Clare Nuttall in Bishkek -

The Kyrgyz government is planning to privatise several of the largest state-owned companies as it seeks to plug a $500m budget deficit. Companies going on the block include the successor to AsiaUniversalBank (AUB), Zalkar Bank, and other assets controversially nationalised after the April 2010 revolution.

The government is understood to have drawn up a list of around 30 enterprises to be privatised. In addition to Zalkar, they include several major companies in the telecomunications and energy sectors - two of the most profitable areas of the economy.

However, with the autumn presidential elections approaching, decisions may be put off until the end of the year. The parliament's ruling coalition has several times been on the brink of collapse in recent weeks, and the government has been too preoccupied with trying to hold it together to have much time for lawmaking. Tempers have been running high, and punch-ups between deputies from rival parties are not uncommon.

Indeed, the parliament is in such a sorry state that MPs sacrificed seven sheep in April to drive evil spirits from the building. Although one MP, Ondorush Toktonasyrov, slammed the ritual as a sign of a "backward mentality," most of his colleagues attended the ceremony in the hope of making things run more smoothly, although not with any notable success. The intense political wrangling is set to increase as the presidential elections approach, making it highly unlikely any solid progress on privatisation will be made before the end of the year.

However, the revenue is urgently needed. Kyrgyzstan faces a yawning $500m hole in this year's state budget, due mainly to agreements to raise wages for teachers and doctors, and to rebuild houses in Osh and other southern towns that were destroyed in last year's ethnic violence.

Reprivatise

Some of the companies likely to be sold were nationalised immediately after the April 2010 revolution, when the new interim government took over five banks and a number of other assets that it said were linked to the family of ousted president Kurmanbek Bakiyev, in particular his influential son Maxim. They include power company Severelectro and fixed-line telecom company Kyrgyztelecom, both of which had been privatised to investors allegedly connected to Maxim Bakiyev immediately before the revolution. In fact, the deals were one of the key grievances that sparked the revolt. "There is now a plan to carry out appraisals of these companies then to sell the shares held by the state. The government needs money to cover the budget deficit so it wants to sell these assets," says Umet Daletbaev, managing director of Bishkek-based Aiten Consulting.

There are still questions over the legality of the nationalisations of these and other companies. With the parliament disbanded, the interim government carried out the nationalisations by decree, which was not provided for under the constitution.

Prior to its nationalisation, AUB was Kyrgyzstan's largest bank, the merger of the country's two largest financial institutions - AUB and Kyrgyzpromstroibank - in November 2008 having created a local giant. AUB's former management led by Mikhail Nadel has always denied having inappropriate links to the former regime, however, it has made no headway with the new government in getting the bank back.

AUB was put under the control of the central bank in April 2010, and has since been restructured and divided into a "good bank" and "bad bank". The "good bank", Zalkar, was created in December 2010. "The government is planning to privatise Zalkar Bank, which is based on the assets of AUB, by the end of 2012. We are still among the top 10 banks in Kyrgyzstan, and have around 40,000 clients," Zalkar's chairman Maksatbek Ishenbaev told a panel at the European Bank for Reconstruction and Development (EBRD) annual meeting in Astana on May 21. EBRD officials have indicated they may be interested in the sale of Zalkar.

Buyer beware

The other challenge will be to find buyers for the assets. Even without the nationalisation controversy, privatisation in Kyrgyzstan has been a struggle. "Successive governments have been looking for a buyer for fixed-line operator Kyrgyztelecom for over 15 years," points out Denis Bagrov, senior lawyer at Grata law firm.

Kyrgyzstan has moved closer to democracy, holding Central Asia's first open elections in October 2010. However, fears of a recurrence of last year's political turmoil, added to the forced nationalisations and the disregard of property rights after the revolution, have scared off a lot of foreign investors.

"The investment climate is better than a year ago, but the political situation is still not very stable, so people are afraid to make big investments into Kyrgyzstan. The government needs to reassure both the Kyrgyz population and potential investors that property rights will be respected," says Aktilek Tungatarov, executive director of the International Business Council (IBC) in Bishkek.

"The outcome of the presidential elections will affect all sectors of the economy, so decisions are being put on hold. Privatisation is being planned, but I think it will not be soon. The ministries have goals and plans but they are not implementing them, because when there is a new president, there could be a change of plan," Tungatarov says.