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KAZAKHSTAN: Kazakh Bank Lost Billions in Western Investments

by Landon Thomas Jr.New York Times
November 27th, 2009

Yuri Mashkov/Itar-Tass

Mukhtar Ablyazov, BTA's former chairman, is under investigation over the loans.

In the last few years, big banks have found many surprising ways to lose billions of dollars by making loans that turned sour. But few can match the odd tale involving Kazakhstan and a little-known bank that many Western financiers wish had remained so to them.

From 2003 to 2008, the likes of Credit Suisse, Morgan Stanley, Royal Bank of Scotland, ING and others funneled more than $10 billion in loans into Kazakhstan’s largest bank, Bank Turalem, as the large Central Asian country enjoyed a growth boom spurred by its rich deposits of oil and natural gas.

So many of these loans are now bust that many foreign banks are facing write-offs of as much as 80 percent of their value, prompting investigations into why the loans went so bad so fast, according to officials at Bank Turalem, which was taken over by the government earlier this year. Hoping to become the dominant bank in the region, BTA, as the bank is known, cast its eye well beyond Kazakhstan and lent billions of dollars to finance vast real estate projects in Russia and Ukraine, as well as offshore companies with vague business plans and no trading histories to speak of, according to executives at BTA who did not want to be identified because of the sensitivity of the matter. The money went to companies with names like Best Catch Trading and Sandown Holding, based in places as diverse as the Seychelles, the British Virgin Islands and England, that offered up little in the way of collateral, according to these executives.

Among other things, prosecutors in Kazakhstan and a team of international lawyers and accountants hired by Bank Turalem are investigating whether the foreign banks may have unwittingly financed a scheme by BTA’s former chairman, Mukhtar Ablyazov, to direct between $8 billion and $12 billion worth of BTA loans — about half of the bank’s loan book — to companies that he secretly controlled, according to lawyers representing BTA as well as prosecutors in Kazakhstan.

Mr. Ablyazov denies the allegations, insisting that the loans were proper and that the investigation is politically inspired because he has been a critic of the government.

Mr. Ablyazov is a longtime political opponent of Nursultan Nazarbayev, Kazakhstan’s authoritarian president, and he fled Kazakhstan for London just days before the government took over BTA this February, fearing a government crackdown.

Whether the investigation reveals the foreign banks to have been careless, naïve or hoodwinked about how the loans would be used, the losses point to a recurring problem for supposedly smart and sophisticated international bankers. In past decades, international banks have rushed headlong into hot markets like Mexico and Argentina, and later into Thailand and Russia, only to suffer huge losses.

Ignoring or forgetting lessons learned from those debacles, institutions poured billions of dollars to help finance property developments in Ireland, the global expansion of Icelandic banks and subprime mortgages in the United States, only to see much of that money evaporate.

“Capital markets have no memories,” said Richard Portes, a professor of economics at the London Business School. “Bankers simply charge premium spreads high enough to take defaults and still end up, on average, with profitable lending.”

Currently embroiled in arduous talks with BTA over restructuring their debt in hopes of trimming their losses, foreign bankers claim they did their homework before making the loans, although none would publicly discuss their relationship with BTA and its controversial chairman.

Deloitte, the accounting firm that is advising a steering committee representing the foreign banks, did not respond to a request for comment. In a statement, Credit Suisse, which lent close to $1.1 billion to BTA, the most of any bank, said its current exposure to BTA was immaterial to its financial condition and that “all transactions with BTA went through established due diligence procedures.” But, while BTA may have been the flavor of the day for international lenders, questions were being raised about it closer to home.

“BTA was one of the least transparent banks here, and there were a whole bunch of transactions prior to the seizure that indicated extremely lax banking,” said Michael Carter, the chief executive of Visor Capital, an investment bank based in Kazakhstan. “But Kazakhstan was very sexy at the time, and foreign banks were just shoveling in money, so much so that that banks here had more money than they knew what to do with.”

Mr. Ablyazov, 46, a small, energetic man who made his first fortune importing cars from Lithuania, maintains that the loans that BTA made were legitimate. He claims that the $9 billion charge against profits that the bank declared after he left — as well as the government takeover of the bank — represent the final stage of a plot by President Nazarbayev to wrest BTA from him.

“We have been a profitable and transparent bank, with $538 million in profits in 2007,” said Mr. Ablyazov in an interview through an interpreter in London.

As he sees it, the robust support he garnered from international banks was an endorsement of his plan to remake BTA in the image of HSBC, the hugely successful international bank that grew from its roots as a colonial bank financing trade between China and Britain. He scoffs at the allegation that his ultimate aim was to siphon off profits.

“We would do all this just to misdeal money? That would be a strange criminal to make a plan like this,” he said.

It may be some time before investigations determine if Mr. Ablyazov did anything illegal at BTA or is just the target of a political witch hunt.

But BTA has already filed a civil suit against Mr. Ablyazov on a narrower claim in a British court that he misappropriated $295 million in bank funds last year; a judge ruled this month that the charges were serious enough to support the continued freezing of his assets.

What is not in dispute is that, even by the loose standards of the credit boom, few banks lent as aggressively as BTA. Between 2003 and 2007, the amount of its loans outstanding grew by an extraordinary 1,100 percent. Like many other banks in less developed countries, BTA relied heavily on foreign funds, as opposed to customer deposits, to propel its loan growth — so much so that its ratio of loans to deposits peaked at 3.6 to 1 in 2007, one of the highest anywhere in the world.

Mr. Ablyazov maintains that BTA would have paid off its loans had he remained at the helm and that the enormous charge-off was a ploy by Mr. Nazarbayev to seize control of BTA and damage a political rival’s reputation.

Lawyers and BTA executives contend that many of the offshore companies were controlled by Mr. Ablyazov, and BTA lawyers are now trying to determine whether the loans were used to provide billions of dollars to Mr. Ablyazov’s own real estate projects — in particular, a 4,700-acre development outside Moscow in which BTA has a $1.5 billion credit exposure.

Although his title was chairman, Mr. Ablyazov took a hands-on approach when it came to the bank’s lending, even sitting on the regional credit committee that oversaw many of the questionable loans.

In its 2008 report on BTA, Ernst & Young, the bank’s auditor, highlighted this unusual arrangement, citing it as a conflict of interest that “potentially contributed to the issuance of loans to offshore companies, which became uncollectible in 2008.”

Mr. Ablyazov disputes this claim, saying that he had headed this committee for three years without complaint from his auditor, and that the bank’s credit operations were transparent.

Nikolay Varenko, the deputy chairman of BTA and the executive leading the bank’s internal investigation into Mr. Ablyazov’s activities, disagrees.

“The bank was like an investment fund for his own personal projects,” he said.

For Mr. Ablyazov, the question of how he deployed BTA’s loan book is just the latest in a series of battles he has been waging with President Nazarbayev.

And while he may well have his enemies, few question his bravery.

In 2001, he and several other reform-minded businessmen founded the Democratic Choice of Kazakhstan Party, the first opposition party to challenge Mr. Nazarbayev on the ground that he and his network of family insiders were monopolizing economic and political power.

A year later, he was sentenced to six years behind bars on charges related to his time as head of the government electricity company. Mr. Ablyazov claims the charges were politically motivated. He served a little over a year in Kazakhstan prison, where he says he was subjected to numerous beatings and other forms of torture.

After pressure from international human rights organizations, Mr. Ablyazov was released in 2003. In 2005 he took full control of BTA.

These days, he rents a 15,000-square-foot mansion on Bishops Avenue in London, one of London’s most exclusive neighborhoods, where security guards stand day and night.

Unlike other oligarchs here, Mr. Ablyazov keeps a low profile in London. He says that his ultimate aim is to overthrow Mr. Nazarbayev, even though he could be caught up in British courts for years to come.

“I am just here temporarily,” he insisted. “In the end I will return to Kazakhstan.”





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