News Roundup - September 18, 2007

The Journal of Turkish Weekly: Kashagan: Possible Outcomes of the Kazakhstan Government Decisions
The government of Kazakhstan has suspended work on the largest oil field Kashagan. The present in the Northern part of the Caspian Sea and is located in shallow water, the field is the largest found in the last decade oil source...
Radio Free Europe / Radio Liberty: Despite Restrictions, Foreign Investment Grows in CIS
A new report from the United Nations shows that the transition economies of the Commonwealth of Independent States and South East Europe are seeing the highest-ever levels of foreign direct investment (FDI)...
Telegraph: Eastern Europe to Reap Its Own Subprime Crisis
Soaring inflation across Central and Eastern Europe has begun to derail the region's booming economy, setting off alarms bells at the IMF and raising the risk of a monetary crunch...
Times Online: Black Gold Feeds a Taste for Consumerism
The new business capitals: Almaty. Kazakhstan’s new-found oil wealth has made expensive cars a common sight in the city...
Times Online: Seven Sacked in Max Petroleum Scandal
Max Petroleum, the London-listed oil explorer, said yesterday that it had dismissed its chief executive, chief operating officer and five other staff over a share option scandal...
EnerPub: Importing Central Asian Oil Another Lame Duck Idea
A proposal to import Central Asian oil into eastern Europe and break the region’s dependence on Russian crude faces the same old problems...
Gazeta.KZ: Is There Light or Misy at the End of the Tunnel?
Foreign investors working in Kazakhstan in the sphere of oil and gas, metal or other natural resources extraction will not leave the country because of the changes into the bowels and subsurface usage legislation...

News Roundup - October 17, 2007

Eurasia Daily Monitor: Kazakhstan's Oil Export Picture Detailed
At last week’s energy summit of Baltic, Black Sea, and Caspian countries, hosted by Lithuania in Vilnius, Kazakhstan’s Energy and Mineral Resources Minister Sauat Mynbayev provided a remarkably detailed picture of the country’s oil export policies, both ongoing and projected...
Wall Street Journal: Chevron Plan Hits Russian Hurdle
U.S. energy company Chevron Corp. has ambitious plans for Tengiz, an oil field in Kazakhstan that is one of its biggest and most prestigious projects. The consortium it leads is investing $6 billion to double production there...
Bloomberg: Germany Eyes Kazakh, Azeri Accords to Diversify Energy Supplies
German Economy Minister Michael Glos began a four-day trip to Kazakhstan and Azerbaijan, stepping up efforts to deepen energy ties with the resource- rich former Soviet states...
Reuters: After Crunch, Kazakhstan on Radar of CEE Banks
Central European banks are eyeing oil-rich Kazakhstan for further expansion after the country's banking sector went through a severe refinancing crisis, bankers at the Reuters Central European Investment Summit said...
The Financial Times: Upgrades to Rise for Emerging Markets
Standard & Poor's expects ratings upgrades on emerging market countries to outstrip downgrades in the next six months, as strong fundamentals help them weather the credit squeeze...
Forbes: Kazakhstan Kagazy H1 Pretax Profit Slightly Higher, Operating Profit More Than Doubles
Kazakhstan Kagazy PLC posted a slightly higher first-half pretax profit and said operating income rose nearly four-fold in the first two months of the second-half as its paper business continued to generate high double digit rates of revenue growth...
odwyerpr.com: APCO Picks Up 'Borat' Account
APCO Worldwide is hammering out final details in an agreement to provide global PR for energy rich Kazakhstan, the former Soviet Union state that was featured in the movie "Borat." ...
Harper's Magazine: APCO, Paragon of Ethics, Representing Kazakh Regime: Can Turkmenistan Be Far Behind?
APCO’s high ethical standards apparently don’t keep it from working for Nazarbayev, who recently took steps that effectively make him president-for-life...
The Washington Times: Embassy Row: Kazakh Promises
The ambassador from Kazakhstan faced strong opposition on Capitol Hill yesterday when he argued that his Central Asian nation deserves to lead a major human rights organization, despite charges that his government is run by an authoritarian president obsessed with expanding his power...
Oilweek: Tethys Petroleum Shares Gain More Than 10 Percent on Gas Discovery
Shares in Tethys Petroleum Ltd. (TSX:TPL) rose more than 10 per cent in Tuesday afternoon trading as the company reported a natural gas discovery in Kazakhstan...
IFEX: Adil Soz, Other NGOs Issue Joint Statement on Shortcomings of Proposed Media Law Reforms
The following is joint statement by Adil Soz and eight other freedom of expression organisations to members of the Kazakh Parliament, in response to media law amendments proposed by the Ministry of Internal Affairs and the Ministry of Culture and Information...

News Roundup - October 16, 2007

EnerPub: Oil Companies on Defensive in Kazakhstan
Development of the Kashagan oil field appears close to getting back on track, as the Kazakhstani government and a consortium led by the Italian oil company Eni SpA make progress in settling grievances surrounding the project...
Malaysia Star: Steppe Cement Poised for Growth
Steppe Cement Ltd chief executive officer Javier Del Ser Perez talks to StarBiz about its operations in Kazakhstan...
Islamic Republic News Agency: President Says Iran, Kazakhstan, Turkmenistan to Establish Railway
President Mahmoud Ahmadinejad said on Monday that Iran, Turkmenistan and Kazakhstan will establish joint railway networks...
Kazinform: Kazakh President Satisfied with Results of Top-Level Talks in Tehran
At a press conference following up the top-level negotiations in Tehran between presidents of Iran and Kazakhstan Mahmoud Ahmadinejad and Nursultan Nazarbayev the latter said he was satisfied with its results, Kazinform correspondent reports...
RIA Novosti: Cleanup after Rocket Crash in Kazakhstan Completed
Kazakhstan has completed decontamination work at the site where a Russian Proton rocket crashed last month, the Central Asian country's emergencies ministry said on Monday...
Ferghana.ru: Kazakh Investors Need a Predictable Elite in Kyrgyzstan
The Bishkek Press Club approached Kazakh political scientist Eduard Poletayev for comments. Here is an interview with Poletayev on how the developments in Kyrgyzstan are viewed in Kazakhstan and on what is expected by way of the outcome of the referendum and parliamentary election in Kyrgyzstan...
Energy Current: Kazakhs Know Their Role in Energy Security
Kazakhstan is aware of its importance in providing the world with energy, President Nursultan Nazarbayev said today as he announced the production timetable for the coming decade...
Gazeta.KZ: Caspian Sea "Black Pearl" and Local Oil Ambitions
One of the most significant news sounded on recently held Kazakhstani International Exhibition "Oil and Gas" - KIOGE 2007 was a statement of "KazMunaiGas" (KMG) president, Uzakbai Karabalin, on new discovered oil reserves on the shelf of the Caspian Sea...
Reuters: Kazakhstan Jan-Sept Copper, Zinc Output Down
Kazakhstan's refined copper output fell 4.1 percent year-on-year to 297,017 tonnes in January-September, the statistics agency said on Monday...
Radio Free Europe / Radio Liberty: Politicians Stake Out Territory Ahead Of Caspian Summit
Tehran is set to host a Caspian Sea summit at which the leaders of Iran, Azerbaijan, Russia, Kazakhstan, and Turkmenistan will try to hammer out a legal framework for use of the sea and its resources, including significant energy deposits...
RIA Novosti: Caspian Nations Expected to Sign Sea Status Declaration
A declaration expected to be signed at the Caspian summit in Tehran on October 16 will act as a guideline until the approval of a convention on the legal status of the Caspian Sea, Russia said on Monday...
Kazinform: Kazakh Investment Company Interested in Privatization of Some Iranian Firms
Eurasian Industrial Investment Company JSC (Kazakhstan) is interested in privatization of a number of Iranian enterprises...
Oil and Glory: Where's My Cut?
What does $86 oil mean in the former Soviet Union? More muscular attitude from Russia's already swollen President Putin, and greater petro-assertiveness from Kazakhstan...

How Deep Is the Credit Crisis in Kazakhstan?

Kazakhstan is facing two major problems:

1) Large external short-term debt that the banks hold on their books and the upcoming refinancing of this debt (while facing an increased cost of new borrowing abroad).
2) Massive lending to construction companies and issuance of mortgages to general population (and the growing risk of default due to possible decline in the value of housing as collateral and the inability of people to pay the high rates of previously obtained loans).

To solve the first problem, the banks will be forced to (since the cost of external borrowing is not likely to decrease): (a) refinance their debt abroad at higher rates, (b) increase the cost of credit in the domestic market (raise their interest income), (c) raise tariffs on banking transactions (increase their non-interest income), (d) increase their capital (attract new shareholders' capital), (e) reduce operating costs, (f) sell non-core assets (g) buy foreign currency in large volumes on the domestic market to repay external debts (which may cause the tenge to devalue).

This will lead the banks to "tighten their belts", and people and businesses will see the bank lending becoming more expensive. That by itself would not be a crisis. There will be a crisis, however, if a second problem will not be resolved: the sharp decline in property values and the deterioration of the loan portfolio of banks. Then the scenario could be similar to the subprime crisis in the USA --- a sharp increase in defaults on mortgages, declining value of the banks' assets, and new risks to financial stability of banks that are least diversified and most exposed to mortgage and retail banking.

From what we know, it seems that Kazakh banks will be able to weather the current crisis. The government (including Kazakh president Nursultan Nazarbayev) and the Kazakh National Bank have stepped in and made it clear that they will support the banks and will provide necessary liquidity if needed. The question, however, is whether the crisis is only concentrated in the banking sector. The Kazakh government would undoubtedly be able to rescue the banks if they were the only sector of the economy affected by the crisis and if the crisis only involved a sudden cut-off of foreign credit. If the disease is spread among the entire economy, though, it can prove too much to handle even for this energy-rich petro-state. And there are growing signs that other sectors are affected as well --- the construction sector has been hit hard by the sudden draught of liquidity, the inflation has been running wild in the last few months, and the government even had to intervene to keep the prices of foods from rising. These symptoms may simply be the result of the banking crisis and overall uncertainty over what its consequences will be and may take care of themselves as soon as the government and the financial authorities bring the liquidity draught under control. However, should they be indicative of larger imbalances in the Kazakh economy, it could become much harder for the government to put together a bail-out plan not just for Kazakhstan’s banking system but also for the entire economy.

News Roundup - October 15, 2007

Telegraph: Angry Kazakhstan Props Up Bank Shares
Kazakhstan will respond to an "attack" by hedge funds by buying shares next week in the country's banks that are listed on foreign exchanges to support prices, its prime minister said...
The Financial Times: Kazakhstan Plans Foreign Share Buybacks
Kazakhstan is considering buying the shares of its companies that are listed on foreign exchanges in a move to bolster stock prices and respond to credit rating agencies' moves to downgrade Kazakh debt...
Times Online: Kazakh Authorities May Buy Back Shares on LSE of Banks Hit by Squeeze
Kazakhstan may buy back shares in some of its largest national companies listed on the London Stock Exchange, including Kazcommertsbank and Alliance Bank, as the country grapples with a financial crisis...
Reuters: Kazakhstan Cuts Oil Output Forecast, Blames ENI
Kazakhstan will produce 13 percent less oil than expected by 2015, removing 400,000 barrels per day from forecast global supply, due to delays in launching the massive Kashagan field, government officials said on Friday...
Radio Free Europe / Radio Liberty: Kazakhstan: Global Financial Turmoil Hits Credit Rating
Kazakhstan, thriving on oil and gas exports, has long boasted one of Eurasia's most dynamic economies. But it seems that not even the towering Altai Mountains can shield Central Asia's economic giant from the turmoil swirling on international credit markets...
New Europe: Kazakh Prime Minister Sees Solution for Chevron’s Tengiz
Kazakh Prime Minister Karim Massimov said on October 12 a row with the Chevron-led Tengizchevroil consortium over sulphur contamination at the Tengiz oilfield “is almost solved.” He said Tengizchevroil should accept the Kazakh proposal and pay the Kazakh side for suitable storage facilities...
The Independent: Kazakhstan PM Steps Up Oil Fight with Western Companies
Hopes of a swift resolution to the dispute between the Kazakhstan government and a consortium of Western oil majors were dashed this weekend, as the Kazakh Prime Minister hinted at new legislation...
Institute for War and Peace Reporting: Kazak Government Signals Compromise in Oil Dispute
A threat by the Kazak government to take control of a major foreign-run oil project has raised a few concerns about investment risk, but the move appears to have specifically addressed problems with the giant Kashagan oil field, which is seen as vital to the country’s future...
Interfax Russia: Kazakhstan's National Security Will Be Integrated with Global, Regional Systems - Nazarbayev
Kazakhstan plans to further strengthen its security system in the next few years, Kazakh President Nursultan Nazarbayev...
Malaysian Star: Much to Explore and Tap in Kazakhstan
Malaysians probably know Kazakhstan as a place near the Russian border or that it was where the first Malaysian astronaut (Dr Sheikh Muszaphar Shukor) was launched into space recently. But Kazakhstan has much more to offer, especially to local companies wanting to expand their businesses beyond local shores...
The Associated Press: Troubled Caspian Waters Await Putin
Russian President Vladimir Putin's visit to Tehran this week will include participation in a summit of Caspian Sea leaders. Iran, Russia and three former Soviet republics along its shores have been locked in tough talks on dividing the resources of the vast inland sea...
China Internet Information Center: China, Kazakhstan Build on a Solid Foundation
For Ikram Adyrbekov, Kazakhstan's ambassador to China, the cultural events that make up the Days of Culture of Kazakhstan in China are symbolic of the strong cultural ties between the two countries...

Interview with Alliance Bank Chairman Dauren Kereybayev

The price of Alliance Bank's shares traded on the London Stock Exchange has declined by more than half since its IPO in June. There is growing skepticism among international investors about how the bank will be able to refinance its foreign loans and whether it will be able to stop the continuing outflow of deposits. Talking to the chairman of Alliance Bank Dauren Kereybayev, however, it appears that the bank is trouble-free and in perfect shape to continue its fast growth in the Kazakh retail banking sector. Below is an interview with Kereybayev published in Kazakh business weekly "Business and Power". The original version in Russian can be found here.

Not long ago, you returned from a road show where you met with international investors? What can you say about their attitude towards Kazakh banks?

I think it is more correct to talk about their attitude towards the Kazakh banking system as a whole. If you noticed, the stock prices of Kazakh banks tend to move up or down together; if the prices are decreasing, then they are decreasing for all the banks; and if they are going up, it’s also the same. In principle, the investors’ mood is reflected in a wait-and-see attitude and their willingness to immediately forget past problems. The wait-and-see attitude that is found mainly among the Western investors is the result of their belief that we have not yet seen the end of the global credit crisis. Only after it is over, can we realistically assess who was affected by the crisis and how. The concern of British investors, specifically, is understandable because even an institution like Northern Rock with a two-hundred-year history suffers massively from the liquidity crisis. On the other hand, investors have short memories, and are ready to approach previously problematic markets, if they see that potential profits outweigh the inherent risks. Therefore, we can assume that in February of next year, when all banks publicly show the results of their 2007 activities, the Eurobond market will slowly start to resurrect.

Do you think that Kazakh banks will be able to refinance their current outstanding debt at more or less attractive terms?

Of course, the rates will be slightly higher than in the recent past but nevertheless they should allow the banks to refinance their debt and continue their activities. The result of this, however, will be that the growth of Kazakh banking sector will not exceed 30 percent next year.

Some analysts predict a second wave of the current crisis because of possible defaults in the American mortgage market. Are you ready for this scenario?

Even if there is a second wave, and there will be one, it should not affect us. I think that Kazakh banks are facing their most difficult period right now. Once they refinance their debt, there will no longer be such indiscriminate issuance of loans, especially mortgage loans. The first wave of the crisis was so distressing because it happened suddenly. It’s like a typhoon --- the first wave brings maximum destruction and damage, but by the time the second wave comes, people have time to prepare. Incidentally, I wish to point out that investors appreciate the actions of our regulators aimed at maintaining the stability of Kazakhstan's financial system.

Do you think that Western investors see today as an opportune time to enter the market and pick up the suddenly inexpensive shares of Kazakh banks?

Absolutely. They are observing the markets and trying to determine when the market sentiment changes not just in Kazakhstan but everywhere. This is the wait-and-see attitude that I already mentioned. At one point I even thought that the market players were attempting to escalate the crisis to cause an even greater fall in the prices of securities, so that they could buy them even cheaper. There is a whole army of professional markets participants with their own rules of the game and a plethora of financial instruments that they use to their goals.

What about the current liquidity situation at Alliance Bank?

We exceed all the liquidity rations. As far as the bonds accumulated in the National Bank as minimum reserves are concerned, we are not creditors. All this, in my view, clearly shows the status of the bank. We have openly spoken about our need to refinance $406 million in foreign loans by the end of the year. The non-critical bank liquidity stands currently at more than $2 billion, and as you know, our shareholders have placed on the accounts of Alliance $220 million from the IPO proceeds. Additionally, the bank receives monthly another $120-150 million from repayments of our outstanding consumer credit. Also, the recently altered method of calculating the minimum reserve requirements resulted in the lowering of these by another 15-17 billion tenge ($125-141 million) which provides additional liquidity for the bank. Therefore, the current state of liquidity will allow the bank to fulfill its internal and external obligations.

Will consumer lending continue to be the top priority for Alliance Bank?

Sure. Consumer lending has proven its viability in the face of the mortgage crisis. Consumer lending is based on the real income of the population which is generally not declining but rather increasing because of the encouraging macroeconomic situation in the country. This is why the current crisis has not been reflected in the retail lending market --- not in the volume of loans issued, not in the terms of repayment. We did not stop for a second, and we continue to grow in the same direction. It is necessary to understand that this is a specific product and it’s necessary to be able to work with it. Today, the approach that we chose has confirmed its viability, as opposed to concentrating the loan portfolio in mortgage and construction lending. In our bank, construction and mortgage only make up 22 percent of the loan portfolio. This, according to our estimates, is lower than for Halyk Bank, Bank CenterCredit and Kazkommertsbank. We have, incidentally, begun issuing consumer loans because we did not want to compete in the overcrowded mortgage market. The rivalry between participating banks led to seriously declining rates and low profitability.

The emergence of the savings product “Excellent” (its rates greatly exceed those of the competition) has caused talks that this could be an evidence of problems in the bank?

If you take a look at the market, you will see that we have the highest rate of return on our loan portfolio. That allows us to play with rates depending on the market situation. Also, if you added the cost of prizes, raffles and other promotional activities that other banks incur with their loans, I am sure that you would come up with the same rate that we pay our customers. A few years ago, Alliance Bank started an initiative to abolish these promotional activities but none of the other banks supported our efforts. Today, we no longer look at the other banks on this issue --- Alliance Bank is conducting an independent deposit policy, and the rejection of promotional activities like raffles or lottery is an integral part of our policy.

News Roundup - October 12, 2007

EurasiaNet Insight: EU Official Urges Building Trans-Caspian Gas Pipeline
A trans-Caspian gas pipeline should be built and could become a good opportunity to pipe gas from Central Asia to Europe, the secretary-general of the Council of the European Union and the high representative for common foreign and security policy of the European Union, Javier Solana, believes...
Oil and Gas Journal: EU's Solana Promotes EU-Asia Energy Cooperation
European Union foreign policy chief Javier Solana in Central Asia Oct. 10 expressed hope that disagreement over the Kashagan oil field project will be solved in terms of the existing agreement...
Kazinform: Inflation Rate in Kazakhstan Made 8.6 % for 9 Months
“The rate of inflation in Kazakhstan made 8.6 per cent for the period of 9 months, 2007,” Prime Minister of Kazakhstan Karim Massimov said today at the governmental session in Astana with the participation of President of Kazakhstan Nursultan Nazarbayev...
Radio Free Europe / Radio Liberty: Rocket Ban Still In Place Ahead Of Scheduled Russian Launch
Russia is scheduled to launch a Proton rocket into orbit with three of its GLONASS satellites from Kazakhstan's Baikonur Cosmodrome on October 25...
TREND: International Conference Dedicated to ‘Kazakhstan- 2030’ Strategy’s 10th Anniversary to Begin in Astana
An international conference dedicated to the tenth Anniversary of ‘Kazakhstan- 2030’ strategy will begin in Astana on 12 October, according to the event’s organizing committee...
NewEurasia.net: North Kazakhstan Surprised with New Leadership as Mansurov Leaves for EurAsEC
On October 8th local authorities in Petropavlovsk, the administrative center of North Kazakhstan Oblast, announced that President Nazarbayev and his entourage would be flying in to on the following day to proclaim a new akim...
Ferghana.ru: Nearly 100,000 Chinese Entered Kazakhstan in 2006
Almost 100,000 Chinese entered the territory of Kazakhstan in 2006 and only 5,000 of them obtained the official permit to remain, Yelena Sadovskaya said at her press conference in Alma-Ata on October 98...
Kazinform: Area Phone Codes in Kazakhstan Changed as of October 5
Please note that area phone codes in Kazakhstan have been changed as of October 5. The first digit “3” in all the area codes in Kazakhstan has been changed for “7”...
United Press International: Analysis: The Caspian's Division
The eyes of Western energy companies will be focused next week on Tehran, where the second Caspian Sea Littoral States Summit will convene Oct. 16. Atop the meeting's agenda is a discussion of the final status of the division of Caspian waters among the five littoral states of Azerbaijan, Russia, Iran, Kazakhstan and Turkmenistan, an issue that has bedeviled their relations since the 1991 collapse of the Soviet Union...
International Herald Tribune: Russia Snubs Major Energy Conference Organized by East European Consumer Nations
Russia snubbed a major energy conference on Thursday attended by presidents and ministers of 20 European and Central Asian countries, highlighting the tension between the region's largest energy supplier and various importing nations...
Forbes: ENRC Prepares Draft Prospectus for 5 Bln USD IPO
Kazakhstan mining company Eurasian natural Resources Corporation has prepared a draft prospectus for an initial public offering, which could raise as much as 5 bln usd, indicating it may come to the London Stock Exchange in the next few months...
The Financial Times: Five States Agree Caspian Oil Pipeline Extension to Reduce Reliance on Russia
A plan to build a pipeline to reduce central and eastern Europe's dependence on Russian oil was signed by five former communist countries in Lithuania last night...

The Financial Times: ENRC Listing Could Raise $5bn
Eurasian Natural Resources Corporation from Kazakhstan has prepared a draft prospectus for an initial public offering that could raise as much as $5bn (£2.46bn), in a sign that it hopes to float on the London Stock Exchange in the coming months...
Ferghana.ru: Cruelty in the Barracks in the Regular Kazakh Army Remains a Problem Kept under the Lid
Whoever refuses to feed his own army will feed a foreign. This axiom remains true even now. Unfortunately, the army demands more than donations in the form of taxes. It also demands human sacrifices...

Kazakhstan's Banking Crisis - What Went Wrong?

Kazakhstan's financial system is currently undergoing a trying period coping with lack of liquidity caused by the subprime crisis in the United States. The banking system is the most developed among the CIS states, possibly even counting Russia, but massive lending sprees in international financial markets and overexposure to the (suddenly hurting) real estate sector seem to be stretching its limits.

The first sign that international investors grew wary of Kazakhstan's success story was the public offering of the GDR's of Kazakhstan third largest bank, Alliance Bank, on the London Stock Exchange. The bank tried to capitalize on global appetite for Kazakhstan's IPO’s that enabled two other large Kazakh banks to raise record amounts of money on the LSE and made Timur Kulibaev officially a billionaire. However, by the time Alliance presented its shares for sale, it was clear that investors were going to pay closer attention to what was offered. The subprime crisis was still contained to the United States, and it seemed likely that the only victims would be a few overleveraged hedge funds whose bets went wrong. But investors suddenly became wary of inherent risks not only in exotic derivative products but also in exotic emerging markets like Kazakhstan.

At the first look, Alliance Bank was a success story and a poster child of Kazakhstan’s emerging banking sector. Within less than three years it grew from being the tenth largest retail lender in Kazakhstan to being the leader in June 2007. The bank was a trailblazer in marketing strategies (some rather controversial) to attract retail and SME clients and was the fastest growing banking institution in Kazakhstan. However, the risk factors that this fast growth brought are representative of Kazakhstan’s banking sector as a whole.

The overexposure to the retail and construction sectors (in the case of Alliance retail lending represented 45 percent of its loan portfolio) has made the banks vulnerable to macroeconomic shocks. This systemic risk has not been a factor yet as Kazakhstan’s overall economy remains relatively stable and healthy. Another important risk factor, however, exposed Alliance, and other Kazakh banks, to the current crisis - its dependence on foreign credit. More than fifty percent of Kazakh banks’ borrowing is conducted abroad, and only 2006 they managed to obtain a combined $18 billion from international creditors. As long as credit was cheap, this influx of foreign money helped fuel the rapid growth of Kazakh banking sector and significantly contributed to the real estate booms in Almaty and Astana. The downside, however, was the ever increasing dependence on the willingness of foreign lenders to finance this growth. Until this summer, credit spreads were extremely low as compared to historical averages. This was thought to be due to a better ability of investors to understand and manage risk with derivative instruments. The fallacy of this view is clear now but for several years it contributed to the willingness of international lenders to overlook the inherent risks of investing in an emerging economy which depends almost entirely on the global oil prices boom. And Kazakh banks borrowed more than willingly, profiting handsomely lending at high rates to Kazakh home-buyers and retail consumers. It was an almost perfect arbitrage opportunity --- as a consequence, they experienced rapid growth and their investors reaped massive rewards from IPO’s in London.

In retrospect, it is not difficult to determine that this growth was not sustainable and its cause was mainly (temporarily) cheap credit. During the height of the Kazakhstan frenzy, however, investors, creditors and credit rating agencies largely chose to ignore the presence and possible consequences of the inherent risks. In those rare instances when the risks were brought up, they were muffled by the great showing of Kazakhstan’s overall economy and its double-digit annual growth. Kazakhstan and its banking system were held as an example of desirable and functioning banking reforms that helped distribute oil wealth among the people.

The Kazakh banks’ penetration of the retail sector is the highest among the CIS states, and Kazakh banks have been among the most active and innovative. This level of development, though, has been the reason why Kazakhstan finds itself on a verge of a banking crisis. Kazakhstan’s banks were among the few in the former Soviet states that could easily (and cheaply) raise funds on international markets. They have been the fastest in rolling out banking and mortgage products and dispersing credit among the population. But this perfect storm of the Kazakh banks’ willingness to borrow, and the eagerness of international lenders to lend to not miss out on the Kazakh miracle led to an overexposure to foreign borrowing. As mentioned above, Kazakh banks raised more than half of their funds on international markets. Russian banks, as a comparison, raised approximately 18 percent of their non-equity funding on international markets. At the point, when international lenders realized that Kazakhstan is an emerging country with a highly suspect authoritarian government and they should require an appropriate compensation for investing in such conditions, Kazakhstan’s banks were caught on the wrong end. They held $40 billion of foreign loans in foreign currencies, a significant share of which had to be refinanced at suddenly very high rates.

The continuing lending spree also led to an artificial inflation of the value of the Tenge, and the sudden drop in demand for Kazakh lending was immediately reflected in an increased volatility of the currency. This factor obviously further exacerbated the situation making the repayment of the foreign-denominated debt all the more unpredictable and difficult. The Kazakh National Bank has been pumping money into the financial markets since August and it seems that it has managed to keep the Tenge relatively stable.

Despite these systemic setbacks, it is unlikely that Kazakhstan, and its banking sector, will suffer a significant crisis. The system that first helped to jumpstart the rapid growth of the Kazakh banking sector and then was a cause of a liquidity crisis, should help the banks (at least the majority of them) to survive and thrive. The Kazakh government has already issued reassuring statements to international lenders and investors, and the consensus is that it will readily step in to bail out a major bank that would get into serious trouble. The question now may be where the line will be drawn. A run at the bank in Alliance shows that it may find itself right under the line but overall the banking sector should emerge stronger.

The credit crisis in Kazakhstan follows the predictable pattern (at least in hindsight) of boom and bust. First foreign lenders and investors did all they could to get a piece of action in the booming Kazakh market, often ignoring present warning signs. Then, when the confidence in Kazakhstan’s economic miracle finally suffered, they overreacted to warnings that should have been obvious for a long time. For Kazakhstan and its young banking system, this crisis should be an important lesson. Even before the crisis unfolded, the financial authorities were trying to pressure banks to be more conservative in their lending and borrowing policies --- recent events should leave no doubt that while the Kazakh banking system is fundamentally strong, certain restraint is necessary and in long-term interest of both the Kazakh economy and the banks’ shareholders. As for Western investors, Kazakhstan just became another hot emerging market that suddenly went cold. However, the continuing commodity boom will without a doubt provide further impetus to continuing growth of Kazakh economy and strengthening of its banking sector, and today just may be a perfect time for investors to find some great bargains among the battered banks.

News Roundup - October 11, 2007

EurasiaNet: Oil Companies on the Defensive in Kazakhstan
Development of the Kashagan oil field appears close to getting back on track, as the Kazakhstani government and a consortium led by the Italian oil company Eni SpA make progress in settling grievances surrounding the project...
Reuters: Total Presses for Kashagan Deal before End-Year
Talks between Kazakhstan and a consortium led by Italian oil company Eni on the development of the giant Kashagan oil field should be wrapped up quickly, the head of French oil company Total said on Wednesday...
CNN Money: Kazakhstan's Alliance Bank Assigned 'B+' Corporate Rating; Outlook Stable - S&P
Standard & Poor's Ratings Services assigned Kazakhstan-based Alliance Bank JSC a 'B+' long and 'B' short-term counterparty credit ratings, with a stable outlook...
Kommersant: Kazakhstan's Ratings Lowered
S&P lowered the country's sovereign rating on October 8. At the same time, It lowered its long- and short-term rating on obligations in tenge from BBB+/A-2 to BBB/A-3 and gave its short-term obligations in hard currency an A-3 rating...
Radio Free Europe / Radio Liberty: EU Pushing Energy Cooperation With Central Asia
European Union foreign policy chief Javier Solana is in Kazakhstan today as part of a Central Asian tour to promote cooperation between the region and the EU, particularly in the field of energy resources...
Radio Free Europe / Radio Liberty: OSCE: Member States Must Stand Up To Russia's 'Bluster'
For the past two weeks, civil-society groups from across the former Soviet region have been meeting in Warsaw with member states of the Organization for Security and Cooperation In Europe (OSCE)...
Radio Free Europe / Radio Liberty: Making Sense Of Post-Soviet Alphabet Soup
Youth leaders from the four member states of the GUAM Organization for Democracy and Economic Development meet today in Azerbaijan's capital, Baku...
Ferghana.ru: Blended into the United Social Democratic Party, the Opposition Learns to Live in the New Kazakhstan
The opposition is learning to live and operate in the conditions where a multiparty system coexists with a one-party parliament as peacefully as the Communist regime and free enterprise do in China. When the figures reported by the Central Electoral Commission or Statistics Agency differ so greatly from what one sees with his own eyes, it inevitably brings to mind the concept of parallel worlds...
Gazeta.KZ: EU Is Interested in Deepening the Cooperation with Kazakhstan
Kazakhstan Today. October, 10. ASTANA. The European Union is interested in deepening the cooperation with Kazakhstan, said on briefing after the meeting with the RK Minister of Foreign Affairs Marat Tazhin the EU Council Secretary General Xavier Solana, as reported by KZ-today correspondent...
Kazinform: Fitch Teleconference: Kazakhstan Sovereign Outlook
Fitch Ratings will host a teleconference call on Wednesday 10 October at 17:00 Moscow time (14:00 London time) to discuss Kazakhstan's outlook and key sovereign rating drivers, following the agency's sovereign rating mission to the country last week and its affirmation on Monday 8 October of Kazakhstan's sovereign ratings, while revising the Outlook to Stable from Positive...
RIA Novosti: Moscow-Astana Space Symbiosis
Kazakhstan and Russia have few reasons for discord, but Russian rocket launches are an increasingly sore point between them. In Kazakhstan's opinion, they often fall on its territory causing significant environmental damage...
Gazeta.KZ: The President of Kazakhstan Discussed Almaty Regional Financial Center Development
The President of Kazakhstan, Nursultan Nazarbayev, discussed with his freelance adviser, James Wulfenson, perspectives of development of Almaty Regional Financial Center, as reported by KZ-today correspondent...

News Roundup - October 10, 2007

The Moscow Times: S&P Marks Down Kazakhstan's Ratings
International ratings agency Standard & Poor's has downgraded Kazakhstan's sovereign ratings to within a notch of losing its investment grade rating on concerns that the country's banks are overexposed to foreign borrowings...
Forbes: Kazakhstan Outlook Cut to Stable as Banks Hit by Tough Financing Climate - Fitch
Fitch Ratings revised the outlook on the Republic of Kazakhstan's issuer default ratings (IDR) to stable from positive, citing the impact of a tougher international financing climate on Kazakhstan's banks...
The Financial Times: Kazakhstan Hit Hard by Shortage of Liquidity
At a recent gathering of bankers in Almaty, Kazakhstan’s financial capital, Dmitry Shishkin, an analyst from Standard Bank, noted the efforts being made to play down the problems in the country’s banking sector...
EurasiaNet Insight: Italian Premier "Happy" with Kazakh Pledge to Keep Oil Contract
Italian Prime Minister Romano Prodi is positive in his assessment of assurances by the Kazakh leadership that contracts will remain unchanged...
The Wall Street Journal: Kazakhstan Downplays Tiff With Eni About Oil Project
Kazakh President Nursultan Nazarbayev played down his government's dispute with the Eni SpA-led consortium developing the giant Kashagan oil field...
Reuters: Kazakhstan Maps Demands for Eni Oil Talks Next Week
Kazakhstan has mapped out a set of demands for an Eni-led consortium developing the huge Kashagan oilfield and will start talks on them next week, its energy minister said on Tuesday...
The New York Times: Kazakh Leader Eases Tensions Over Oil Project
The president of Kazakhstan sought on Monday to ease fears that his government was seeking to alter the terms of the Kashagan offshore oil project, indicating a possible cooling in the dispute with the Italian-led consortium developing the field...
International Herald Tribune: Media Watchdog Requests Withdrawal of Amendments to Kazakh Defamation Law
The media freedom representative at a European security organization said Tuesday he has requested the withdrawal of recent draft amendments to Kazakhstan's defamation law...
Itar-Tass: Russia, Kazakhstan Disagree on Sum of Damage from Proton Fall
Russia and Kazakhstan could not agree a sum of damage from a Proton-M missile. A compensation sum of the damage will be determined in December 2007, head of Roskosmos (Russian Space Agency) Anatoly Perminov told reporters in Astana on Tuesday...
The Canadian Press: Russians Present 'Kazakh' Whip' to 1st Woman to Command Space Station
A Russian space official presented a traditional Kazakh whip Tuesday to American astronaut Peggy Whitson a day before she was scheduled to head into orbit to become the first woman to command the international space station...
TREND: Kazakhstan, Azerbaijan and other Countries of Region Interested in Cooperation with Europe: Italian Premier
Kazakhstan, Azerbaijan and other countries of the Caspian region are interested in cooperation with Europe, the Italian Premier Romano Prodi said in Kazakhstan...
Reuters: Kazakh Halyk Bank 9-Month Net Income Up 65 Percent
Kazakhstan's Halyk Bank reported a rise in nine-month net profit and growth in deposits, as Fitch Ratings cut its outlook on the Central Asian nation's third-largest bank to stable from positive...
Reuters: Kazkommertsbank Buys into Russian Brokerage
Kazakhstan's Kazkommertsbank has bought 50 percent of Russian brokerage East Capital, the Kazakh bank said on Tuesday. Kazkommertsbank said in a statement it planned to rename the company East Kommerts...
EurasiaNet Insight: CIS Summit: Coming Together on Paper, Still Apart in Practice
The leaders of former Soviet states signed a bevy of agreements during three separate inter-state gatherings held recently in the Tajik capital of Dushanbe. Despite the move toward greater integration on paper, it remains uncertain to what extent the agreements will be implemented...
Forbes: Four Kazakhstani banks' outlooks cut to stable from positive - Fitch
Fitch Ratings said it has revised the outlook on the long-term issuer default ratings (IDR) of four Kazakhstani banks -- the Development Bank of Kazakhstan (DBK), Bank TuranAlem (BTA), Halyk Bank of Kazakhstan (Halyk) and Kazkommertsbank (KKB) -- to stable from positive...
Telegraph: Russian Billionaire's Hostile Bid for Celtic
Billionaire steel magnate Alexei Mordashov ran out of patience with the board of Celtic Resources yesterday, launching a hostile bid for the gold miner and threatening to throw out management even if he does not secure full control of the company...
Kazinform: Heads of Caspian Littoral States to Convene in Tehran
The second summit of the heads of the Caspian littoral states will be held in Tehran on October 16. All the presidents of 5 Caspian littoral states will take part in the summit, Kazinform refers to the spokesman of the Kazakh Foreign Affairs Ministry Yerzhan Ashikbayev...

News Roundup - October 9, 2007

International Herald Tribune: Kazakhstan Says Government Won't Interfere with Kashagan Investors
President Nursultan Nazarbayev moved Monday to reassure investors that the Kazakh government was not seeking to alter the terms of the Kashagan offshore oil project, indicating a possible cooling in a bitter dispute with the Italian-led consortium developing the giant field...
Reuters: Kazakhstan Reassures Italy over Kashagan Oil Field
Kazakhstan reassured Italy on Monday it would not change the terms of its contract to develop the huge Kashagan oilfield with Italy's Eni, which it blames for major cost overruns and production delays...

The Financial Times: Nazarbayev Says No Revision of Kashagan
Kazakhstan’s dispute with an Italian-led consortium over delays and cost overruns in developing the Kashagan oilfield can be resolved without rewriting the contract, President Nursultan Nazarbayev told Italy’s visiting prime minister on Monday...
Forbes: Eni CEO Expects to Close Talks with Kazakh Govt over Kashagan by Year-End
Eni SpA CEO Paolo Scaroni said he expects talks with the Kazakh government over the Kashagan oilfield to be wrapped up this year...
CNN Money: Kazakhstan Long-Term Foreign Currency Ratings Lowered to 'BBB-'
Standard & Poor's Ratings Services lowered its long-term foreign currency sovereign credit ratings on the Republic of Kazakhstan to 'BBB-' from 'BBB', and its long- and short-term local currency sovereign credit ratings to 'BBB/A-3' from 'BBB+/A-2', citing funding problems in the Kazakh financial system...
Times Online: Flood in Kazakhstan Starts Mining Sell-off
A flood in Kazakhstan prompted widespread selling of mining stocks yesterday, continuing the sector’s boom-and-bust movement of recent months...
RIA Novosti: Kazakhstan Wants Russia to Pay $60 Million in Damages for Proton Crash
Kazakhstan is seeking 1.5 billion rubles ($60 million) from Russia in compensation for a rocket crash on its territory, a Kazakh regional governor said Monday...
EurofundingMag: EBRD Intensifies Activities in Kazakhstan
Building on a strong and successful cooperation the EBRD and Kazakhstan are intensifying their activities. During his first visit to the country, EBRD First Vice President Varel Freeman has signed a Memorandum of Understanding with Keirat Kelimbetov, CEO of the Sustainable Development Fund Kazyna...
International Herald Tribune: Malaysia's 1st Astronaut, American and Russian Prepare for Blastoff from Central Asia
A crew that includes Malaysia's first astronaut and an American who will become the first woman to command the international space station prepared Monday for blastoff later this week...
Ferghana.ru: Construction of a Politically Correct Pyramid or Snapshots of Dushanbe Summits
A colossal array of twelve state flags of CIS countries was installed on one of transport junctions in Dushanbe, the capital of Tajikistan, on the eve of three summits - those of the Commonwealth, Eurasian Economic Cooperation Organization, and CIS Collective Security Treaty Organization...
Times Online: Run on Kazakh Bank Places Loan Covenants in Jeopardy
Kazakhstan’s third-largest bank yesterday gave warning that it would breach its loan covenants if customers continued with a run that saw 10 per cent of its deposits, or 27 billion tenges (£110 million), withdrawn in July and August...
Reuters: Kazakh Alliance Bank May Breach Loan Covenants
Alliance Bank, the No.3 Kazakh bank by assets, warned on Monday that it could breach loan covenants if it suffers a further withdrawal of customer deposits...
The Financial Times: Severstal Turns Up Heat on Celtic
Severstal turned hostile in its bid for Celtic Resources on Monday, warning that its 29.7 per cent stake in the Aim-listed gold miner “can be used to block any other party from acquiring full control of Celtic and could potentially dissuade third parties from making a competing offer”...

News Roundup - October 8, 2007

International Herald Tribune: Russia, Belarus, Kazakhstan Sign Agreement Moving Closer to Customs Union
Russia, Belarus and Kazakhstan moved a step closer to a long-delayed customs and trade union on Saturday...
The Moscow Times: Unhappiness With Moscow Sours CIS Summit
Discontent over Russia's continued domination of former Soviet republics soured a summit of their leaders, with Kazakhstan announcing plans to form an economic grouping without Moscow and Tbilisi refusing to sign an amended CIS treaty...
International Herald Tribune: Italian PM Holds Talks in Kazakhstan as Eni-Led Energy Consortium Hits Trouble
Italy's prime minister met with top officials in Kazakhstan Monday on a visit that comes amid a dispute between the oil-rich Central Asian nation and an international consortium led by Italy's Eni SpA...

The Moscow Times: Kazakhs Rebuff Hedge Funds
Kazakhstan's central bank said Friday that it was capable of stabilizing the country's banking system after what it called a "speculative attack" by large hedge funds...
Radio Free Europe / Radio Liberty: Central Asia: Kazakh, Russian Leaders Discuss Transport Corridor

Ahead of the CIS summit in Dushanbe this weekend, the presidents of Kazakhstan and Russia -- who meet frequently -- met again in the Russian city of Novosibirsk to attend the Forum of Leaders of Border Regions...
United Press International: Analysis: Russia Eyes Central Asian Gas
Since 1991 the United States and Russia have been involved in a conflict to exploit the Caspian's vast energy reserves. Now, however, Moscow seems to be gaining the upper hand by proposing an agenda with neighboring Kazakhstan that could see the issue of Caspian energy exports westward largely dominated by Russia for the next three to five decades...
United Press International: Central Asia’s Last Oil, Gas Frontier
While Western attention in the search for hydrocarbons in the Commonwealth of Independent States has until now focused largely on the Caspian Sea, the race is heating up to exploit Central Asia's last significant body of water, the Aral Sea...
Oil and Gas Eurasia: Kazakhstan Key for Mideast Oil & Gas Sub Sector’s International Expansion Says GMMOS Group
GCC oil & gas service providers have the opportunity to gain much from Kazakhstan’s burgeoning sector and vast untapped natural resources despite a recent law designed to empower the government annul contracts with major IOCs in its bid to improve revenues stemming from exploration and production activities in the country, according to a Dubai industry source...
The Huffington Post: The Well-Connected Dictator
This is about Nursultan Nazarbayev, the brutal and corrupt dictator of Kazakhstan and friend of politicians in high places, including three current and past U.S. presidents, Dick Cheney, presidential candidates from both parties, and heads of state everywhere...
EurasiaNet Civil Society: Ethnic Kazakhs to Ponder Future Amid Tourism Boom
The Chinese province of Xinjiang is often in the news, with most media reports examining the independence aspirations of its Uighur population, as well as the Go West policy of populating the region with Han Chinese. There is another, less reported story in Xinjiang -- the erosion of ethnic Kazakh culture...
EurasiaNet Insight: CIS Minister Wrestle with Labor Migration Problem
Labor migration was high on the agenda of a Commonwealth of Independent States (CIS) foreign ministers’ meetin