Kazakhstan will use $2.1 billion from its Samruk-Kazyna National Wellbeing Fund to buy 78.1 percent of shares in BTA, the country's largest bank, and will purchase a further 76 percent of shares in the Alliance Bank, the country's fourth-largest bank, for a symbolic sum of less than $1, the Kazakh government announced Feb. 2. The government added that the nationalization will be temporary, and that BTA will most likely be sold to Russia's Sberbank. A third bank, Kazkommertsbank, received just under a $1 billion from the same fund Jan. 30 as part of a recapitalization effort and the partial nationalization of 25 percent of its shares. Kazakhstan's economy is in trouble due to problems with its massively indebted financial system. The crisis opens up an opportunity for President Nursultan Nazarbayev to further strengthen his already-firm hold on the country's economy. It also creates an opportunity for the Kremlin to swoop in given Russia's financial means, greatly enhancing Moscow's sway over Kazakhstan, the most strategic and powerful state of the Central Asian countries. The financial situation in Kazakhstan has deteriorated rapidly due to the extreme indebtedness of its banking sector to foreign lenders caused by a massive expansion of the sector, which has grown at nearly 50 percent annually since 2000. The total assets of Kazakh banks have grown from the equivalent of around 5 percent of Kazakhstan's gross domestic product (GDP) in 1998 to more than 75 percent in 2008. The latter figure is an astronomical number when compared, for example, to the 55 percent bank asset-to-GDP ratio of Russia, the 85 percent ratio of the U.S., the 130 percent ratio of the Czech Republic and the 95 percent ratio for the eurozone's newest member, Slovakia. Relative to the size of its economy, in an extremely brief period Kazakhstan's banking sector has expanded to the size of the Central European and U.S. banking sectors. But unlike the United States and Central European countries, Kazakhstan lacks the experience to manage its banking sector. Only around 7 percent of the Kazakh banking sector is foreign-owned. While that may have its advantages — in Central Europe, foreign-owned banks were most aggressive in using foreign currency-denominated loans, leading to massive problems in their own right — it also has meant that the Kazakhs had to learn banking on their own. And Kazakhstan's timing was unfortunate: It was working to build a banking system from scratch during the worldwide flood of credit that since 2001 has inundated emerging markets with cash — certainly not an auspicious time to develop good habits on managing a nascent banking system. The expansion of the Kazakh banking sector also coincided with an increase in oil production, with output going from 603.6 thousand barrels per day (bpd) in 1999 to roughly 1.33 million bpd in 2008. The oil money and the wealth it generated (GDP per capita has doubled in just eight years) fueled a construction boom between 2002 and 2007 as a significant number of people began moving to the country's newly built capital, Astana, and as others began purchasing homes and cars for the first time. Loans issued to corporations and consumers increased tenfold between 2001 and 2006. Meanwhile, the loan-to-GDP ratio increased from 18 percent in 2002 (largely comparable to most of its Central Asian neighbors) to 42 percent (comparable to European emerging markets) by the end of 2005, and to 145 percent of GDP by the end of 2008 (higher than the loan-to-GDP level of 104 percent in 2007 of the eurozone. So much money pouring in so fast and the subsequent increase in lending proved problematic because most of the money came via loans from foreign banks. Unlike in Central Europe, where foreign banks brought their own capital through market penetration in the 1990s, Kazakhstan's banking explosion occurred during a time of massive global credit expansion. Kazakhstan therefore simply borrowed money abroad with little restraint, and then lent it to domestic borrowers (many of whom had never before taken out a loan). As of Dec. 1, 2008, Kazakh banks — most of which are privately owned, though many owners share family ties with the president — owed $86 billion, of which $38.5 billion is to foreign institutions (38 percent of GDP). The 37 Kazakh banks had a combined profit of only $126 million in 2008 as they tried to set aside capital to repay more than $17 billion of foreign debts that matured in 2008 and to cover bad loans — which could be as high as 20 percent of total loans according to Standard & Poor's. Western banks get nervous when that figure reaches 2 percent, let alone 20. Kazakhstan's entire private sector has a foreign debt of $103 billion, equivalent to 100 percent of GDP (for 2007 figures), one of the highest foreign-held private debt figures in the world (compared to 31 percent for Russia and 47 percent for Ukraine). The precipitous fall in oil prices since their brief mid-July 2008 high of $147 per barrel also has put a serious damper on the Kazakh economy. According to Fitch, the forecast for Kazakhstan's GDP growth in 2009 is 2.5 percent and only 1 percent for 2010, down from an annual rate of 9.6 percent from 2003-2007. While the financial sector has grown recently, oil is still the king for Kazakhstan. It accounts for more than 70 percent of overall exports, attracting more than 76 percent of all foreign direct investment in the country. The energy sector is funded separately from the financial sector — although because of the global financial crisis getting loans is difficult across the board — and contagion between the two is unlikely. This means that Nazarbayev's economic power base will remain unaffected by the crisis. Meanwhile, industrial production declined 2.9 percent and the manufacturing sector declined 16.3 percent in December 2008 on the numbers from a year ago — a statistic that includes the bumper growth from the first half of the year before the global recession hit. While officially still traded near its 120 per U.S. dollar target, the Kazakh currency, the tenge, is traded as low as 140 per U.S. dollar on the black market. While the discrepancy is still not egregious for a country that emerged from the former Soviet Union, the pressures from the decreasing oil prices and collapsing banking system could force Astana into devaluation. Devaluing the tenge may also be necessary because of Kazakh reliance on and links to the Russian ruble, which itself has lost 35 percent of its value against the U.S. dollar since August 2008. The ruble is used intermittently with the tenge in Kazakh regions close to the Russian border, and Kazakh migrants working in Russia (close to 25 percent of Kazakhs worked abroad in 2005, the vast majority of them in Russia) send back roughly 6 percent of Kazakh GDP in remittances. Kazakhstan therefore needs a strong ruble both because of exports to Russia (which account for more than a third of all Kazakh exports) and because the value of remittances sent by working family members abroad lose their value as the ruble depreciates. The debate now for Astana is whether it can continue to hold the tenge at its current price of around 120 per dollar, largely unchanged since August, or to devalue it in the coming weeks. A devaluation would astronomically increase the already-high foreign debts held by Kazakh banks, meaning the government may have to pick up most of its foreign debt by nationalizing the banks and taking on their debt obligations. The economic crisis in Kazakhstan will allow Nazarbayev an opportunity to consolidate control over the largely privately owned banking system. Nazarbayev has made sure that his family members have a stake in almost every important sector inside of Kazakhstan. Nazarbayev thinks more in terms of dynasties than governments and appears to believe that the entire region is his family's to rule as an empire. Nazarbayev already has installed his grandson Nuri Aliyev, chairman and majority holder of the seventh-largest Kazakh bank, AO Nurbank, as the deputy head of the Development Bank of Kazakhstan. In this position, Aliyev is essentially in charge of the bank rescue package and the stimulus plan, valued at roughly $21 billion (or 20 percent of GDP). Aliyev also controls how the country's reserve fund, which holds roughly over $50 billion, is used to fight the crisis. Nazarbayev may not be able to save the banking system all on his own, however. The government oil coffers are large, but would have to be almost completely emptied to pay off all of the foreign debts. A great part of the Kazakh banking system may therefore come up for sale in the next few months. Russia, looking to assure control of Central Asia and being one of the few countries with actual cash on hand, will be an eager buyer. To this end, plans are already in motion for Kremlin-controlled Sberbank to purchase BTA. Moscow wants to make sure that these countries do not make any deals independent of the Kremlin as the United States looks to lure Central Asian countries to help it find an alternate route to Afghanistan. On Feb. 3, for example, Moscow's $450 million loan to Kyrgyzstan was enough to convince Bishkek to ask the U.S. to leave the strategically important Manas air force base, which the United States depends on for its operations in Afghanistan. The financial crisis in Kazakhstan is therefore also an opportunity for Moscow to lend a helping hand to its neighbor, conditioned on Astana's continued toeing of the Moscow line.