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. Last Updated: 07/27/2016

Kazakhstan Lures Foreign Banks

ALMATY, Kazakhstan -- Texas and the Central Asian republic of Kazakhstan may seem to have little in common, but they now have one unique bond: a new U.S. joint venture bank called the Bank of Texas and Kazakhstan.

Split 50:50 between private U.S. investors and Kazakh companies, the bank opened for business late last year and is trying to bring Western standards of bank service to this oil-rich republic.

Gerg Studor, formerly of North Park National Bank in Dallas and now shareholder and vice president of the joint venture, is optimistic about his new business but is frank about the difficulties. "In a way, we are here a little bit early," he said. "There is still a lot of reform that has to happen."

In fact, the Bank of Texas and Kazakhstan is not the only foreign bank appearing in this remote republic.

Chase Manhattan has opened up its own joint venture bank with the Kazakh government, called the International Bank of Kazakhstan; Citibank has obtained a license and will open soon; and the Dutch bank ABN-Amro will open a joint venture by mid-year in partnership with the semi-private Kazakh bank KRAMS and the International Finance Corporation, the World Bank's private lending arm.

The attraction of banking in Kazakhstan clearly revolves around the billions of dollars that are expected to flow from the country's huge mineral wealth.

Major contracts have already been signed with oil and gas firms like Chevron, British Gas, Agip and Elf-Aquitaine.

As Studor pointed out, however, banking in Kazakhstan is barely ready to deal with this flood of wealth and the system may need foreign help to cope.

The biggest problem is the instability of the fledgling Kazakh currency, the tenge, introduced last year after Kazakhstan split from the Russian ruble zone.

Janet Akhmetova, the Kazakh Central Bank's foreign relations expert, said that in theory the bank should trade twice every week but in fact auctions are sometimes canceled "for technical reasons."

She said the main technical reason was that the supply of dollars and tenge did not match. In other words, noone wanted to buy tenge.

When the Central Bank has allowed the currency to trade it has shown an alarming tendency to fall sharply. Introduced at a value of 4.7 to the ruble six months ago, the tenge now trades at 24 to the ruble, a decline of 600 percent in just six months.

Nelli Kovalenko, another vice president of the Bank of Texas and Kazakhstan, said that cancellations of auctions are so frequent that her bank takes a minimum of 10 days to change money at auction. "The government only allows trade because the alternative consequences are terrible."

Vladimir Zhelezyonov, local deputy manager of Apple computer distributor ABSYS, said that this exchange rate instability was at least an improvement from the situation last November, when all bank accounts were frozen until the government introduced the national currency.

He said that sales had grown well this year but he estimated they would have grown five times more without the exchange rate problem. "Our dealers have got into a lot of trouble. They have seen profits turned to loss by exchange rate fluctuations," he said.

Roller coaster exchange rates are not the only banking problem in Kazakhstan. Studor of the Bank of Texas and Kazakhstan said that the country still retains the distinction between cash and noncash currency held over from the Soviet system. Noncash money attracts a worse exchange rate than cash.

He added that anyone opening an account or making a transfer faced requirements for masses of documentation to satisfy Kazakh tax authorities.

Ben Miller, managing partner for Ernst & Young in Kazakhstan, said that Kazakhstan's banks also fall well below Western standards in their ability to move cash around inside and outside the country. "They are two or three years behind Moscow," he said.

Apart from the Bank of Texas and Kazakhstan and Alem Bank, the main foreign trade bank, only a few banks have correspondent accounts that allow electronic transfers with foreign banks.

Miller said that trade finance and letters of credit are unobtainable locally. This may change soon: The European Bank for Reconstruction and Development recently approved a 100 million ecu (about $113 million) loan for small and medium enterprise development that will be distributed through some Kazakh banks.

But even with the arrival of foreign banks and money, Kazakhstan's finance problems will not be solved quickly.

According to Studor, the Bank of Texas and Kazakhstan had start-up capital of only $1.5 million. Because attracting deposits is almost impossible in the unstable Kazakh climate, the bank is short of funds to expand and is now trying to raise another $4 million in the United States.

Chase Manhattan and Citicorp are mostly in town to act as representative offices for project finance deals. Of the big three foreign entrants, the ABN-Amro joint venture bank will be the only real commercial bank when it opens in July.