Kyrgyzstan's Transnational Corruption Networks

The Global Financial System and Informal Practices in Kyrgyzstan

Source: Radio Azattyk

Kyrgyzstan is a nation defined by informality. From the clan politics of national government to the unwritten rules of everyday life, informal ties and practices permeate the system. This is widely accepted. However, what is often missed in discussions of Kyrgyz informality is the role of global networks. While allegiances to one’s descent group (Uruuchuluk) and practices such as Reiderstvo remain local, informality is increasingly enabled by financial institutions, Western governments and other actors in the international political economy.

We explore this point by addressing global financial networks’ role in facilitating informal, and often corrupt, behaviour in Kyrgyzstan. We begin with a summary of informality in Kyrgyzstan, before considering the role of global financial networks. In doing so, we reference one of Kyrgyzstan’s most infamous cases of financial impropriety: that of Asia Universal Bank (AUB).

Informality in Kyrgyzstan

Explaining the nature of governmental rule in Kyrgyzstan, Lewis (2012) references the idea of neopatrimonialism, a concept used to describe political systems that combine formal institutions of the state and informal politicking. In neopatrimonial societies, power stems from control over opportunities for corruption, with the leader using the distribution of this access to secure their authority and win loyalty (Lewis, 2012). This provides a useful introduction to Kyrgyzstan. While the post-Soviet era has brought new official institutions of government, informal networks and opportunities for wealth accumulation remain paramount.

Informal networks feature prominently in the work of Kathleen Collins (2002), who argues that clans drive political realities. Kinship-based organisations compete for state resources and form the basis of political patronage networks (Ibid.). Far stronger than political party ties one might see elsewhere, they have played an important role in key events, such as the 2005 and 2010 revolutions (Putz, 2019).

The clans are linked to another aspect of Kyrgyz informality: the capture and distribution of revenues amongst the elite (Engvall, 2016). Patronage relationships, what some might term “protection rackets” (Zabyelina and Buzhor, 2019), prikhvatizatsiya, and other informal practices play a key role in the economy. Indeed, according to Engvall (2016), the perception of the state as a space for investments “seems to have become internalized” within Kyrgyzstan.

Global Financial Networks and Patterns of Informality

Although rooted in deeply “local” practices and kinship ties, informality is intertwined with global financial networks. Indeed, as noted by Lewis (2012, pp. 122), in Kyrgyzstan the international financial sector is “needed to keep the system afloat'’.

Global links provide elites with an opportunity to “hide and protect wealth on a greater scale” (Engvall, 2016, pp.104). With estimates putting the share of politicians’ wealth held outside the country at as high as 95%, it is widely recognised that offshore institutions are a popular destination for illegal, as well as legal, Kyrgyz funds (Ibid.). Foreign banks and shell companies facilitate the capture of state revenues, allowing those in power to “camouflage” transactions and secure their wealth (Cooley and Sharman, 2015).

Global financial networks have also provided new opportunities for the informal practices of rigged privatizations and asset seizures, as evidenced by the practices of former Kyrgyz President Kurmanbek Bakiyev. Investors would face pressure to sell interests to offshore companies linked to the president’s son, Maksim Bakiyev (Cooley and Heathershaw, 2017). This occurred in the case of Megacom, which was then the country’s largest cell service provider. Having originally transferred 49% of the business to an offshore firm, rumoured to be controlled by Maksim, the company’s owners lost full control in what Shishkin (2013, pp. 122) labelled a “raider’s takeover”. Installed as Megacom’s deputy director of strategy, an ally of Maksim’s organized a $80,000,000 loan for the company, only for this sum to be transferred out via an offshore firm (Shishkin, 2013). Unable to repay the loan, Megacom was forced into bankruptcy and its assets sold to Alpha Telecom (Ibid.). Alpha subsequently sold shares to Vesatel, a New-Zealand registered company with links to Maksim.

Maksim Bakiyev - Source: Voice of America

By enabling the accumulation and seizure of wealth, global financial networks have become entrenched in Kyrgyz informality. On one hand, this has helped the regimes consolidate power. However, the concentration of revenues at the top may also have provided the impetus for the revolutions that deposed them (Engvall, 2016). By keeping more wealth for themselves, the leadership moved away from a system that used the sharing of rent-seeking opportunities to secure the loyalty of different regional and national elites (Ibid.). Angered by changes to the status quo, these political rivals were encouraged to use their own informal networks to secure regime change and “space” was created for revolution (Ibid.).

Global Financial Networks and the Bakiyevs: The Case of Asia Universal Bank

The importance of informality and global links is demonstrated in the case of Asia Universal Bank. Registered as the Kyrgyz subsidiary of a Western Samoan bank in 1997, AUB was officially controlled by Mikhail Nadel (Cooley and Heathershaw, 2017). The bank gained prominence following the 2005 revolution, with sources telling Global Witness (2012, pp.45) that it “enjoyed a privileged position within the country’s banking system”. Eugene Gourevitch, another businessman closely linked to the regime attributed this privileged position to the informal involvement of Maksim Bakiyev, saying that “Maxim and Nadel reached some kind of a deal” (Shishkin, 2013, pp. 118).

Against this backdrop, AUB became a key conduit for financial flows in and out of Kyrgyzstan. In his interview with Philip Shishkin (2013, pp.125), Gourevitch went as far as to say that AUB became “one of the few places he (Maksim) could trust to keep his money”. With major local companies, such as the airport operator and gold-export monopoly, also holding accounts at AUB, the bank became a key node in the global financial networks used by elites to hide the wealth secured through local practices of informality (Engvall, 2016).

Eugene Gourevitch - Source: Bloomberg

Just as significantly, AUB was a tool in the privatizations and asset seizures that defined the Bakiyev era. Accounts at the bank were specifically created to participate in privatization schemes, the proceeds from which were transferred to offshore companies allegedly linked to the Bakiyevs (Ibid.). AUB’s involvement in the Bakiyev’s illicit activities likely went even further, with local businessmen alleging that Maksim used his political influence to seize their companies, before diverting their cash flows to AUB (Global Witness, 2012).

Going as far as to engage in its own “Megacom-style” corporate raids (Chicken, 2013, pp.126), AUB was an active player in the informal practices that accompanied the consolidation of power under the Bakiyevs. However, at the same time, the extreme concentration of rent-seeking opportunities it enabled likely fed the resentment of rival elites. Indeed, when the regime fell, AUB became a lightning rod for much of the criticism of the Bakiyev era.

Conclusion

The cases of Megacom, Asia Universal Bank and many other Kyrgyz businesses point to an important truth: informality is no longer a local phenomenon. Instead, it plays out across distinctly “global” financial networks.

This globalization of Kyrgyz informality has, in some ways, amplified it. Local elites have new opportunities for extracting and securing revenues from the state, a reality that seems to have enabled an increasingly visible and extreme form of corruption.

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Bibliography

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