KAZAKH BANK LOSES BILLIONS IN WESTERN INVESTMENTS

From 2003 to 2008, the likes of Credit Suisse, Morgan
Stanley, Royal Bank of Scotland, ING and others funneled more
than US$$10 billion in loans into Kazakhstans 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 BTAs former chairman, Mukhtar Ablyazov, to
direct between US$8 billion and US$12 billion worth of BTA
loans about half of the banks 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, Kazakhstans 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, naive 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 US$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 rivals 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. Ablyazovs 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 banks lending, even
sitting on the regional credit committee that oversaw many of
the questionable loans.

In its 2008 report on BTA, Ernst & Young, the banks 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 banks credit operations were
transparent.

Nikolay Varenko, the deputy chairman of BTA and the
executive leading the banks internal investigation into Mr.
Ablyazovs 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 BTAs 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 Londons 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. In the end I will return to
Kazakhsta," he added.

(TCA) lm

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