Aug. 2 (Bloomberg) -- In a Muslim cemetery on a hill above Almaty, Kazakhstan’s largest city, a bronze bust of Erzhan Tatishev faces away from the headquarters of the bank he once led. It’s a fitting final gesture for BTA Bank JSC’s first chief executive officer, who died of a gunshot wound while hunting wolves near the Kyrgyzstan border in 2004.
The bank, once the country’s largest, defaulted in 2009 on more than $12 billion of debt held by investors, including Credit Suisse Group AG, HSBC Holdings Plc, JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc. Two former CEOs are in hiding, Bloomberg Markets magazine reports in its September issue. And Mukhtar Ablyazov, Tatishev’s successor, is facing criminal charges in Kazakhstan and lawsuits filed by BTA in the U.K. alleging he embezzled more than $5 billion -- claims he has called fabricated.
Ablyazov, 49, the bank’s former chairman, fled to London in 2009. He dropped out of sight this year after a judge there sentenced him to 22 months in prison for lying about his assets and moving funds in violation of a court order. The Almaty-based bank, taken over by Kazakhstan’s sovereign-wealth fund after Ablyazov disappeared, claimed he siphoned money from the firm using fake loans, backdated documents and offshore accounts.
He left behind a 100-acre (40-hectare) estate in the English countryside and a London mansion, each valued at about 20 million pounds ($31 million); a home in Almaty with an indoor pool and a screening room; and 750 shell companies that prosecutors say he used to invest in oil production, property development and agriculture. The scandal and a second default this year have undermined investor confidence in the largest energy producer in Central Asia.
“This is a national issue because the sovereign-wealth fund owns 80 percent of the bank,” says Raymond Zucaro, who helps manage about $230 million of emerging-markets assets, including BTA bonds acquired a year ago, for Newport Beach, California-based SW Asset Management LLC. “It’s so annoying. Kazakhstan has the ability to pay with all its natural resources, so we are not going to take this lying down.”
The turmoil at BTA didn’t stop after the bank was taken over by the government of President Nursultan Nazarbayev, 72, who has ruled the country, a former Soviet republic, for 22 years. BTA restructured its debt, only to fall behind again.
In January, CEO Marat Zairov quit for health reasons amid accounts by former executives that he was assaulted by a subordinate. That same month, the bank missed a payment to bondholders, and it defaulted in April on $5.2 billion of recovery notes.
“BTA is part of the family business in Kazakhstan, and it’s a dysfunctional family,” says Eric Kraus, a fixed-income manager in Moscow who lost money after a Russian company linked to Ablyazov defaulted. “It reminds me of Russia in the 1990s.”
Kazakhstan, which is four times the area of Texas, has about 3 percent of the world’s proven oil reserves and 1 percent of its gas. It ranks 120th out of 183 nations in a list based on Transparency International’s 2011 Corruption Perceptions Index, behind Mali and Bolivia. Graft is pervasive in banking, with every seventh borrower paying a bribe to secure a loan, according to a February poll by Sange Research Center in Almaty. BTA was ranked as the country’s fifth most corrupt among 23 commercial lenders.
The economy expanded by an average of 10 percent a year for 10 years, spurred by high oil and natural gas prices, before slowing in 2009.
It was the promise of more oil -- the biggest discovery in a generation, at Kashagan field in the Caspian Sea -- that enabled BTA to borrow $15 billion, most of it in foreign currency, to finance industrial and real-estate development, including Eurasia Tower, a 75-story building under construction in Moscow. Western investors, seeking to ride the next wave of cash coming out of the region, loaded up on Kazakh bank shares and bonds.
The Kashagan field, being developed by Italy’s Eni SpA, Exxon Mobil Corp. and Royal Dutch Shell Plc, was supposed to come online in 2004, producing 1.5 million barrels a day and doubling Kazakhstan’s output. The target date came and went, as did a second one in 2008. Oil company executives now expect that Kashagan, whose development costs almost doubled to $46 billion from initial estimates, will start pumping next year.
The delays, along with a global credit freeze and the collapse of a Kazakh real-estate bubble, spelled trouble for BTA -- and for Ablyazov. The former energy minister, a graduate of Moscow Engineering Physics Institute, became chairman in 2005, after Tatishev’s death, of the lender then known as Bank TuranAlem.
It was a remarkable change of fortune for a man who, four years earlier, had helped found opposition party Democratic Choice of Kazakhstan. Ablyazov was arrested in March 2002 while serving as chairman of Almaty-based Temirbank JSC and sentenced by a Kazakhstan court to six years in prison for embezzlement. He spent a year behind bars, where he was allegedly tortured, according to a May 2004 Amnesty International report, before being pardoned by Nazarbayev in exchange for a pledge to stay out of politics and a confession that his deeds had damaged the country’s image. He moved to Moscow, only to return a year later to start his new job.
The one-time prisoner had big plans for the bank, which had been privatized after the forced merger of two bankrupt state-owned institutions. He expanded into other former Soviet republics such as Belarus and Ukraine; talked about becoming a Pan-Eurasian lender with headquarters in Russia’s capital and a listing in London; and started developing a community for 150,000 people in the Moscow suburb of Domodedovo, replete with stadiums, schools, hospitals and a movie studio.
“There were plans to buy a U.S. bank to use as a platform in New York and Los Angeles to attract immigrants from the former USSR,” says George Iosifyan, a BTA board member from 2007 to 2009.
As long as oil prices remained high, as they did even after credit markets began tightening in 2007, BTA was able to repay maturing debt. But when prices sank by two-thirds in the three months following the September 2008 collapse of Lehman Brothers Holdings Inc., corporate balance sheets contracted, cash evaporated and depositors fled.
So did Ablyazov. In February 2009, days after he left for the U.K., Kazakhstan devalued the tenge by 21 percent, adding to the burden of all banks that had borrowed in foreign currency, especially BTA, the most indebted. That’s when the lender was taken over by sovereign-wealth fund Samruk-Kazyna. In March of that year, after BTA CEO Roman Solodchenko also vanished, prosecutors began seizing Ablyazov’s assets and issued arrest warrants for the two men.
BTA defaulted in April. Temirbank, which was acquired by BTA after Ablyazov became chairman, followed in November, after missing payments on $1.4 billion of debt.
“The banks, especially BTA, became a concentration of swindlers and thieves,” President Nazarbayev said at the time.
Creditors agreed in a 2010 restructuring to accept 44 cents on the dollar, splitting $1 billion in cash, new bonds, an 18.5 percent equity stake and recovery notes, which promised holders 50 percent of any gains from impaired assets, including awards in lawsuits against Ablyazov. The debt holders took writedowns of $6 billion, and the bank received $6 billion from the government to bolster its equity capital.
$1 Billion Loan
BTA, now 81.5 percent owned by the state, filed civil suits against Ablyazov and Solodchenko in the U.K., seeking to reclaim assets. One of those cases was brought against firms that borrowed $1 billion to buy oil equipment that was never delivered. The loans were collateralized with an insurance policy sold by London-Almaty Insurance Co., owned by BTA, according to two people familiar with the transaction who asked not to be identified because the matter isn’t public.
Kazakh prosecutors, who have amassed more than 1,000 volumes of evidence against Ablyazov and his alleged accomplices, have seized 20 houses, nine office buildings, three airplanes, 106 cars and stakes in 22 companies, along with $20 million in cash. Sixty-one criminal investigations have been opened against 92 businesses and 57 individuals, including 22 in hiding or on wanted lists in Kazakhstan, the Prosecutor General’s Office says.
In May, a court in Almaty convicted 21 people of embezzling $2.1 billion from the bank. The case, subject to appeal, resulted in 17 prison sentences.
A mansion in Almaty where Ablyazov lived for two years and that’s among the seized properties bears witness to his lifestyle. The 2,230-square-meter (24,000-square-foot) house has a dining room that seats 22, marble statuary and gilded mirrors.
Ablyazov and Solodchenko denied the allegations in 2009 interviews with Bloomberg News, saying the cases were filed because Ablyazov mounted a political challenge to Nazarbayev. Lawyers for Ablyazov said at his trial in London that fear of Nazarbayev forced the former BTA chairman to use offshore firms.
Locksley Ryan, a spokesman for Ablyazov, denied last September that BTA funds were used to sponsor the opposition party and its newspaper, as an adviser to the president had claimed. Ablyazov didn’t respond to requests for comment made through Ryan.
“We did everything to steer the bank through the difficult period,” Solodchenko, 46, said in a telephone interview in March. “Had the government not interfered, BTA would be healthy and the Kazakh banking sector would have less problems today.”
Controls didn’t improve after the government takeover. Saduakas Mameshtegi, CEO of Bank TuranAlem from 2005 to 2007, returned to the bank’s management board in February 2009, only to leave six months later.
Mameshtegi, 42, had been chairman of Astana Finance JSC, a financial holding company in the nation’s capital. While on BTA’s board, he helped arrange a 12 billion tenge ($80 million) loan to an Astana Finance shareholder, accepting that firm’s shares as collateral, according to three people familiar with the transaction who asked not to be named because the deal was private. Astana Finance defaulted in May 2009 on $2.2 billion of debt, as did the shareholder.
The government agency that investigates economic crimes and corruption said in a May 11, 2012, letter that it was looking into embezzlement at Astana Finance. It said Mameshtegi wasn’t a target of the probe. Mameshtegi, who received a commendation from then-BTA CEO Anvar Saidenov when he stepped down, couldn’t be located for comment.
In August 2011, BTA named Zairov, 44, its new CEO, replacing Saidenov, who became chairman. Zairov, a former BTA banker who had been running Nurbank JSC, controlled until 2010 by Nazarbayev’s oldest daughter, Dariga, set out to boost the morale of the firm’s 6,000 employees and more than 1.5 million retail and corporate clients.
“They call me kamikaze,” Zairov said about his mission in a November speech. “The rules of the game are announced today. Don’t confuse your own pocket with the state-owned one. If I find out you are thieves, I will personally ask for hard punishment for you.”
Zairov’s comments followed an announcement in October that prosecutors were investigating three BTA employees for “large-scale embezzlement as part of an organized group.” In November, he likened the bank to a house with a “leaking roof” whose “walls are cracking a little bit and the facade is crumbling.”
By January, Zairov was gone. He resigned for what the bank said were “health reasons.” Five BTA executives familiar with the matter who asked not to be identified because they aren’t authorized to speak say Zairov sustained injuries from a beating by a subordinate at a party. Zairov’s mobile phone has been switched off, and he couldn’t be located for comment. BTA declined to comment about Zairov or Astana Finance.
The second default, which followed Zairov’s departure, was “an absurd travesty, a premeditated disregard for any kind of investor interest,” says Gene Zolotarev, founder and chairman of Maximus Capital SA, a Geneva-based wealth management company whose clients hold what he describes as a “sizable position” in BTA debt. “For the first default, they had the excuse of the crisis and Ablyazov. This time, it’s just a cynical and blatant middle finger to the investment community.”
Members of the BTA creditors’ steering committee, including the Asian Development Bank, BNP Paribas SA, Nomura Holdings Inc., JPMorgan, and hedge fund D.E. Shaw & Co., face an uphill battle. BTA is negotiating with creditors to restructure its debt again and, as of mid-July, expected to reach an agreement by September, according to a presentation published on the bank’s website. Spokesmen for the creditors declined to comment.
“In hindsight, it’s obvious they were building a pyramid, and it has left Kazakhstan with a terrible legacy and reputation,” says Jason Hurwitz, an analyst at Alfa Bank OJSC in Moscow who previously worked at Almaty-based investment bank Visor Capital JSC.
In the twin concrete-and-glass towers that dominate the Almaty skyline and where BTA has its headquarters, Saidenov, 51, is trying to rebuild confidence in the company. A portrait of Nazarbayev hangs on one wall of his office. A brown-leather spider sits atop a cabinet overlooking his desk, on which a white-and-gold dragon roosts, a red ball on its tongue.
The second debt restructuring “will be just to every interested party,” Saidenov wrote in an e-mail in May. The bank, he said, is fighting corruption through “rigorous compliance by management and its departments with the law.”
Yelena Bakhmutova, a deputy CEO at Samruk-Kazyna, the sovereign-wealth fund that controls BTA, says confidence can be restored, even though the bank’s shares have fallen more than 99 percent since the first default.
“Investors are quite loyal to Kazakhstan,” she said in May. “There is no need to link the BTA debt restructuring with some global impact on Kazakhstan.”
That’s not how Kestutis Sasnauskas, managing director of private equity at Stockholm-based investment firm East Capital Explorer AB, sees it. His fund wrote off $100 million from its purchase of a 3 percent stake in BTA in 2006.
“We have been very disappointed with the level of corporate governance in Kazakhstan,” Sasnauskas says. “Based on that experience, I don’t think we will be investing in their banks again.”