Alliance Bank: Clear as mud

Former CEO of Alliance Bank and Eurasian Bank Zhomart Yertayev and his deputy Aleksei Ageyev have been arrested last weekend in connection with several deals sealed during their tenure at Alliance, the KazTAG news agency reported on Monday.

The arrests came months after Alliance first reported it had discovered unrecorded guarantees totaling $1.1 billion which caused the bank to restate its assets and effectively forced it to default on its foreign and domestic debt. At that time, neither the bank nor Kazakhstan’s financial authorities provided details on the nature of the said transactions. It was only known that the guarantees were to two unnamed Russian banks as collateral for loans which the two banks issued to unknown offshore entities and which were eventually not repaid.

The wheels have begun to turn in June, when Kazakhstan’s Prosecutor General’s Office began a probe into Yertayev’s and Ageyev’s activities at the helm of Alliance, after the Financial Supervision Agency (FSA) suspended the bankers from their new positions as the CEO and deputy CEO of Eurasian Bank, another Kazakh lender. While not directly linking the executives to the $1.1-billion guarantees, the FSA cited insufficient disclosure of several deals by Alliance during their tenure at the helm of the lender as the reason for their dismissal.

At that time, Grigoriy Marchenko, the chairman of the central bank and elder statesman of Kazakh banking, strongly condemned the “serious violations of Kazakhstan’s banking legislation” committed at Alliance and, possibly as a sign of things to come, suggested the wrongdoings at the bank did not end with Yertayev and Ageyev.

Then in July, without providing any details, the financial police leaked to the media that Margulan Seisembayev, Alliance’s chairman and main shareholder, had fled the country. Seisembayev himself vigorously denied the allegation and announced that he would return to Kazakhstan at the conclusion of his annual vacation on August 30.

The dealings

Documents, leaked to local media at the beginning of August, have shed additional light on the mysterious guarantees. If proven true (Alliance itself admitted the documents were authentic), they would implicate Yertayev, Ageyev and Seisembayev in a fraud scheme which led to a near-collapse of Kazakhstan’s fourth largest bank and cost its shareholders $1.1 billion.

According to the documentation, between 2005 and 2007, Alliance kept $1.1 billion in Treasury bonds with the subsidiaries of Russian investment banks Renaissance Capital and Metropol, a fact fully disclosed on its financial statements. However, unbeknownst to investors and regulators, Alliance used the same Treasuries as collateral for loans issued by the two Russian banks to offshore companies registered on British Virgin Islands and Samoa. A failure of the offshore companies to repay their loans would (and did) give the banks the ownership of Alliance’s Treasuries. The existence of the second part of the deal only surfaced after the state took control Alliance in February of this year and conducted a full-scale audit of the bank’s financials.

As details began to pour out, Seisembayev, while still apparently on vacation, admitted the knowledge of the transactions in a letter to the Interfax news agency (RU) but denied his involvement and maintained that the deals were concocted by Yertayev and Ageyev.

According to Seisembayev, Yertayev and Ageyev used the loans raised from Renaissance and Metropol to increase the bank’s capital, as its existing shareholders including Seisembayev were unable to do so. Of the entire amount, $636 million were used to increase Alliance’s equity capital, $160 million to repurchase bad loans, $50 million to cover losses, $60 million to pay interest to Metropol and Renaissance, while the remaining approximately $200 million were used to repurchase the bank’s shares.

Seisembayev did not disclose the relationship of the four offshore companies with Alliance, neither did he say why the deals were not disclosed in the bank’s financial statements.

Seisembayev’s letter evoked strong reactions from Yertayev and Kazakh financial authorities, assigning blame to different sides but offering few clues to clear the mud surrounding the case. The arrest of the two former Alliance executives provides another opportunity to shed some light on Kazakhstan’s murky banks but observers and investors should not hold their breadth.

By Silk Road Intelligencer.