Clare Nuttall in Almaty -

On the same day in October that Prime Minister Gordon Brown announced a £50bn investment into British banks, the Uzbek government quietly moved to inject capital into six of the country's largest banks. Both actions appeared to be intended to support the banking sector at a time when the financial crisis was intensifying, but with one key difference - none of the Uzbek banks capitalised were struggling or had asked for funds.

Three of the banks concerned were either wholly or majority owned by the Uzbek state - Asaka Bank, Halk Bank and Microcreditbank. However, the other three - Uzpromstroybank, Pakhtabank and Gallabank, ranked second, fourth and 15th respectively in terms of assets - were mainly in private hands.

A total of $425m was pumped into the banking sector through investments from the Ministry of Finance, the Central Bank, Uzbekistan's sovereign wealth fund - the Fund for Reconstruction and Development - and other government agencies. As a result of the October recapitalisations, four of the five largest banks in the country are now under state ownership.

Brokers and investment firms in Uzbekistan have complained that the recapitalisations of the three privately owned banks were carried out without shareholders' permission and at unfavourable prices. "The government actions caused a significant dilution for investors," says one Tashkent-based broker who declined to be named. "Unlike in Kazakhstan, the banks were not squeezed. The sector is heavily regulated, it is not dependent on international capital markets and there was no mismatch between assets and liabilities."

After healthy growth in 2008, the international crisis is just starting to have an impact in Uzbekistan, as exports to its trading partners, in particular Russia and Kazakhstan, start to decline. Remittances from overseas Uzbeks are also starting to fall, with a knock-on effect on domestic consumption. However, pricing for Uzbekistan's main exports, gas and gold, have proved resilient to the crisis, and according to the latest forecasts from the European Bank for Reconstruction and Development, GDP growth of 9% is expected in 2009.

Healthy and private

The three privately-owned banks that were recapitalised were financially healthy and hadn't asked for government assistance. Data for the first nine months of 2009 shows that Uzpromstroybank made a profit of around $15m, Pakhtabank $10m and Gallabank $500,000.

The sector had, however, seen a series of capital increases by several banks, which had resulted in large blocks of shares being bought up by private - and in some cases foreign - investors. Before the government recapitalisations, 68% of Uzpromstorybank was in private hands, for Pakhtabank the figure was 72%, and Gallabank 51%. As a result of the recapitalisations, the level of private ownership in each of the banks was reduced to 24%, 25% and 14% respectively. "It seems the government saw people buying up huge blocks in the state banks and didn't want to give up control. These are infrastructure banks and important for Uzbekistan's economic system," says a director at one of the country's largest brokerages, who also declined to be named. "The problem was that they did not give the existing owners the chance to buy shares when they carried out the capital increase."

Since then, the government has already made changes at Pakhta Bank and Gallabank. On March 30, two new banks were created "on the basis of" Pakhta Bank and Gallabank. Pakhta Bank, in its new incarnation as Agrobank, will provide a range of banking services to support development of the agriculture sector. Gallabank has been renamed Qishloq Qurilish Bank (meaning "rural construction bank" in Uzbek). "The purpose of the creation of the bank is to improve the living conditions of the rural population and construction works in the villages, speeding up the development of the industrial and social infrastructure in the regions, and wide introduction of the long-term crediting of the housing construction in the country," a statement from the Uzbek government said.

2009 had been designated "Year of Improvement and Development of the Agricultural Sector" in an effort to reduce the difference between standards of living in rural and urban areas. Fears that a wave of returning gastarbeiters to the country would boost unemployment and lead to social unrest has also prompted the government to invest in labour-intensive public works projects. Uzbekistan's state-owned banks are typically used to channel funds into the government's priority areas.

Brokers in Tashkent say that private investors in the three nationalised banks, who include several of the major frontier markets and CIS/Eastern Europe funds, are unhappy about this development. Not only have they lost control of the banks, it was done on very unfavourable terms. The recapitalisations were carried out by government decrees, and didn't allow existing shareholders to exercise their rights to participate on a pro-rata basis. The government also carried out its share purchases at nominal prices, which are well below book values and even further off real market values.

Investors who decide to cut their losses and exit their investments will have a difficult task ahead. According to brokers, in addition to the loss of liquidity due to the international crisis, the dilution of shares has reduced investor appetite in the market, leading to lower market prices. Despite reforms to Uzbekistan's securities market, a new decree introduced last year forces non-resident investors who want to buy publicly traded bank equities to receive permission from the central bank - this would be needed if any of the existing investors want to sell to foreign buyers. Currency conversion is also becoming more difficult.

Despite its steady GDP growth, Uzbekistan has seen a slump in foreign investment since the onset of the crisis along with other frontier markets. The nationalisations of several major banks is a slap in the face for the international emerging markets specialists who chose to invest there and will ruin confidence in what was already a little-understood market.

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