Download The Recession in Kazakhstan

The Recession in Kazakhstan
Summary
Kazakh Prime Minister Karim Masimov announced June 15 that his country has no plans to borrow
money from the International Monetary Fund amid the current global recession. Kazakhstan is seeing
some financial decline; an easy explanation for this would be the collapse of oil prices since July 2008,
but Kazakhstan’s real problems will come from its banking sector. Kazakhstan’s financial woes will
allow Russia to gain a stronger foothold in the country.
Editor’s Note: This is the ninth part in a series on the global recession and signs indicating how and
when the economic recovery will — or will not — begin.
Analysis
Kazakh Prime Minister Karim Masimov said June 15 that Kazakhstan has no plans to seek help from
the International Monetary Fund (IMF). Speaking at a press conference with visiting IMF head
Dominique Strauss-Kahn, Masimov said, “Despite the global economic crisis, the macroeconomic
situation enables Kazakhstan to do without resources from the IMF.” Kazakhstan will, however, accept
“technical assistance” from the IMF in reforming its banking sector.
According to the IMF’s revised numbers, the current recession will create a 2 percent decline in
Kazakhstan’s gross domestic product (GDP) in 2009. This is a far cry from projections made mere
months earlier of 2.5 percent growth for 2009, and a total reversal from an average annual growth of
9.6 percent from 2003-2007. To fight the recession, Astana has enacted a bank rescue and stimulus
plan valued at around $19 billion (roughly 16 percent of Kazakhstan’s projected 2009 GDP). The
stimulus package will lead Kazakhstan’s budget deficit to grow to 3.6 percent in 2009.
The easy explanation for the recession and its negative effects on Kazakhstan would be that the
collapse of oil prices since July 2008, when they peaked at $147 per barrel, has damaged Astana’s
commodity export-dependent economy. A full 70 percent of Kazakhstan’s export revenue comes from
oil (by comparison, oil makes up 34 percent of Russia’s export revenue), so oil prices are certainly
crucial for the Kazakh economy and government revenue.
But Kazakhstan’s problems run much deeper than its oil wells. Its banking system is in severe crisis —
a crisis that has nothing to do with the price of oil, but threatens to severely affect Astana’s economy in
the near future. Therefore, Masimov is correct in that Kazakhstan does have considerable domestic
currency reserves (around $43 billion) to fight off the recession. However, despite the recovering oil
prices and what appears to be a solid macroeconomic situation, the country’s banks are massively
indebted to foreign lenders. Now, the only foreign lenders interested in picking up the pieces of
Kazakhstan’s financial system may be the Russian banks. With Kazakhstan’s economy in trouble, the
Kremlin will therefore gain leverage in this key Central Asian state.
Follies of the Kazakh Banking System
Kazakhstan’s banking system expanded astronomically during the post-2002 global credit expansion.
In fact, Kazakh banks’ troubles are emblematic of the broader global conflagration, brought on by the
expansion of credit after the 2001 recession.
To see the expansion of the banking system, one can look at Kazakh banks’ total assets, which grew
from a mere 5 percent of GDP in 1998 to more than 75 percent of GDP in 2008 — more than the 55
percent bank-asset-to-GDP ratio in Russia, and approaching the level found in Western economies
with fully developed banking systems. Such rapid growth should have set off many alarms, particularly
because it was made possible entirely by foreign lending, and not at all by an increase in domestic
deposits.
A growing and developing banking system is not a problem in and of itself, as credit availability makes
entrepreneurship and investments possible. Credit begets economic activity, which begets more credit.
However, since its independence from the Soviet Union, Kazakhstan has encountered challenges in
developing its banking system that are similar to the problems Russia faces: domestic credit is largely
unavailable; people are generally skeptical of keeping money in banks; and the state hoards cash from
commodity sales, keeping it unavailable to the general public through the banking system. Therefore,
banks are forced to seek foreign loans with which to complement the paltry depositor base. Without
such foreign capital, the banks lack the necessary money to grant loans to anyone.
Unfortunately for Kazakhstan, it developed its banking infrastructure by participating in financial
debauchery during a global credit free-for-all, when investor exuberance about places like Russia and
Kazakhstan was largely motivated by the availability of cheap and plentiful credit and the promise of
enormous returns thanks to the commodity export economic boom. Kazakhstan lacked the meaningful
lending standards that would have limited bad decisions during this exorbitant time of plenty, when bad
decisions lurked around every corner. Credit from abroad was so readily available that Kazakh banks
saw no end in sight to how much money they could raise and then lend to corporations and consumers
at home — consumers who were getting a taste for spending as the average monthly wage increased
from $132.60 in 2002 to $506.60 in 2008.
As a result, Kazakhstan’s banks today have extremely concerning loan-to-deposit ratios. A loan-todeposit ratio of 100 percent means that for every dollar deposited in a bank, a dollar is loaned out.
Anything above 100 percent means that the bank is lending more than it is receiving in deposits, which
means that it is financing its lending activities on loans it itself has taken out, often with foreign banks.
The German banking system, although experiencing some problems, has a very reasonable loan-todeposit ratio of 96 percent. In Kazakhstan, the loan-to-deposit ratio is 214 percent, with the largest
Kazakh bank, BTA, having a ratio of 361 percent.
Russia is in a situation similar to Kazakhstan’s. Russian banking problems are now weighing down the
Kremlin’s recession-fighting efforts, with the state looking at $400 billion of foreign loans that Russian
banks took out to fuel their domestic lending efforts. Kazakh banks are even more overexposed to
foreign loans; the Kazakh economy is less than one-tenth the size of Russia’s, but its total external
bank debt at the end of 2008 stood at $39.2 billion. Kazakhstan’s total private sector foreign debt
stands at $103 billion, equivalent to 86 percent of the projected 2009 GDP.
The problem with such an enormous external debt, aside from the obvious fact that the banks have to
be able to repay it, is that when the currency depreciates — as the Kazakh tenge did in February,
losing 22 percent of its value — banks holding foreign loans experience an appreciation in the real
value of their debt abroad. In cases where banks made loans in foreign currency straight to the
consumer, much like banks did in Central Europe, consumers are in danger of not being able to repay
their loans because of the appreciation of the loans’ value. In both cases, the banks are on the hook
for loans that either they or their consumers can no longer repay.
Despite the dangers of devaluing the tenge, the Kazakh government had to do it. Kazakhstan’s
economy is intimately linked to the Russian economy, so when the Russian ruble began to depreciate
from August 2008 onward, reaching 35 percent depreciation by February, Kazakhstan was forced to
follow suit. Kazakh exports to Russia account for about a third of Kazakhstan’s GDP, and remittances
from Kazakh laborers in Russia account for 6 percent of GDP. The ruble depreciation could have hurt
the Kazakh economy because it made Kazakh exports uncompetitive on the Russian market and
threatened to depreciate the value of migrant laborers’ remittances, the source of income for many
families in Kazakhstan.
The 22-percent tenge devaluation essentially has appreciated loans taken out in foreign currency,
whether by Kazakh financial institutions or corporations/consumers, by an equal amount. This has
created a situation that threatens to inundate Kazakh banks with nonperforming loans as corporations
and consumers default on their increased debt burdens.
Opportunities and Dangers in Kazakh Bank Restructuring
To pre-empt a likely bank collapse, the Kazakh government nationalized two of the largest privately
held banks in Kazakhstan — BTA (the country’s largest bank) and Alliance Bank (the country’s fourthlargest bank) — the day before the tenge was devalued.
Through the nationalizations, the banking crisis will increase Kazakh President Nursultan
Nazarbayev’s control over the financial sector in the short term. Nazarbayev’s grandson, Nurali Aliyev
— who at age 24 is the chairman and majority shareholder of Kazakhstan’s seventh-largest bank,
Nurbank AO, and is considered (albeit not publicly) a potential successor to Nazarbayev — was
appointed deputy head of the Development Bank of Kazakhstan. In that position, the president’s
grandson is essentially in charge of the bank rescue package and the stimulus plan, valued at roughly
$19 billion. He will also be in charge of how the country’s $43 billion of reserves are used to fight the
crisis. This will allow Nazarbayev to further consolidate his control over the financial system.
As part of the consolidation efforts, the government forced the chairmen of both BTA and Alliance
Bank to resign; the two now face corruption charges. Former BTA chief Mukhtar Ablyazov, who has
fled Kazakhstan, has said the government takeover of the bank was politically motivated and has
urged Western creditors involved with any loan restructuring efforts to boycott them. Much like Moscow
does in times of crisis, Astana is using the recession and the uncovering of corruption as “legitimate”
reasons for sackings and legal attacks against executives — including Ablyazov and the heads of
energy firm KazMunaiGaz and uranium company Kazatomprom. Thus far, Nazarbayev has continued
running Kazakhstan as a dynastic monarchy by making sure that various family members and
clansmen have stakes in almost every important sector in the country.
Family politics aside, Kazakhstan does not have enough cash to throw at the banking system, as it
must also think about defending against potential future depreciations of the tenge and stimulating the
economy during the recession. The $43 billion in Kazakh government coffers is substantial, but so is
the Kazakh banks’ foreign debt of $39.2 billion. Kazakhstan’s financial situation allows Russia — which
is well-capitalized, with approximately $600 billion in various government coffers — to move in on its
neighbor’s financial system. With no real alternative, Nazarbayev will have to pave the way for BTA to
be acquired by Kremlin-owned Sberbank, the largest bank in Russia.
Russia, however, has designs on Central Asia that go further than investing in the Kazakh banking
system. Russia is in the process of consolidating power on its periphery, extending its sphere of
influence to the borders of the former Soviet Union. Kazakhstan, as the largest country in Central Asia
and Russia’s only direct link to the other four Central Asian republics, is a key part of that
consolidation. By entering Kazakhstan’s financial system through state-owned banks, the Kremlin will
be able to affect the Kazakh economy directly, especially if the sector’s current size and influence on
the economy can be maintained. By controlling who receives loans and whose debts are rolled over,
the Kremlin could have enormous direct political and economic influence over every facet of the
Kazakh economy.
And the recession is giving Russia a chance to expand its influence in more than Kazakhstan’s
banking system. Moscow is also looking to become more entrenched in the Kazakh energy sector by
offering capital that foreign investors are currently withholding because of the global financial crisis.
Russian oil company LUKoil has purchased BP’s stake in the Caspian Pipeline Consortium project in
Kazakhstan, and in February, Moscow gave Astana a $3.5 billion loan from state-owned
Vnesheconombank with which to purchase Russian products.
Russia is not the only regional power with interest in Kazakhstan, however. China, which hopes to
expand its energy links to the region, agreed to give Kazakhstan’s oil and natural gas industry a $10
billion loan in April and pledged another loan at the Shanghai Cooperation Organization summit on
June 16. While the Chinese loans are given with no strings attached — Beijing is content to expand its
influence in Kazakhstan through what are essentially gifts — the Russian loans give Moscow the
opportunity to concretely expand its influence in Kazakhstan’s energy and financial sectors.
At one time, Kazakhstan was seen as a bastion of Western influence in Central Asia; the country of 16
million people received more foreign direct investment from the West than Russia did. This afforded
the West great influence in Kazakhstan. The global recession, however, has allowed Moscow to
refocus on the strategic Central Asian country, and to use its well-capitalized state coffers to pull
Astana back under its influence.