Kaspi Update 2024: The Culper Short Report
"Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth."
Today Culper published a short report on Kaspi, alleging that the company has been misleading its shareholders by not disclosing its Russian connections.
Last May, I published 3 issues of the newsletter about Kazakstan in general, and Halyk and Kaspi specifically. So now, I am compelled to write down my thoughts on the topic, if not for any other reason, then to check my reaction to contradicting information.
The Russian Connection
The first, the major, and the recurring point the Culper report makes is Kaspi’s Russian connection. Upon reading the report, one may be left with the impression that there is a lot of illegal activity going on at Kaspi. However, the main allegation this report makes is misrepresentation of Russia related business dealings. For example, it claims that a large proportion of Kaspi's non-resident inflows are attributed to Russian citizens, and as such they merit mention in the company disclosures.
Kaspi is exposed to Russian citizens and Russian businesses.
The twist of the message is that only Kaspi, and no other bank, opens accounts for Russian citizens in Kazakstan.
I doubt this is true, especially for banks in countries that are not in the US or the EU, specifically for banks in countries with deep historical ties to Russia. I bet every bank on the south border of Russia opens accounts for Russian citizens. Further south, Turkey and Dubai are welcoming them by the tens and hundreds of thousands. Not even mentioning India and China that have completely substituted for the EU as the main markets for Russian oil and gas.
However, we are not even talking about actions that break sanctions. Is opening a bank account for a Russian citizen illegal under US sanctions? No, not even in the US and the EU unless they are on Santa's bad list of oligarchs (OFAC's Specially Designated Nationals List). The EU Commission Consolidated FAQ, last updated just 15 days ago, says:
While not strictly prohibited, banks may be more cautious about opening accounts for Russian citizens due to increased compliance requirements and risks.
Also, working with a correspondent bank in Moscow is not automatically a breach of US sanctions. Moreover, Raiffeisenbank, which is not without its issues, does not appear on the CAPTA list nor on the SDN list.
Then, there is the allegation of doing business with regular Russian citizens not only in the bank but also in the marketplace.
How is this illegal again? It is not. I guess the point again is disclosure. Maybe. Maybe it is too small to merit special mention.
Then the report mentions several deals that Kaspi didn't disclose:
The partnership with Smartix and Yandex Taxi
The purchase of Postomat lockers from Russian manufacturer Techline.
I don't know if Kaspi was under any obligation to disclose any of these. But it is definitely sneaky not to mention them at all. So, this again falls under the improper disclosure and potential misrepresentation.
The Warmed Up Kairat Satybaldy Story
The guy has been serving his sentence for embezzling money from state-owned companies for more than two years now.
Satybaldy, who was detained in March (2022), has pleaded guilty and repaid over $500 million to the state as part of a plea agreement, the authorities have said.
We can speculate whether Kaspi fell short in applying its AML policies. As of now, it hasn't been implicated in the crimes committed by Satybaldy.
Related Transactions
Some of them are plain wrong, like the claim that Magnum Cash & Carry, with which Kaspi firmed a JV, was run by Vyacheslav Kim's daughter.
Others, like the purchase of Alseco, which started the digital transformation of the plain old Bank Caspian, are just business as usual in markets such as Kazakhstan. Yes, it was owned by an oligarch close to the former President, just like pretty much every other important asset in the country.
The most startling and obscure one was the purchase of Digital Classifieds, which holds three Azerbaijani ad platforms, for $31M in exchange for 5 MacBooks and $14,058 in revenues. I have to admit this one stinks.
Conclusion
This is investing in frontier markets for you. Shady deals and spotty disclosure are the norm. Political risk is real. You should never get too comfortable. This why I limit the size of my positions in frontier markets. From the Kazakh OS issue:
This is why I am a strong believer that bets in such markets are inherently speculative and should be sized as such. Depending on your risk tolerance, this can mean anything between 0 and 5% per bet, up to whatever your allocation for speculative bets is.
I bet Kaspi has skeletons in the closet. But at the same time, I think management has done a great job of developing the business into the Kazakh OS it is today.
The risk I am worried about is not the short seller's report or the poor disclosures. The real risk is how Kaspi continues growing from here given that user growth in Kazakhstan is tapped out. Everyone is a customer already. Spend and share of wallet will increase, but this growth won't be as fast as adding new customers. The expansion into neighboring countries has not gained momentum yet, although there are some bright spots, such as the possibility to buy Uzbekistan's Humo payment system, announced in the end of August.