VZCZCXRO5437
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 #1626/01 2710105
ZNR UUUUU ZZH
O 280105Z SEP 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6345
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 1970
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1339
RUEHKO/AMEMBASSY TOKYO 2038
RUEHUL/AMEMBASSY SEOUL 0990
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1525
RUEKJCS/SECDEF WASHDC 1406
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 2501
RUEHNO/USMISSION USNATO 2815
UNCLAS SECTION 01 OF 03 ASTANA 001626
SENSITIVE
SIPDIS
STATE FOR SCA/CEN (PLEASE PASS TO PARTY AT UNGA), EEB/ESC
STATE PLEASE PASS USTDA AND OPIC
E.O. 12958: N/A
TAGS: PGOV PREL ECON EFIN GM UK IT KZ
SUBJECT: KAZAKHSTAN: THE GOVERNMENT'S EVOLVING APPROACH TO BTA
TRADE FINANCE DEBT
REF: A. ASTANA 1613
B. ASTANA 1509
1. (U) Sensitive but unclassified. Not for public Internet.
2. (SBU) SUMMARY: Kazakhstani financial officials are negotiating
with export credit authorities (ECAs) from at least 14 countries,
who have demanded sovereign guarantees for debt repayment on several
billion in exposure. For several months, Kazakhstani officials have
stood united in their refusal to accept such terms, publicly arguing
that such a practice would constitute special treatment for ECA
debts compared to other obligations. Although the Kazakhstani
government maintains its distance in the resolution of ECA debt,
numerous officials have begun expressing a willingness to consider
ECA terms. Emboldened by a signed MOU that provides for full
repayment on acceptable terms of trade finance debt, ECAs will now
push for the government's sovereign guarantee. END SUMMARY.
MOU SIGNED WITH ECA OPTION
3. (SBU) Following London negotiations September 10-17, troubled
BTA Bank and its creditor steering committee signed a
unanimously-accepted memorandum of understanding (MOU) on
restructuring that ultimately satisfied a September 18 submission
deadline set by the Kazakhstani Financial Supervision Agency (FSA)
(ref A). They thus warded off the risk of liquidation. The MOU
included an option specifically designed for export credit agencies
(ECA) that provides for full repayment of trade finance debt within
seven years, with an initial three-year grace period on principal
payments. While this ECA option alleviated some fears about trade
finance's access to preferential terms, international ECAs remain
seriously concerned that full repayment remains in jeopardy without
explicit sovereign guarantees.
NATIONAL BANK'S HANDS-OFF APPROACH
4. (SBU) Although somewhat receptive, Kazakhstani financial
authorities indicated a strong preference for a quick resolution,
and adopted a generally hands-off approach in the days and weeks
prior to the signing of the MOU. This tactic left BTA and the
members of its steering committee in charge of determining the
specific terms of the agreement even for international ECAs who took
their case for preferential conditions in restructuring to the top
Kazakhstani financial and regulatory agencies. During a September 9
meeting with Chairman of the National Bank of Kazakhstan (NBK)
Gregory Marchenko, a delegation of international ECAs comprised of
representatives from Italy, Germany, Belgium, Hungary, the United
States and Korea pressed their demand for an extension of the strict
MOU submission timeline and revision of restructuring terms, which
they described as "unprecedented" and "blackmail." Otherwise, they
argued long-term economic relations with Kazakhstan would suffer
significant consequences.
5. (SBU) Marchenko initially recoiled at the suggestion that the
government should assume liability for the trade finance obligations
of banks that include BTA and Alliance, whose management was fired
or are fugitives charged with massive fraud. He responded by
rhetorically asking how many ECA executives were fired for "not
having seen any of the abundant red flags that were present at the
time." Because the NBK believes that most ECA assets ended up being
used to finance projects in Russia, Marchenko said the government is
distancing itself from restructuring talk -- the banks and creditors
must negotiate amongst themselves. He further explained his opinion
that the FSA should have begun to limit BTA's banking operations in
June because of the risks associated with loss of confidence in the
banking sector. Calming a bit, Marchenko said he understood Lazard
(i.e. BTA's Financial Advisors) were "playing hardball," but he
believed room for negotiation remained.
ASTANA 00001626 002 OF 003
6. (SBU) When ExIm Bank Vice President for Asset Management Frances
Nwachuku assessed that "mistakes were made on all sides, including
oversight," Marchenko, with unexpected grace, responded that the
government does not want to turn its back on the ECAs. However, it
is wary, he said, because bad deals backed by sovereign guarantees
in the early 1990s cost Kazakhstan nearly $2 billion. Marchenko
ended the meeting by calling ECA concerns surmountable,
acknowledging the need to defend public funds, and saying he would
"speak with the government." However, he closed with a thinly
veiled warning that if additional creditor demands made
restructuring too expensive, the government would see little use in
maintaining the institution.
MORE OF THE SAME FROM THE FSA
7. (SBU) The ECA delegation expressed similar concerns and received
similar responses during a September 7 meeting with the Director of
the FSA Banking Supervision Department Mukhtar Bubeyev. Bubeyev
repeated the official government position that negotiations remain
solely between the banks and their creditors, and that the FSA
exercises no influence over the process. Denying Germany's Euler
Hermes' accusations that FSA certainly plays a central role in the
process, Bubeyev explained that FSA's primary role will be to review
the restructuring proposals. If FSA does not believe that the plans
leave the banks with sufficient capital and liquidity, it will
reject them.
8. (SBU) The banks and the creditors alone must negotiate the
potential separation of ECA trade finance and commercial debt, he
said. According to Bubeyev, some ECAs conducted "proper banking
business," as opposed to "true trade finance." However, the
government planned to leave resolution of this issue to the banks
and creditors. The FSA, he argued, is charged with the maintenance
of financial stability in Kazakhstan, and public confidence is
tantamount to stability. Diminishing public confidence precluded
the possibility of any extension. Finally, without mincing words,
Bubeyev said, "The bank (BTA) has been operating with negative
capital since June; we are expecting a bank run. The deadline is
firm."
BTA OPEN TO ECA OPTION
9. (SBU) BTA Chairman and Samruk-Kazyna Co-Chairman Arman Dunayev
explained in a September 7 meeting with ECA creditors that he
personally had hoped to keep ECA debts separate from commercial
finance in the restructuring process. However, he understood that
other creditors on the steering committee wanted immediate cash
returns and were heavily influencing the process. According to
Dunayev, Samruk-Kazyna Chairman Kairat Kelimbetov had acknowledged
the need for ECAs' preferential treatment. Dunayev urged the group
to raise the issue with the steering committee, but refused an Euler
Hermes request for a strongly-worded endorsement of their position,
saying that he had no legal right to interfere in negotiations.
10. (SBU) Reflecting the final outcome, Dunayev highlighted the
firmness of the September 18 MOU deadline, but indicated they could
sign a final agreement by November 15. "Right now, it is very
important to sign an MOU; otherwise we risk actions being taken by
the FSA," he said. At the same time, he emphasized that the
agreement could be preliminary. Dunayev also admitted that he
learned of some possibly fraudulent ECA-financed assets in Russia.
11. (SBU) In conclusion, Dunayev again expressed his support for
the ECA position, but acknowledged competing interests. "I'm very
concerned. It seems like there are a lot of lions, ECA and
Commercial banks, and jackals, small investors, who want a piece. I
will recommend that you are treated differently, but you are lions.
Crisis comes and goes, but business stays. I hope the situation
around BTA and Alliance will be sorted out. I hope we buy back all
ASTANA 00001626 003 OF 003
debts, ECAs first, according to an appropriate schedule. I hope we
find a proper solution."
MINFIN OPENS DOOR TO SOVEREIGN GUARANTEE
12. (SBU) The combined international ECA delegation concluded its
trip with September 8 talks in Astana with Minister of Finance Bolat
Zhamishev. Reiterating his September 4 discussion with Ambassador
Hoagland (ref B), Zhamishev defended government actions and noted
the initial decision to bail out the banks in February, rather than
simply liquidate, as the strongest proof of its support. Zhamishev
emphasized the lack of legal precedent for this decision and for the
potential use of public funds to cover obligations never taken on by
the government. He restated the government position that half of
the ECA financing was used for projects in Russia. Regardless, he
argued, a government bail-out of these debts is a politically
sensitive issue.
13. (SBU) At the same time, Zhamishev referenced a recent
conversation with Dunayev and announced his support for ECA
preferential treatment if the BTA steering committee reaches such a
consensus. Consistently defending his actions to date, and
maintaining a delicate distance from other regulatory agencies
including the FSA, Zhamishev finally conceded that the Kazakhstani
government might assume sovereign guarantees, but only with the
condition that such a move would not be activated in the near
future. "Our budget is limited. Please keep this in mind -- but,
based on what I know, I think we will find a compromise."
WHAT NOW?
14. (SBU) With a signed and submitted MOU, the difficult task of
due diligence resumes. BTA must evaluate its toxic assets, which
will be contentious on all sides. (NOTE: BTA is paying KPMG for
this service. In turn, the BTA steering committee is financing
oversight of KPMG's work by Deloitte. END NOTE.) The end goal
remains the signing of a legally-binding agreement in the middle of
November.
15. (SBU) COMMENT: The signing of the BTA MOU accomplished one of
the immediate goals of the Kazakhstani government. The local media
are hailing it as a success, which is likely part of a concerted
public relations initiative to restore confidence in the beleaguered
Kazakhstani banking sector. It should also satisfy the immediate
demands of the international ECAs. However, as KPMG and their
Deloitte minders work to unravel the tangled web of toxic assets in
an attempt to establish true value, contentious results will likely
emerge for creditors, BTA management, and regulatory agencies.
Should the U.S. government consider joining international colleagues
in pressing for preferential treatment of trade finance debts, we
should exercise a degree of caution, making certain that we do not
ask Kazakhstan to accept liabilities we would be unwilling to take
on ourselves. END COMMENT.
HOAGLAND