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In Kyrgyzstan, Buyer Beware

Repeated failures to sell public companies may be a hangover from a hasty privatization.
by Askar Aktalov 7 February 2012

BISHKEK | In mid-January, Kyrgyzstan's government held its fourth auction aimed at selling Zalkar Bank, one of the country's largest financial institutions. Despite the asking price having dropped from $24 million to $15.6 million since the first try in November, there were no legitimate bids.


Two days later, President Almazbek Atambaev threw up his hands and ordered that Zalkar be sold directly to an investor, with the assistance of the World Bank.


With a wide network of branches and more than 20,000 clients, Zalkar Bank might normally be an attractive purchase. But analysts say investors are staying away from it and other large, state-owned properties because the companies were nationalized under questionable circumstances and buyers don’t want to end up in court later on.




Zalkar Bank was created in late 2010 from the assets of the biggest domestic bank, AsiaUniversalBank (AUB), which had been nationalized by the interim government after the overthrow of President Kurmanbek Bakiev earlier that year.


Altogether, 47 properties – including plots of land, corporate shares, cars, airplanes, and even a ship – were taken over by the government because they were connected with the former leader’s family and his associates, or because they had been privatized illegally during Bakiev’s tenure from 2005 to 2010.


In 2011 Bishkek had planned to sell 23 of these properties, but only 13, including Zalkar Bank, ended up at auction.


Six small properties were sold to Kyrgyz businessmen, among them a ship, shares of three companies and one factory, and a bungalow at Issyk-Kul lake, a prime vacation spot. Buyers failed to materialize at seven other auctions, and the state took in only $3.6 million of the $160 million it had hoped to make through privatizations in order to partially close a $460 million budget gap.


The biggest properties – Zalkar Bank and 49 percent of the Alfa Telecom company – attracted no legitimate investors.


Kanysh Sharshekeeva, who was recently dismissed as director of the state privatization agency for failing to sell the bank, said three foreign investors had been interested in Zalkar but “didn't want to officially declare their intentions.” Sharshekeeva said she suspects the interested parties were still preparing their documentation, or just waiting for the price to drop.


The auction for Alfa Telecom in November attracted only one bid, from TeliaSonera in Sweden, but two legitimate bids were required for it to go forward. The government’s shares in the company have been valued at about $100 million.




Prime Minister Omurbek Babanov acknowledged to reporters in January that privatization had failed because of the questionable legal status of some of the properties.

Omurbek Babanov


“Many are afraid to buy. The phrase ‘nationalization by decree’ itself suggests a problem,” Babanov said, according to the Tazabek news agency.


Dmitry Orlov, an analyst with the East-West Strategy Center in Bishkek, said the interim government’s large-scale nationalization in 2010 had amounted to “raiding.”


“Nationalization means that private property is confiscated in favor of the state. But these nationalized assets are put up for sale to other individuals. What’s the difference between that kind of nationalization and raiding?” Orlov said.


The analyst said the government is trying to shift the potential legal liabilities associated with these holdings onto someone else. “No serious businessman or investor will ever deal with stolen property like Zalkar Bank or Alfa Telecom,” Orlov said.


Twenty-five lawsuits are under way over the status of nationalized property, Nazira Usenalieva, who manages the properties for the state, told the Vecherniy Bishkek news agency. Kyrgyz law requires that owners of newly privatized property take responsibility for all financial and legal issues connected with it.


Elnura Kazakbaeva, who monitors economic issues for the Egalitee research center in Bishkek, said any new owners of Zalkar Bank could face demands to pay the debts of AUB.


Beyond issues of debts and lawsuits, Orlov said the 2010 confiscation of property established a troubling precedent for future investors: “Who can guarantee that power in Kyrgyzstan won't be overthrown again and the property won't be confiscated once more?”


Bishkek has to demonstrate to foreign buyers that it can protect their interests and maintain order in the country, the analyst said. When it comes to attracting investors, he said, “Stories about democracy in Kyrgyzstan are beside the point.”


Vasily Koltashov, an economist at the Institute of Globalization and Social Movements in Moscow, had an even more realkpolitik explanation for the government’s failure to sell the assets. He cited the poor economic climate and the lack of a “suitable dictator who can be bribed by investors.”




The failure of privatization doesn’t bother those who think the state should not be getting rid of the assets at all.


“Too many of the nation’s resources have been given, not sold, to third parties by previous regimes without any benefit to ordinary people,” Koltashov said, noting that previous privatizations had done little to help the country weather the economic crisis that began in 2008.


Koltashov said the government should hold on to its assets for now and “learn how to manage and use its own resources” instead of seeking foreign buyers to rescue its economy.


Orlov and Sharshekeeva, the former privatization director, both said privatization should be halted as the asset prices continue to slide. Otherwise, Orlov warned, “They will be bought by local officials through stalking-horses.”


Even so, Prime Minister Babanov said his government plans to press ahead with privatizations in 2012, for the same reason many experts say the efforts won’t succeed.


Babanov said potential investors will take on all the responsibility, including legal issues, of owning the properties. “Yes, it can influence the commercial price of object. But it also will release our state from risks, and that is very important,” he told the Tazabek news agency.


The government is set on divesting itself of 17 of the 41 nationalized properties still in its possession.


The International Finance Corporation, a subsidiary of the World Bank, is set to offer Zalkar Bank for sale in late March.


As for its other assets, Bishkek has not set a date for the next auction and, unlike in 2011, has not included potential privatization proceeds as income in this year’s budget.
Askar Aktalov is a journalist in Bishkek.
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