Mukhtar Ablyazov’s united kingdom: a tale of four files/III

Four cases are currently pending at the High Court of London concerning the freezing of assets belonging to entities under control of former BTA Bank head Mukhtar Ablyazov and a number of associates who have seen their accounts frozen (but for some generous pocket money) and their passports taken. The first one, dubbed the Chrysopa case, leads to The Netherlands. The second, known as the Drey file, puts ownership and responsibility for loan and collateral diversion schemes in the Russian Federation at stake. The third one, known as the Tekhinvest case, takes us back downtown Moscow, and involves, among other projects, the Moscow City Tower – the one that in a court hearing last year Mukhtar Ablyazov “forgot” to mention when asked to declare all his assets connected with the file – prompting a High Court judge to decide that “Mr. Ablyazov apparently cannot be trusted”. BTA’s current management on behalf of the state tries to lay its hands on the collateral, but other claimants are standing in line as well. For Kazakhstan’s struggling banking sector, the stagnant situation means further brakes on recovery.

by Charles van der Leeuw, KZW senior contributor

Mukhtar Ablyazov’s united kingdom: a tale of four files/IIICranes and steel frames half-filled with prefab concrete segments are rusting away at the site of Moscow City, a peninsula encircled for three-quarters by the Moskva river, northeast of the Kremlin. The location is destined to become Moscow’s version of Paris’ La D?fense, a skyscraper landmark displaying the former proletarian world power’s bastion’s entry into the post-communist age. But business is no longer what it looked like in the immediate aftermath of Russia’s conversion to capitalism for the simple reason that as elsewhere in the world a lot more capital was available on entrepreneurs’ minds than bank deposits could account for.

The half-built structure in question is known as the Eurasia Tower, a rather dull-looking twin circular building, 75 floors up with a total commercial space of over 200,000 square metre. Its rather plump-looking form remotely reminds one of that of Baku’s Maiden Tower, and is standing amidst much more science fiction and fantasy-style architecture surrounding it. Its owner, a company by the name of Tekhinvest, was established in 2002 by two parent companies. One was MosCityGroup (MCG), controlled by real estate tycoon and project developer Pavel Fuchs. The second one was the Eurasia Group, established in the winter of 2002/’03 by no one less than Mukhtar Ablyazov.

The latter had just been released from jail in his country of origin after a brief, hapless career as a cabinet minister through a presidential pardon on condition that he would stay out of politics. Unusually for Kazakh procedures, his assets had not been declared forfeit, and thanks to this he cold hold on to his stake in Bank TuranAlem and use it to make his dirty dream come true: to become a Kazakh Boris Berezovsky (this was before Berezovsky’s disgrace for pretty similar reasons). As for Tekhinvest, Ablyazov put one of his longstanding associates and men of confidence Ildar Khazhayev in charge of the operation. Even though for a brief while Ablyazov himself acted as chairman of the board of Tekhinvest, his personal beneficial interest in the enterprise was hidden behind an offshore firm by the name of Colligate, which was registered as the official owner of Tekhinvest, while Khazhayev remained the visible face of the Moscovite venture.

Between 2004 and 2008, credits up to a total lump sum in the order of 300 million US dollar were set out by BTA, based on an annual interest rate of 20 per cent. Beneficiaries were not only Tekhinvest but also affiliated companies named Konvis, PaladioExport and CityBestPlus. The fact that all those beautiful-looking labels cover little else than Mukhtar Ablyazov was “not reported” to BTA. Nor was the bank officially aware that Tekhinvest was little more than a hollow shell, with its assets under control of Colligate, which was located outside either Russian or Kazakh judicial territory.

Today, a sale of Ablyazov’s 50 per cent share in Tekhinvest for the sum of 50 million US dollar to be paid over the counter has been agreed upon with Fuchs, but creditors are contesting it in courts of law both in Britain and the Russian Federation. Among them are BTA, but also Sberbank of Russia and Alpha Bank. BTA entered the judicial fighting ring in March 2010, by starting proceedings in London against Colligate, Tekhinvest, Konvis, PaladioExport and CityBestPlus (the latter three have been dubbed the KPC companies), as well as Ablyazov and Khazhiyev in person. BTA’s current management intends to lay its hands of Ablyazov’s stake in Tekhinvest and through it into the Eurasia Tower, which, once completed, is supposed to have a value up to six-fold the $50 million Ablyazov is supposed to receive for his share in the venture, whereby BTA suspects a kickback in the game – with much more money being funneled into his webs through the other beneficiaries of the loans.

“Proceedings were brought in England by the claimant bank in respect of loan facilities to a Russian company, Tekhinvest (owned by Colligate), and to other companies (the KPC Companies),” an official report by the London Commercial Court signed by Justice Christopher Clarke and dated March 28 this year reads. “The facilities and the loans under them were subject to Kazakhstan law, and ‘disputes, differences or claims arising from this contract (agreement) or in connection therewith, including the ones relating to its performance, breach, termination or invalidity’ were to be resolved by arbitration in Russia. The bank asserted that Tekhinvest and the KPC Companies were controlled by Mr Ablyazov, and that the loans were liable to be set aside because those four companies had participated in his dishonest scheme to defraud the bank. In particular, it was said Mr Ablyazov was a disguised majority shareholder and Chairman of the bank, but had failed to disclose his interest in the borrowing companies to the bank. Tekhinvest and Colligate, but not the other defendants (who included Mr Ablyazov), sought a stay of the proceedings under section 9 of the Arbitration Act 1996. Christopher Clarke J granted a stay.”

Whether BTA stands a chance to recover at least some of the money it lost on Tekhinvest in the form of a stake in the Eurasia Tower depends on more than just that. In Russia, two more banks have gone to court for exactly that. Both Sberbank of Russia and Alpha Bank, the property of Russia’s top-5 tycoon Mikhail Friedman, have loans outstanding with Fuchs’ enterprise, and claim a stake in its assets under construction including Eurasia Tower. Even in the best case, the outcome of the battle is bound to mean that BTA will have lost at least half of the money it lent to Tekhinvest plus all interest that should have been paid in the course of time.

The damage caused by Ablyazov has not only left BTA in the doldrums. The way he juggled with his bank’s provisions created a culture of recklessness in Kazakhstan’s banking sector that keeps hurting the entire financial business of the country up to this day. As things stand today, between two-thirds and three-quarters of Kazakh banks’ outstanding loans remain uncovered by provisions, while the same proportions of loan portfolios remain exposed to default on the borrowers’ side. In this way, billions of dollars worth in assets could turn into liabilities in years to come. Together with most of the rest of the world, Kazakhstan finds itself in a situation where fund-raisers keep turning away from bank loans and increasingly look for alternative sources to raise money. Such alternatives remain scant, especially in the retail sector but also on corporate levels – thereby pushing demand for funding back. As a result, both corporate capital reserve build-up and personal savings are on the rise. For banks, the only appropriate response to that situation is a shift away from investing money in loans towards investing it in stock and other tangible assets.

This by and large explains why in Kazakhstan recovery of the credit market is unlikely to be on the agenda this year, as Reuters reported on January 24 this year, quoting sources fro the National Bank of Kazakhstan. “The central bank forecast zero growth in Kazakh banks’ loan portfolio in 2011, followed by growth of around 10 percent in each of the following two years,” the news report read. “The bank said in a statement that the total loan portfolio of Kazakhstan’s banks fell by 2 percent year-on-year in the first 11 months of 2010 to 7.5 trillion tenge ($51 billion). […] The Financial Supervision Agency forecast in September that the banking sector’s overall loan portfolio would shrink, or remain flat at best, in 2010 due to a lack of solvent borrowers.”

The cases of Chrysopa, Drey and Tekhinvest have left BTA with net holes of 120, 295 and 300 million US dollar respectively – losses on interest and other income on outstanding credits not included. But there is more at stake in the legal battles fought in London and Moscow, as subsequent episodes in Ablyazov’s war of exhaustion with his claimants are due to demonstrate. Altogether, well over 10 billion dollar is supposed to have “disappeared” through his operations in no more than a few years. One detail is that money, especially in such amounts, never really disappears but is bound to be found somewhere. Once located, consequently, the right to obtain it back looks more obvious in theory than it often appears to be in practice.

(year-end situation; amounts in million Kazakh tenge)

item assets loans liabilities deposits capital net income
– 2007 2715109.0 2256364.3 2446463.9 1686231.4 268645.1 48074.7
– 2008 2335659.0 2160583.4 v1449913.4 1588462.9 196390.1 228.7
– 2009 2351990.8 2312247.5 2082564.2 1689082.7 269426.6 52.3
– 2010 2430236.2 2344296.5 2151742.8 1445704.0 278493.5 104.5
Halyk Bank
– 2007 1567239.1 1068603.4 1425949.5 1114869.8 141289.6 32720.5
– 2008 1620049.9 1232224.8 1449913.4 1153161.4 170136.5 9713.4
– 2009 1988880.4 1236928.4 1748444.3 1244912.2 240436.0 2592.6
– 2010 2023521.7 1224415.8 1755756.6 1396507.2 267765.1 27418.0
BTA Bank
– 2007 2648603.2 2117321.3 2244320.8 1608865.1 404282.4 48682.8
– 2008 2915110.7 2323641.6 2498184.9 1516090.9 416925.8 12686.8
– 2009 1971441.9 2524360.1 3445335.3 1386937.5 (1473893.4) (2103642.7)
– 2010 1993993.9 1644706.7 1812572.0 666427.7 181421.9 1150232.2
– 2007 880774.0 659763.9 810778.0 482103.4 69996.1 13774.4
– 2008 946032.0 662514.3 850204.9 564645.1 95827.1 10007.0
– 2009 1152094.7 669233.3 1063893.9 803157.2 88200.8 1463.0
– 2010 1211056.6 719928.2 1134266.3 789706.9 76790.3 (29306.9)
ATF Bank
– 2007 992518.6 759059.1 913673.1 415947.2 78845.4 8876.4
– 2008 991431.5 808405.0 915829.2 377741.5 75602.3 28211.8
– 2009 1074592.2 847964.5 979554.2 471473.9 95038.0 1135.2
– 2010 982965.0 829475.4 919033.8 480531.5 62931.2 (37674.5)
Alliance Bank
– 2007 1192269.6 853675.8 1036567.9 453441.9 155701.8 36355.1
– 2008 1036798.8 680168.8 877627.0 399905.9 159171.8 2601.4
– 2009 529987.3 504958.1 978440.2 506583.0 (448452.9) (605793.8)
– 2010 489442.3 545529.2 455601.9 208926.0 33840.4 318826.0

NOTE: the average exchange rate of the tenge stood at 120 per US dollar till its
devaluation in early 2009 which put it at 150.
source: Financial Supervision Agency of Kazakhstan



Moody’s: Ba3/negative/NP; S&P: B/stable/C; Fitch: B-/stable/B


Moody’s: Ba2/stable/NP; S&P: B+/stable/B; Fitch: B+/stable/B


Moody’s: Caa3/evolving/NP; S&P: B-/stable/C, kzBB-; Fitch: B-/stable/B


Moody’s: B1/negative/NP; Fitch: B/stable/B; Expert RA: A+


Moody’s: Ba2/stable/NP; Fitch: BBB/positive/F3, AAA(kaz)


Moody’s: B3/evolving/NP; S&P: B-/stable/C, kzBB- kzBB-; Fitch: B-/stable/B

source: KASE