In April 2013, Kazakhstan’s parliament passed a bill creating a single pension fund (ENPF), with the objective of nationalizing the pension funds that were previously held at banks and other financial institutions. At the time, the objective was to safeguard pension assets, given the troubled period that banks in Kazakhstan had just experienced after the global financial crisis of 2007.
The merger of the private pension funds proved to be a challenging feat, as the most prominent banks either held off negotiations until the last possible moment, in the case of Kazkommertsbank, or refused to sell for anything other than cash, as was the case with Halyk Bank. In the end, however, the overhaul was complete and the assets were put under the Central Bank’s administration.
As an asset manager, however, the ENPF has not performed too well. The case of an investment in an ailing Azerbaijani bank has become a cautionary parable for the ENPF’s poor management in recent weeks.
Two years ago, the ENPF invested around $250 million in a 10-year bond issued by the International Bank of Azerbaijan (IBA), the largest bank in the Caucasian country, 76.7 percent-owned by the Ministry of Finance. Over the past few weeks, however, IBA has shown huge cracks: it announced that it had halted payments of foreign debts in early May and said it will go ahead with a restructuring plan, a “soft” default.
The problem for Kazakhstan’s ENPF is that it will have to either swap the notes for longer term ones, or renegotiate a payout at a lower price, said to be a 20 percent write-down. A source familiar with the negotiations told Reuters this week that there will be no special treatment for Kazakhstan compared to the other creditors of IBA. The ENPF could now potentially join a creditor group and negotiate as a bloc, but analysts said that the conundrum is unlikely to be resolved soon or favorably.
As it kickstarted, ENPF managers and regulators said they were confident that with a cautious policy of portfolio diversification, a unified fund would have prospered and would have remained unaffected by financial crises. Until 2013, most of the state pension fund’s investments were channeled into low-risk, low-yield assets.
“Investment of pension assets ENPF will be carried out on the principles of diversification, preservation and moderate level of profitability,” Kairat Kelimbetov, at the time deputy prime minister, told Reuters in 2013.
Kelimbetov went on to become the country’s Central Bank chief, overseeing the first major devaluation of the local currency in five years in February 2014 and another sharp depreciation in August 2015, before being fired. The depreciations have greatly affected the purchasing power of Kazakhstan’s residents and the value of their pensions. The exchange rate to the dollar is now twice what it was in 2014, at 314 tenge to $1. A galloping inflation rate in 2015 and 2016 impoverished the country and put banks under pressure.
It was during this economic malaise, also triggered by the sharp fall in oil prices, that the ENPF decided to invest in IBA bonds in October 2014, despite the widely-known issues with Azerbaijan’s oil-fueled economy and the previous downgrade of IBA assets. Just a few months after the investment, IBA’s director resigned and was later charged with embezzlement in a high-profile case in Azerbaijan.
Another financial institution from Kazakhstan had been exposed to IBA debt. The state-owned Development Bank of Kazakhstan bought a $198 million bond in 2013, but IBA repaid it early in 2016, according to Bloomberg.
Whereas the Development Bank of Kazakhstan is now safe, the ENPF will have to face the IBA case for the next few months. Daniyar Akishev, who took over from Kelimbetov as Central Bank chief, conducted a first round of negotiations with Samir Sharifov, Azerbaijan’s finance minister, in May. Akishev and Sharifov will likely meet more often as the process unfolds.
Members of Kazakhstan’s parliament are now calling for a thorough investigation of the decision-making process that brought ENPF managers to choose IBA as a safe place to invest, as this is only the latest of a series of scandals concerning the ENPF.
In January, in an unrelated court case, Ruslan Yerdenayev, then-chairman of the ENPF, was detained on charges of embezzlement regarding a suspicious purchase of local assets. This prompted the creation of a Public Council, formed of prominent economists and members of the civil society, to review the investment policy of the ENPF. The Council lost its main protagonists, political expert Dosym Satpayev, economist Rakhim Oshakbayev, and financial expert Bota Zhumanova after only two months of operations at the end of April. The three resigned over concerns regarding the transparency of the oversight process.
Nothing seems to be stable around the ENPF, once heralded as a wise operation that could become a model of asset management in Central Asia. Now, with the banking sector in disarray and incessant scandals involving the elite, Kazakhstan’s leadership will have to find the funds to prop up, once again, its weakening economy.