch indexes. The company’s credit rating was lifted three times from 2000 to 2006 by Standard & Poor’s to as high as BB, two levels below investment grade. The KASE Index rose 26-fold from its creation in 2000 to the end of 2007.

A nation of more than 15 million people wedged between China and Russia, Kazakhstan has been ruled since Soviet days by Nazarbayev, 68.

The government added BTA’s former chief executive officer, Roman Solodchenko, to its wanted list in March, and prosecutors said they identified 32 suspects in the case.

Ablyazov has faced such charges before. He was sent to prison in 2002 on allegations that he enriched himself as energy minister. He was pardoned 10 months later by Nazarbayev.

Nazarbayev’s government originally sold BTA to Ablyazov for $72 million in March 1998. The banker reclaimed the helm in 2005, two years after his jail term ended. He built up the business by riding the wave of foreign money that was attracted to Kazakhstan after the discovery of the Kashagan oil field in 2000.