Kazakhstan Looks To Foreign Business To Shore Up Its Banks

By Bruce Wilson, Senior Consultant, The PBN Company, Almaty

Karim Masimov, Kazakhstan’s Prime Minister, has floated the idea of requiring foreign businesses that operate in Kazakhstan to keep a share of their funds in domestic banks. The need to help Kazakh banks is understandable, but would the proposal have a detrimental impact on the economy?

Kazakhstan’s banking sector still has serious problems, despite significant emergency investments by the government. Many banks, burdened by enormous foreign debts, are also mired in corruption scandals, and the damage to their reputations has further dampened economic activity throughout the country. Foreign investors, so the theory goes, are the ideal candidates to step in and help to bolster the banks’ balance sheets.

Foreign businesses have a vested interest in Kazakhstan’s economic health in general and the viability of the financial sector in particular. However, the merits of Masimov’s idea must be off-set against the additional damage that may be done to Kazakhstan’s international reputation. The proposal will be seen abroad as an additional challenge to investing in Kazakhstan - a constraint adding to the existing costs and risks of doing business in the country. If foreign businesses reduce their investments as a result the plan will backfire, further hampering Kazakhstan’s ability to attract capital and technical know-how. Ultimately, it may reduce the competitiveness of Kazakh products in the global market, raise prices for local Kazakh consumers and hinder rather than expedite Kazakhstan’s economic recovery.

Further details on Masimov’s proposal are currently awaited. The Prime Minister’s comments were sufficiently vague that if he wishes he can back away from the idea by saying that he merely wanted to explore ways of encouraging foreign businesses to use local banks, or to set targets that would be voluntary rather than obligatory. It is also possible, however, that the Prime Minister is motivated by a belief that foreign companies in Kazakhstan are not being good corporate citizens. He may even argue that they are wrong in their analysis of Kazakh banks’ cost/risk profile, and therefore have an irrational bias against those banks.

The delicate calculation that the Prime Minister appears to be making is that the negative effect of these requirements on the investment climate will be balanced by the support it provides to the banking sector. Unfortunately, the very fact that a debate has been opened on the topic is cold water on an already stifled economy.

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