It is like Doctor Faustus' pact with Mephistopholes: immediate benefit to be paid for in treacherous longer-term loss. But should the pact, preliminarily agreed upon between the current state-controlled board of BTA Bank, materialise, those who created the current mess will still be in charge of the process getting out of it. A mere glance at BTA's figures still looks very much like an anti-Hamlet scenario - with the Danish royalty surviving, Duncan holding the strings from abroad and no Fortinbras available to make a fresh re-start. Will the rest be silence...?
As noted in the first episode of what starts looking more and more like a business-detective, the latest craft compromise has been "agreed upon" between the present-day board of embattled BTA Bank and a negotiation team on behalf of its major creditors in Europe and America, as of December 8 this year. The creditor's negotiations committee has no carte blanche and their approval (or disapproval) is not to be expected before late January. The current state of affairs comes down to a proposal from BTA as of mid-December still under consideration by its creditors, the content of which has led to confusion in the media. According to the Financial Times (see first episode) part of 7.7 billion US dollar in existing debt would be converted into a package consisting of fresh debt in corporate bonds, a 15 per cent stake in BTA, as well as so-called recovery notes which entitle holders to receive a share in income from liquidation of assets. The main conclusion after reading various reports as well as comparing them to one another is that the figures given simply fail to add up.
The least confusing report on the December 8 declaration came from Bloomberg. "BTA Bank, the biggest Kazakh lender to default this year, reached a compromise with bondholders that will give them cash and new securities equal to about half of the $11.6 billion they are owed," the agency wrote the same day. "The package is equal to $5.57 billion, or 48 per cent of outstanding principal and interest, according to a BTA statement released today. Creditors will also receive recovery notes allowing them to profit from the sale of assets and 15 per cent of BTA's equity. Kazakhstan's National Wellbeing Fund will own 85 per cent of BTA after the restructuring. Creditors opposed a September proposal under which some bondholders would have received a cash payment equal to 17.75 per cent of face value, with none of the remainder rescheduled. [...] BTA plans to pay about $1 billion in cash to the creditors and issue $2.3 billion of new senior debt and about $797 million of subordinated debt, according to the agreement. The lender will also provide so-called original issue discount debt instruments with an initial value of $763 million and final value of $1.636 billion, to export credit agencies and some eligible trade finance creditors, BTA said. A group of senior creditors will receive 10.5 percent of BTA's equity and subordinated financial creditors will receive 4.5 percent under a so-called junior package, according to the agreement."
The recovery notes are the key to creditors' hopes to recover a bit more in cash of the would-be deal's non-cash elements. The notes allow reimboursement of income on asset sales before Kazakh tax authorities can lay any claim on them. Even new bonds offer little hope of substantial yield since as long as BTA keeps defaulting on bond repayment and interest it is hard to see how such bonds could sell on open markets at surplus sales value even with the generous-looking discounts offered. Worse: creditors in BTA proper have been excluded from money that could be collected through liquidation of the bank's subsidiary Temir Bank, inheritor of the Kazakh branch of the Soviet-time railway fund through which orders used to be booked, pension and other social security premiums collected and wages and pensions paid to railway employees. As in the case of BTA proper, Temirbank has been draining on its equity as losses soared over the summer of this year. The bank defaulted on three bond issues, as compared to two for BTA which paid up for most other outstanding bonds thanks to cash injections from the government.
And even then, there is worse: BTA's offshore holding base in Rotterdam, The Netherlands, created by Ablyazov, has also started to default on bond pay-outs. Yet, there are no figures on the holding's financial performance available - in violation of the rules imposed by KASE on which it remains quoted. The Almaty stock exchange which trades its bonds mentions BTA as "parent company" without giving any further details, thereby suggesting that there are no other shareholders.
Temir Bank is not the only BTA subsidiary the ownership of which has become questionable. Thus, BTA Ukraine, claims that it is currently majority-controlled by "a group of Ukrainian and foreign investors" with BTA proper owning no more than 9.99 per cent in the enterprise - with the latter claiming a 49.99 per cent stake in it. It looks very much indeed that Ablyazov and friends have simply sold the difference to existing and/or new partners while funneling the money out of reach for BTA Kazakhstan. This would leave BTA the parent company with a claim on the cash - not on the shares.
It also reduces BTA's stake in Oranta, one of Ukraine's biggest insurance companies, in which BTA Ukraine bought a 25-per-cent-plus-one-vote stake back in 2006 for the equivalent of $100 million. BTA Kazakhstan's new board claims that it is entitled, through BTA Ukraine and a number of affilates, to 85 per cent in Oranta. According to Kiev-based news correspondents, the insurer is now under control of a company called IMG Holding, in turn controlled by Oleg Spilakh, a former executive at the time of Ablyazov and colleagues at the helm of BTA. How exactly he has been able to impose himself on Oranta has not been disclosed.
It will be hard to imagine how BTA could put enough pressure on Ukraine's legal authorities to yield what it claims rightfully belong to it. Political arm-twisting plays a role here: Ukraine generally considers Kazakhstan an ally of Moscow, with which it remains at odds. This may well trigger BTA to shift its priority to recovering stolen assets in the Russian Federation and Belarus. The fact that negotiations with Sberbank of Russia to take over the incredible mess called BTA altogether from both the state and the aforementioned claimant banks in western Europe can hardly be strange to that thought.
The burning question is what the Ukrainian, Belarus and Russian authorities, courts of law in particular, will decide concerning BTA assets abroad. Kyrgyzstan's judicial authorities have already decided to follow the British example (see below) and frozen all BTA assets in the country with the aim to give creditors and other claimants the opportunity to defend their demand in court and eventually obtain their bait. The chances that the Russian will do the same thing will considerably increase should Sberbank take over BTA. And what is at stake for BTA on Russian territory exceeds all other offshore assets by far.
Apart from a number of plazas downtown Moscow behind which Kazakh capital is supposed to stick, little is known about Ablyazov's ventures in the Russian Federation - with one exception. It must have been at the time Ablyazov thought he was nearing the summit of wealth and glory as he broadly publicised a project by Eurasia Logistics, an enterprise under the umbrella of Eurasia Investment and Industrial Group. The ribbon of the first phase of the plan was cut in 2007 with the opening of a freight forwarding, storage and transit centre on the edge of Yekatarinaburg. Once the three stages would be realised, close to 600,000 square metre of "Class-A" (in Ablyazov's terminology) commercial space would be available to corporate users. Subsequently, another half million square metre would be available in two more logistics centres, one on the other side of Yekatarinaburg and another one close to Chelyabinsk. In all, in the order of 70 billion rouble was set to be invested in the mega-project.
At the time, observers already noted exorbitantly high valuations of space value per square metre for the projects in southwestern Siberia. This and little else determined the volumes of credit issued by BTA - which points at the global pattern of property-overvaluation which eventually triggered the subprime syndrome. But in the case of BTA, there has been more to it. As of end-2007, BTA's consumer plus corporate credit to deposit ratio had reached 3.6 to one. This was more or less in accordance with the overall pattern shown likewise by other Kazakh banks such as Kazkommertsbank and Halyk Savings Bank. What they also had in common was an outlet through which they could funnel money out of Kazakhstan without having to reckon with limits on capital flight. It is here that Kazakhstan, presumably deeming that this was the way to do things (which, for the bulk of internationally operating banks around the globe it was - and still is), virtually opened the door for massive embezzlement.
All this still leaves the question open why large banks with a long tradition such as Commerzbank, Fortis, ING, ABN AMRO (now Royal Bank of Scotland) would go for a deal which not only sacrifices 52 per cent of their (meaning their ever-so-confident deposit holders') engagements into BTA but which also includes co-ownership in a parvenu bank, established and until recently majority-owned by a car dealer from a country that two decades ago had yet to come into existence? A devil's advocate tends to put forward the most awkward questions. Fact is that ABN AMRO and Fortis are no more these days with billions of euros in state support still hanging in the air. The RBS had to be bailed out by the British government last year for well over a billion Sterling. This means that not only European deposit holders have been pouring their money into the bottomless pit controlled by Ablyazov & associates, but British, Dutch and Belgian taxpayers as well. In Kazakhstan, a similar picture is the result. Each side, though, is keen on having the other side bleed the most for it.
The most stunning things is that booming oil prices triggering heaps of cash for those producing and selling it to much larger volumes than they could possibly imagine what to do with resulting in them falling straight into the hands of ruthless investment sharks is something that happened not too long ago. The key tool in the game was the Bank of Credit and Commerce International, which emerged in the mid-1980s and collapsed little more than half a decade later. Though officially the property of the Sultan of Abu Dhabi, BCCI was in fact controlled by a dodgy combination of wheelers and dealers holding a colourful variety of nationalities including Pakistani, Saudi, Egyptian, Palestinian, Israeli (pas trop etonnes de se trouver ensemble), European, American and Latin-American. The Brotherhood of Cash.
In the end, BCCI proved to be nothing but a global money laundering machinery. It was exposed, or rather singled out to be exposed since there are bound to be hundreds of its kind in the world, because it had got too big for its boots. In this respect, Ablyazov's exotic investment holdings as mentioned before were originally more discrete and thereby more practical. The fact that in the end they are now falling through betrays the exhibitionism too successful culprits tend to fall into. After all, Pablo Escobar may well have taken himself for a modern-time Robin Hood. But then, his end was far from happy unlike his medieval English example. The main reason is that he had no Richard Lion's Heart to turn to and plenty of Sheriffs of Nottingham to fight.
Meanwhile, both sides in the battle have taken up legal weapons aimed at one another. While Ablyazov and partners have opened civil suits against BTA under its new board, the latter has filed criminal procedures against the former management team. This could bring much into the public domain concerning what has really happened and how it happened. Three defendants plus one incriminated business entity had appealed to a court decision in summer this year which ruled that they could not call in the "privilege against self-incrimination" in the case of "entering or becoming concerned in an arrangement which facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person". The three persons in question were Mukhtar Ablyazov and his associates Roman Solodchenko and Zhaksylyk Zharimbetov, whereas the enterprise referred to is a shell company called Drey Associates Ltd. The latter company is supposed to have been the key tool in an embezzlement in the order of 362 million US dollar. Further details have yet to be disclosed.
It remains doubtful, however, whether the disclosures in England's courtrooms will give the full picture of Mukhtar Ablyazov's network of wheelings and dealings. Nor is it likely to be upheld that the Ablyazov gang acted merely on its own behalf. The next, though far from concluding, episode of what now appears to have been part of a much more widespread web of capital thievery put in place by an incredible class of long-fingered gentry is meant to lift some veils on how the three main scandals, meaning BTA, Kazatomprom and Rakhat Aliev's conglomerate hang together. And even then, this will leave the question how on earth all this could have happen in a member state of what till not so long ago was supposed to be the thoroughest-organised state structure in the world. Could it be that the Soviet Union was never that well organised to begin with and that its image of a totalitarian police state was merely fabricated by western propagandists...?
KEY FINANCIALS OF BTA AND TEMIRBANK AS OF 01/10′09
(amounts in million Kazakh tenge)