Kyrgyzstan: Bishkek Struggling To Find Right Economic Path

By Nate Schenkkan

In a small office on the second floor of the Kyrgyzstan Stock Exchange, a lone administrator checked the time and looked up from the computer: “Two o’clock. No applications received. Auction for sale of Zalkar Bank is declared invalid.”

With that, on November 14, for the third time in a month, Bishkek’s attempts to privatize a major company failed. As it tries to rid itself of companies it acquired in the wake of ex-President Kurmanbek Bakiyev’s April 2010 ouster, the faltering program is raising doubts about the government’s ability to attract investment and formulate a viable economic policy.

After Bakiyev and family members fled, Kyrgyzstan’s interim government moved quickly to nationalize properties the Bakiyevs had acquired with misappropriated government funds. Yachts, luxury cars, and resort properties were seized along with a hydropower plant, almost half of the country’s largest mobile phone provider, and the nation’s leading bank.

In June, parliament approved a program to sell off the nationalized properties and use the profits to help close a budget deficit of 21 billion soms ($450 million).

The program has so far failed to produce results: only four of the original 22 entities included in the initiative have found buyers. On October 24, another major property, the Chakan hydropower plant, also went unsold. Observers say the lack of clarity about the legal status of many companies being privatized is dampening buyer interest.

Zalkar Bank offers a prime example of the uncertainty hovering over the process. The bank’s precursor, Asia Universal Bank (AUB), was once the largest bank in Kyrgyzstan. Widely reported to be controlled by Bakiyev’s son Maxim, the nationalized bank was declared bankrupt in October 2010. Although Zalkar Bank is supposedly made up only of AUB’s “good” assets, its status remains questionable enough to give investors pause. “There is no guarantee that if you invest you will be able to keep your property,” said Mirsuljan Namazaliev, director of the Central Asian Free Market Institute, who describes himself as “pro-privatization” but expresses doubts about the wisdom of the auctions under present circumstances.

“Reputable international companies don’t want to invest because of the risk that a year or two from now a court could take the company away from them, or the government could appropriate it,” he said.

Zalkar’s finances may also be less than sound. Ten days before the auction, the International Finance Corporation, the World Bank affiliate monitoring the privatization, called for a second audit. The National Bank’s Agency for Bank Reorganization and Debt Restructuring, which is overseeing the sale, declined the request, saying it had already done due diligence.

But on November 15, the day after the failed auction, the government announced Zalkar Bank’s asking price would be lowered by 25 percent, acknowledging that the adjustment took into account “the possibility of future legal and reputational risks related to the former owners of AUB.”

Government agencies charged with conducting the sales are operating in unfamiliar territory. “The government has no experience in attracting investors, or in nationalizing and selling,” said Ermek Niyazov, a prominent businessman. “As a result it only attracts speculators.”

That lack of experience has led to situations even more embarrassing than auctions without buyers. The auction of the Petrol Group Company was held October 17 with a starting price of 124 million soms ($2.7 million).

When two local buyers engaged in a bidding war, the price soared to 10 times that. But after the auction, first the winning and then the losing company declined to complete the purchase. Instead, their bids appeared to be a purposeful effort to spoil the auction. The government has now increased the minimum deposit to participate in an auction from 10 to 50 percent of the starting price.

The most valuable auction, for 49 percent of Alfa Telecom, is scheduled for November 29. As the parent company of Megacom, the largest mobile service provider in Kyrgyzstan, Alfa was closely linked to the downfall of Bakiyev’s regime. Reportedly tied to Maxim Bakiyev, Alfa snatched Megacom from its Russian owners in 2009, in a bit of shady business that may have helped provoke the Kremlin’s media assault on the president and his family in the weeks preceding the April uprising.

After the Bakiyevs fled, the interim government immediately nationalized 49 percent of Alfa, but ownership of the shares remains contested. Minister of State Property Dair Kenekeev has said there are 48 lawsuits concerning Alfa still pending.

As of November 14, one investor, the Russian telecommunications company MMT, had officially expressed interest in purchasing the Alfa shares for the starting price of 4.5 billion soms ($97 million). Two applicants are required for the auction to be legal.

The stumbling privatization initiative seems to indicate a lack of direction in the country’s economic policy, especially in the crucial area of attracting foreign investment. “The goal of the auctions is merely to collect cash to fill the deficit,” said Niyazov, the businessman, “not to find the best investor that will contribute to the development of the country. There is no strategic vision for the economy at the top.”

“Business is the foundation of the state,” Niyazov added. “If businessmen are not happy here, they will find other markets to invest in.”

Nate Schenkkan is a Bishkek-based journalist.