Francis Fitzherbert-Brockholes, partner, White & Case
Opinion: Kazakhstan – a litmus test for emerging markets
28 September 2009
As banks worldwide were hit by the global financial crisis, they were increasingly supported through emergency measures launched by governments.
But while the troubles faced by the global banking giants have dominated the headlines, the reduced liquidity and aversion to risk has hit emerging markets even harder. Over the past decade banks in the emerging markets have benefited from significant foreign investment and have therefore suffered badly from the liquidity squeeze - and for some it has already proved too much.
The recovery process will be challenging. For some of these emerging markets this is the first time they have faced such a crisis. For others, the last time they faced a squeeze there was little there to be squeezed. There is also the added complexity that local legislation is often not suitable for a successful restructuring process.
Kazakhstan is an example of an emerging market that has become attractive to foreign investors in recent years and, like many others, it has been affected by the global crisis. This is particularly the case for its banking sector, where over the past 18 months the Kazakhstan authorities have taken a number of steps to support struggling banks, including introducing new legislation. My firm has been involved in this process since the autumn of 2008, and it became clear earlier this year, during the second phase of the restructuring of two of Kazakhstan’s largest banks, that new legislation was needed if there was to be any prospect of a successful, consensual financial restructuring of them - that being the objective of the exercise.
The primary difficulty was that existing legislation required all creditors to agree to a restructuring proposal, meaning any individual creditor potentially had the power to block the restructuring, even if the vast majority agreed. The principle of ‘cramming down’ a reconstruction on dissenting creditors, whereby they are bound by a restructuring proposal when the majority agree, is a longstanding principle of many Western countries’ insolvency legislation. Its absence in Kazakhstan created an enormous obstacle to any restructuring.
To overcome this new legislation to this effect took effect at the end of August. Additional features of the new law also include refinement of the legislative framework, allowing a good/bad bank structure and provisions for the establishment of stabilisation banks. The consensual restructuring component was drafted in short order by a team that worked with the prime minister of Kazakhstan, the country’s financial regulator and its central bank.
The importance of this new legislation goes beyond Kazakhstan. Many other countries in emerging markets, including others in the CIS, lack similar legislation to facilitate complex restructurings of this kind. A number of emerging market countries will look to follow Kazakhstan’s lead as they seek to balance protection of the interests of local investors while increasing foreign investors’ confidence in their banks.
Any emerging market country seeking to undertake this task will only be able to do so if it can get all of the necessary parties to work together. Success requires a country’s financial regulators and government, in conjunction with any necessary international advisers, to work as one team in drafting major new legislation to ensure it balances the need to create an adequate, internationally recognisable legislative framework with the need to protect the local business.
Kazakhstan’s innovation will, we hope, ensure it retains foreign investors’ confidence as an investment destination, as well as providing additional protection to the banking sector from future crises. But it is its legacy of providing a roadmap for other emerging markets to find solutions to their own problems resulting from the current crisis that will be most welcomed.