In summer 2007, the American subprime crisis had an impact on the Kazakhstani real estate market, and then, in 2008, on its entire banking sector, which after Russia’s is the most developed in the CIS. This sector is facing major difficulties owing to its massive lending sprees in international financial markets and its overexposure to the real estate sector. For the first time since the Russian crash in summer 1998, Kazakhstani authorities are faced with managing a major shock, compelling them to test, in real time, not only the solidity of the country’s most dynamic economic sectors, but also the effectiveness of the state intervention mechanisms. Astana ultimately seems to have demonstrated its overall financial solidity, but the long-term social and regional costs remain unclear.

BACKGROUND: Boosted by great petrol reserves and looking for quick ways to make a profit, Kazakhstani banks borrowed significant sums of money from U.S. banks involved in hedge funds. Today, they are paying the price for their success and face two principal problems. First, the weighty role played by the construction sector in their development (which, for example, constitutes 45% of the Alliance Bank’s loan portfolio), and, second, their massive foreign borrowings, which amount to more than 50% of their total borrowings, as compared, for example, with the 18% borrowed by Russian banks. During 2006 alone, Kazakhstani banks obtained more than US$18 billion in international credits. Today, the servicing of Kazakhstan’s foreign debt that will have to be repaid by 2009, has reached a level equivalent to 42% of its exports. In 2007, the country had a bill of US$4 billion to pay, tripling brutally to 12 billion as a result of the crisis. Kazakhstani banks, for their part, hold US$40 billion worth of foreign loans, a significant share of which now has to be refinanced at very high rates.

Nevertheless, the Kazakhstani authorities quickly stepped in to regulate and stabilize the situation. In spring 2007, Kazakhstan’s Central Bank set up an aid fund for small banks with insolvency problems. When Standard & Poor’s and Moody’s Investors Services downgraded the credit ratings of Kazakhstani banks, the state decided to invest US$11 billion of emergency money (nearly a quarter of the Central Bank’s reserves) in order to halt foreign borrowings and avoid a credit ratings collapse. Astana also set up a Stabilization Fund of US$4 billion to ensure liquidity, but this did not suffice to reassure foreign investors, especially when the Renaissance Capital’s Rencasia Index for Central Asia, which is dominated by Kazakh equities, collapsed in September 2008 after Lehman Brothers’ announced its bankruptcy.

In October, Astana announced it would give US$5 billion in aid to the major national banks for about a quarter of their shares (the state already directly or indirectly controls a third of corporate deposits). Thus, the BTA Bank, the largest in the country, is expecting a state injection of more than US$2 billion, while Kazkommertsbank, the country’s second largest, is awaiting a boost of US$300 million, and the Halyk and Alliance Banks US$500 million each. BTA was the most affected because of its high-level involvement in the construction sector, but it was the collapse of the Alliance Bank that caused the most ink to be spilled. After becoming the leading retail lender and the fastest growing banking institution in Kazakhstan in only a few years, the Alliance Bank spectacularly collapsed; in the first semester of 2008, its net income fell by almost half. In the short term, this situation is going to facilitate foreign banks to establish themselves in the Kazakhstani market, as their share had previously been a modest 15 percent. Now, for example, Italian UniCredit, South Korean Kookmin, Israeli Hapoalim, Abu Dhabi-based private equity fund Alnair Capital, and the London-based HSBC, all have their sights set on snapping up sections of Kazakhstani banks. Moreover, Raiffeisen International and the Bank of Tokyo Mitsubishi are planning to open offices in Almaty in the first half of 2009, the second to facilitate Japanese firms’ entry into the Kazakhstani raw materials market.

The banking crisis continues to lean heavily on the Kazakhstani real estate market, estimated at US$30 billion. The banks have massively increased their credit rates, making it difficult to obtain a loan with annual interest repayments of less than 20 percent. As a result, the construction market has collapsed in all the major cities and especially in the two capitals, Almaty and Astana, which have reportedly plummeted by 40 percent in a few months. The building on many construction sites has been blocked, and in Astana itself, financing shortages have halted construction on nearly every second site. The decrease of the price per square meter is making itself felt, especially since the real estate prices had literally shot through the roof, increasing by 900 percent in four years. Tens of thousands of people have been unable to obtain their recently bought apartments, whose construction has been halted. In order to forestall a total market collapse, the government has set up a US$500 million aid program for construction companies unable to get credit terms and has bought thousands of apartments in Astana. Kazakhstani companies that previously invested in national real estate today are now purchasing in foreign markets, while others have decided to stop selling housing altogether and wait for prices to go up again.

IMPLICATIONS: This crisis has multiple implications. It caused major liquidities shortages for the country. Attaining record levels of 18 percent in 2007, inflation has continued to climb in 2008 to around 20 percent, and the tenge’s stability remains fragile.

Concerning domestic political stability, the crisis is not in President Nursultan Nazarbaev’s favor. In fact, the President’s popularity has been staked on the country’s economic success, on his twin resolve to have it gain entry into the exclusive club of the world’s ten largest exporters of crude oil, and to catch up to the living standards of Central European countries. Disappointed social expectations could turn into political discontent. On the other hand, in the “Family’s” somewhat concealed war against the technocrats and certain oligarchs, the crisis paradoxically plays into Nazarbaev’s hands. Since the start of this decade, the Presidential clan has sought to re-establish “vertical power” in the domain of resource management. This goal has been partially accomplished through the Samruk holding, which has reinforced the preponderant role of the state in the management of the country’s large companies (e.g. KazMunayGas, and Kazakhstan’s telecom, postal, railway, and electricity companies). As a result, the oligarchs have concentrated their oppositional forces in the world of finance and banking, as well as in the metallurgy industry, which both are still privately held. The tycoons, including figures such as Nurlan Subkhanberdin, who is often presented as the “Kazakh Khodorkovsky”, Alexander Mashkevich (Eurasian Group), and Vladimir Kim (Kazakhmys), all make appeals for the diversity of economic actors to be preserved. The sudden weakening of these milieus, in particular of the banking circles, facilitates a recentralizing of the Kazakhstani economy around the state. In the short term, this development raises questions about access to resources for private actors, and, in the long term, questions about the stability of property at the time of the next Presidential succession.

On the societal level, the crisis not only affects the population of Kazakhstan, but that of the entirety of Central Asia. Over recent years, Kazakhstan has become the economic motor of the whole region. It is particularly important for Kyrgyzstan, since, with trade levels reaching nearly 450 million dollars in 2007, it rivals Russia and China as the country’s largest trading partner. Moreover, Kazakhstan is establishing itself more firmly in Tajikistan, continues to be one of Tashkent’s most important partners (for example, in cereals), and Kazakhstani-Turkmen cooperation in the domains of hydrocarbons and uranium extraction is certain to develop in coming years. Any collapse of Kazakhstani investments in the region, especially via bilateral Investment Funds (Kazakh-Kyrgyz and Kazakh-Tajik), would be detrimental to the whole region, even more so at the present moment when Bishkek and Dushanbe both face huge energy shortages and the latter significant deficits of foodstuffs. In addition, Kazakhstan has an indirect influence on its neighboring economies, since, after Russia, it is the second most favored destination for Kyrgyz and Uzbek migrants. Since the beginning of winter 2008, construction sector workers, mainly Central Asian immigrants, have not received any or only substantially reduced proportions of their salaries. As a result, they can either no longer send remittances home or are compelled to return to their countries without the hoped-for money, which has all of a sudden deprived hundreds of thousands of families of revenue at the onset of winter.

CONCLUSIONS: In the end, this crisis may come to have positive consequences. It will streamline the Kazahkstani banking sector by getting rid of those companies that placed all their bets on speculation. It will also act as a corrective to the over-evaluation of real estate and encourage investment in more productive sectors. The crisis has demonstrated that the country’s overall financial basis is solid enough to enable Astana to contain a market collapse. Kazakhstan’s central bank still has about US$20 billion in reserves and the country’s oil fund stands at about USS$15 billion. Nevertheless, the long-term social impact remains unclear, and were the “Kazakhstani model” to fail as a result of this crisis, it would have a detrimental impact on the rest of Central Asia.

AUTHOR’S BIO: Marlène Laruelle is a Senior Research Fellow with the Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center. She is the author of, among other, the recently published Russian Eurasianism: An Ideology of Empire (Washington DC: Woodrow Wilson Press/Johns Hopkins University Press, 2008).