Khrapunov & Company playing Monopoly/II: Almaty property scams accumulate

In August this year, judicial investigations were opened against the former mayor of Almaty Viktor Khrapunov, for the usual list of suspected violations of the law: misappropriation of funds, embezzlement, forgery and a number of related offences. If charges follow, he could be exposed to the risk of arrest and end up behind bars for half a decade or more. His personal bait, taken to Switzerland where he and his family live in exile, is relatively modest, and expressed in hundreds of millions rather than the billions taken away by some of his fellow-mega-fraudsters in exile. But the damage his misrule caused stretches a lot further than that, and without it a small legion of other swindlers would have had less chance to work out their pyramid schemes to the detriment of clients. In particular the capital Astana and the city of Almaty are left with the result of such policies in the form of hundreds of half-built residential and commercial blocks of varying size, soaring real estate prices as a result of the persisting shortage of space they cause, and local socioeconomic conditions hard to bear.

by Charles van der Leeuw, KZW senior contributor

Khrapunov & Company playing Monopoly/II: Almaty property scams accumulateIt all started with, looking back in time, a rather ill-conceived piece of legislation. As of January 1 2007, a new law came into vigour which regulated collective ownership of real estate by buyers of apartments and business accommodation. Thos who had paid up-front got shares in the company that was developing the project and owned the land and the infrastructure built upon it as collateral for the future ownership of their purchase. It also included an option to obtain a share in the company that was to manage the property, once building would be completed and accommodation delivered. As far from uncommon in the post-Soviet neo-capitalist domain, the regulations were as well-meant as they were ill-practiced. As it would soon appear, Kazakhstan’s new rule of law in fact flung all doors wide open to large-scale abuse – an opportunity which took the abusers little time to wait.

The very protagonist of such schemes has become the KUAT Corporation, a subsidiary of the KUAT Holding. The latter’s history goes back to 1992, when new private enterprises with vague statutory goals mushroomed throughout the former USSR, the owners of which were keen on laying their hands on assets put on the block for next to nothing by cash-strapped governments. The vultures lurking in the corner have gone into history as the notorious breed of oligarchs – even though quite a few of them acted in teams rather than as high-flying individuals the names of which have become obscurely famous. As for KUAT Corporation, it was only established in 2002 with the aim to pluck the fruits of Kazakhstan’s fresh abundance of cash due to increasing oil and metals sales on flourishing world markets.

It should be kept in mind here that KUAT Corp. and most of its peers never intended to invest a single kopek of the money available in Kazakhstan to make profit on. It is here that the schemes of the likes of Viktor Khrapunov fitted in. During most of the years following its establishment, KUAT Corp. bought options on “vacant” land within the agglomerations of mainly Almaty and Astana – on borrowed money, that is. With the help of Krapunov, land was often simply given to project developers on behalf of KUAT. Much of that land had been given earlier by the government to returnees of Kazakh origin from other former Soviet republics, China, Afghanistan and Mongolia during the 1990s. This campaign of Reunification of the nation within the boundaries of the fatherland as it was dubbed, allowed people to settle and build their own homes on the outskirts of Kazakhstan’s major cities. Many of them have been simply beaten off their new modest dwelling grounds by the likes of KUAT, with the aim to make it look like new modern-time complexes would rise on the spot while in reality the majority of such projects was as fake as the money extorted from credulous buyers was real.

Trouble surrounding KUAT Corp. popped up in the public domain in the course of the winter of 2007/’08. In March 2008, Bloomberg reported that in the order of 29,000 apartment purchasers had “prepaid for uncompleted apartments by September, when credit for Kazakh builders dried up, according to the Industry and Trade Ministry. More than 140 housing projects have been halted in Almaty alone, forcing the government to provide $4 billion of emergency funding to get contractors working again. […] Kazakh construction companies had sold 280 billion tenge ($2.32 billion) of unfinished apartments by September, including 170 billion tenge financed by mortgages, according to government statistics.”

Into the year 2008, it became clear that KUAT’s fate was not just the result of the financial whirlpool that raged in the big bad world outside, but had been carefully planned as a Ponzy scheme from the very beginning on. “Homebuyers are getting help from the government, which on March 13 agreed to provide $500 million to help banks finance loans to builders in Almaty,” Bloomberg’s report quoted earlier read. “Separately, the $4 billion emergency investment program includes funds to purchase 6,000 uncompleted apartments in Astana, the capital.” In an earlier report published on February 8 2008, SRI already signaled the beginning of the end for KUAT by quoting Alexander Kalinin, the chairman of Kazakhstan Estimators Association who stated: “Obscure policy and opaque management, and especially its murky dealings with land acquisition have apparently led to significant problems at KUAT.” But the company, though the worst of its kind, was not the only malefactor. In Almaty alone, already then numbers concerning building projects that had run into deficit looked alarming. “314 billion tenge ($2.6 billion) would be required to assure the completion of unfinished objects, and 167.2 billion tenge ($1.4 billion) will be necessary to finish projects with a high degree of progress,”, SRI’s report read. “There are 93 construction companies working in Almaty right now constructing 143 residential complexes. The total living area of those is 5.1 million. square metre. This is more than 36 thousand apartments, and 12 thousand of those are paid for by would-be owners.”

As early as then, though, suspicions rose that it had all been a well-prepared embezzlement scheme, aimed at swindling homebuyers first and taxpayers later. “Why would the state subsidize the building of 24 thousand apartments, not paid for by anyone?” – SRI quoted Meruert Makhmutova, director of the Public Policy Research Center, as wondering. “She believes that the government should no longer allot budgetary money to construction companies: “In each specific case, it is necessary to investigate how the builders used the funds collected by owners who paid in advance. It is known that many construction companies worked as financial pyramids”, the agency’s report concluded.

Such suspicions would prove to be all too well-grounded. As of December 17 2007, the number of “shareholders” in the form of owners of pre-paid apartments that had yet to be built under the new law, in the case of KUAT amounted to a mere 1380, news archives available these days reveal. According to the company, this was supposed to represent a face value of no more than the equivalent of 10 million US dollar – whereas the money paid by the would-be owners amounted to $20 million. Most of this was mortgaged – meaning that banks could cash in double on overvalued property. In all: an air balloon that could only keep floating as long as people would line up to buy more under such conditions – which of course in the end would not happen. In the meanwhile, the momentary benefits were brotherly shared between the banks and the project developers – eventually blaming each other for the case in which it would go wrong which it soon did.

In the course of the next winter, banks started getting nervous, especially after the turmoil surrounding BTA in early summer, with its management on the run and its balance sheet left with a gaping hole in the order of 12 billion US dollar. Construction fell into stagnation and bills, including staff’s wages, were left unpaid, as Silk Road Intelligencer reported on July 17, 2009. “Employees of the construction company KUAT threatened to block one of Almaty’s central streets or go on hunger strike to protest their situation,” the report read. “The employees have reportedly not been paid for two years. KUAT was Kazakhstan’s largest construction company but like many of its peers, it had borrowed heavily to finance its residential and commercial construction projects before the financial crisis hit Central Asia’s biggest economy in 2007. Since then, demand for housing has dwindled and many construction projects have been suspended or left unfinished. Moreover, in February Kazakhstan’s financial police accused KUAT’s top managers of large-scale theft and launched a criminal case against them.”

The extension of damage done to the community as a result of Khrapunov’s cash-and-carry-away schemes goes far beyond his personal gains due to them. He also may have excelled in combining political and public functions with private enterprise to the former’s detriment and the latter’s benefit – but again , he appears to have been far from being the only one to have done so within the agglomeration of Almaty. One perfect example is that of Viktor Tsoy -who has only the name on common with the popular singer, equally of Korean ethic origin. Tsoy the entrepreneur is reported to have started up his scheme shortly before Khrapunov left his post as mayor of Almaty in 2004, by obtaining building licenses for sites surrounding the city centre – in particular the one of Kalkaman, a shantytown in the north of Kazakhstan’s only metropolis.

The scheme, which in other cases has led to violent riots by legitimate inhabitants who in the end were due to bite the dust, is supposed to have started in the course of 2006, when the “squatters” were either bought out for a mere trifle or simply dumped. The site under construction ever since, as it would appear much later obtained with the use of forged documents on the names of firms that no longer exist if they ever did, was supposed to have 30 blocks with apartments, shops and utility space when in early 2007 Tsoy’s company Ak Ayoul started advertising pre-paid unit ownership contracts. In the course of the year, in the order of 2.5 billion tenge, at the time worth close to 20 million US dollar, had been collected from credulous buyers, who were provided with stock in the company as collateral. By the middle of 2009, about half of that money had been spent on construction works, the rest disappeared, and the company remaining in a virtual state of bankruptcy rendering its stock just as virtually worthless. From the sideline, Mr. Tsoy was smiling from the parliamentary seat he had obtained in the meanwhile which granted him legal immunity.

Tens if not hundreds similar cases have occurred, mainly in Almaty and Astana. What seems to set Khrapunov well apart from many of his peers is that he managed to harmonise his personal interests with those of his peers and potential rivals. The role of bankers, and the likes of Ablyazov in particular, in the web of schemes has yet to be fully assessed and analysed. There is reason to assume that part of the purpose of the speculative real estate schemes were intended to serve other purposes which included embezzlements in the public sector. As shall be demonstrated in the upcoming episode of this never-ending but always ever-so-thrilling dark epic, the eventuality of fraudulent write-offs of debts accumulated by public institutions under Khrapunov looks very much plausible indeed. (to be continued)

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