Will the global economic crisis bring down the “Kazakh Miracle”?

About a month ago, I spoke with a financial consultant close to the Kazakhstan market who said that things looked very bad. He said that the major banks, especially BTA (Bank Turan Alem) and KKB (KazKommertz Bank) were in serious trouble. He thought they were beyond “bailout,” and that the country was headed for serious trouble. This situation, of course, is not unique. Around the world, financial institutions are crumbling as governments try to find ways to prevent them from failing outright. In Kazakhstan, however, this financial crisis could potentially spin out of control, especially coupled with the drop in oil prices.

Monday, the first signs of a serious banking crisis became apparent in Kazakhstan as the government effectively nationalized the country’s largest bank, BTA, by buying up a large majority of its shares. BTA’s chairman, Mukhtar Ablyazov (of DCK fame), was also relieved of his position, an act that led him to lash out against the government stating that “the actions taken toward BTA Bank by the government are arbitrary and state theft.” If the financial consultant with whom I spoke a month ago was correct, however, this was not as much a political move against Ablyazov as it was an act of desperation to forestall an impending crisis. Furthermore, the government buy-out occurred in the midst of speculation that Russia’s state owned “SberBank” was poised to buy BTA out, and the Kazakh government would likely want to bear the burden of the bank’s problems before allowing its largest financial institution to be taken over by Russia.

As the news of the BTA buy-out hit the international financial sector, the Fitch rating agency downgraded Kazakhstan’s sovereign rating to BBB-. While Fitch noted that Kazakhstan’s oil fund had set aside 5 Billion dollars to help the country’s banks weather the financial crisis, it was concerned that this may not be enough. Besides BTA, the Kazakhstan government is also pumping money into Alliance bank, the country’s third largest lender, and is considering buying a majority of its stakes. Meanwhile, there is little talk about what will happen to KKB and Halyk Bank (numbers two and three in the sector), which like BTA have substantial international investments that must be losing money at a rapid rate. Both received 1 Billion dollars in bailout money each from the government in January, but it is not clear that they are not still in trouble. An interview with the Executive Director of KKB this week did not provide much more clarity. While he was careful to not alarm people about the banking sector’s future, he did suggest that things remain tenuous and that more would likely need to be done to avert a crisis. Meanwhile, rumors abound that Russia’s “SberBank” may now be interested in buying out Halyk Bank.

The upheaval in Kazkahstan’s banking sector raises serious questions about the future of the country’s economy and its political stability at the same time that it is poised to increase its international visibility as the president of the OSCE. To Kazakhstan’s credit, the government has worked hard to facilitate the development of a strong banking sector, and the country survived the financial crisis that hit Russia in 1998 with few scars. This time, however, the affect will likely be more severe. What was once called the “Kazakhstan miracle” may be in serious jeopardy.

Politically, upheaval in the banking sector could create serious waves. First, the long tenuous alliance between the government and the country’s financial oligarchs could be in jeopardy. This could lead to serious intrigue in the political arena. Meanwhile, the population has already felt the affects of the crisis. The housing market bottomed out over a year ago, and people’s real estate investments took a serious hit. The evolving banking crisis is already adding to people’s anxiety as jobs are in jeopardy and prices are on the rise. A friend in Almaty has told me that this winter has brought back a certain meanness to the streets of the city that has not been visible since the late 1990s. Gypsy cabs that passed people by on the street only a year ago are beginning to fight for clientele, and few people are out on the streets at night. While the people of Central Asia have incredible tolerance for suffering, the people of Kazakhstan have enjoyed rising economic expectations over the last decade. Nothing creates more popular political discord than rising expectations not met.

Meanwhile, President Nazarbayev has written a thought piece on the crisis in “Rossiiskaya Gazeta” that offers his opinions on the ways out of crisis, most of which depend heavily upon Russia, China, and the SCO to champion his “Plan for Radical Renewal” to the international community. In doing so, he suggests that Kazakhstan, as a bridge between east and west, could play a critical role in resolving the entire global economic crisis. While these lofty ideas born of Nazarbayev’s “Eurasianism” are interesting indeed, they could soon sound like Nero’s violin notes while Rome is burning. For the sake of the people of Kazakhstan, and the rest of Central Asia for that matter, let’s hope not.