Is Kazakhstan's new financial centre for real?

Three and a half years after the advent of an unprecedented oil slump, which has weighed down on economic growth and revived talk of privatisation of state assets, Kazakhstan is preparing for the launch of the brand-new Astana International Financial Centre (AIFC). At a special media presentation in late September in Astana, AIFC governor Kairat Kelimbetov who previously chaired the country’s central bank in 2013-2015, touted the advantages to be offered by this new facility.

Regional hub

The AIFC is expected to become a regional financial hub with leading positions in capital markets, asset management, Islamic finance, fintech, private banking and green finance. It has the ambition to knit together the financial markets of Europe, the Persian Gulf and China and eyes partnerships with all major trading platforms across the world.

Pre-launch testing is underway and the formation of certain governance bodies is still ongoing, but according to the Kazakh authorities, the AIFC will be fully operational as of early 2018. The main decision-making organ, the AIFC Management Council, is chaired by president Nursultan Nazarbayev and comprises, inter alia, the CEOs of Sberbank and Yandex, EBRD president Suma Chakrabarti and JP Morgan Chase International chairman Jacob Frenkel. The Astana Financial Services Authority will play the role of a financial regulator, whereas the AIFC Authority is in charge of overall development strategy, branding, and recruitment of AIFC participants and foreign experts. The remaining components of the organisational chart are the AIFC courts, using English common law and the English language in all proceedings, in full autonomy from the domestic judiciary, as well as the Astana International Arbitration Centre.

The AIFC already has its own stock exchange, 75% of which is currently owned by the government, while the rest belongs to a strategic partner, the Shanghai Stock Exchange (SSE). According to Mr Kelimbetov, the SSE is considering raising its stake to 40% in the near future; another partner, American NASDAQ, is reportedly interested in acquiring 7%. Kazakhstan hopes to use the AIFC bourse as a primary listing platform for a score of state-owned enterprises whose privatisations are scheduled through 2020. Next year should see the auctioning of considerable stakes of at least 25% in three national heavyweights – uranium miner Kazatomprom, AirAstana and KazakhTelecom. The government has so far selected yet-to-be-disclosed investment banks for the former two and is readying them for IPOs. In the case of KazakhTelecom, both an IPO and the sale to a strategic investor are on the table. Other flagship companies are slated for partial privatisations, most likely via IPOs, by the end of 2020, including KazMunayGas, KazPost and Kazakh Railways.

There is no doubt that Kazakhstan has made significant progress in recent years in streamlining and modernising its legislation. Although its overall 2018 Ease of Doing Business ranking by the World Bank is little changed from 2017, the country now ranks first among 190 economies in terms of protecting minority investors and sixth as far as the enforcement of contracts is concerned. This has been enabled by the adoption of sweeping reforms earlier this year, with simultaneous amendments being introduced into multiple laws and codes. The AIFC itself is a bold legal experiment in Central Asia and the entire former Soviet Union whereby a government has voluntarily agreed to a special legal regime beyond its normal jurisdiction, with associated tax breaks running until 2065, visa and residency exemptions, the exclusive use of English and Western judges.

Attracting big names

Yet, unlike in earlier experiments, ultimate success hinges on Kazakhstan’s ability to make a strong case to top-tier foreign investors so they choose Astana over more familiar alternatives. Both the Kazakhstan Stock Exchange (KASE) and the Almaty Regional Financial Centre (ARFC) have largely failed in their respective undertakings. While the KASE was seriously undermined by the 2013 merger of all Kazakh private pension funds into one state-owned entity, which drastically limited the number of institutional investors, the ARFC has been plagued by chronic economic fragmentation in Central Asia. Kazakhstan’s 2018 Doing Business status is unequivocal in this regard: it is only 123^rd out of 190 when it comes to trading across borders, ahead of Laos but behind Niger. For the AIFC to thrive, it must generate enough interest from abroad, especially at a time when the end of the commodity super-cycle has made investments into traditional capital-intensive natural resource projects less attractive.

President Nazarbayev is the oldest head of state in the former USSR, at 77. His current term ends in 2020. The uncertainty surrounding his succession is frequently cited as the foremost source of concern to foreign investors and could jeopardise Kazakhstan’s plans to attract up to $40bn in FDI by 2025. Other challenges remain as well. For instance, being a minority shareholder in a company majority-owned by the government could pose a risk. Even industrial giants have experienced the trouble of working locally on projects in which the state has only a minority stake. Since early 2016, Kazakhstan has been locked in a dispute with foreign members of Karachaganak Petroleum Operating (KPO), a consortium developing a giant onshore gas condensate field. The government claims it was underpaid during the initial exploration phase and has to date rejected two proposals for an out-of-court settlement, including a $300m cash offer. In another instance, KazMunayGas attempted last year to buy out the minority owners of its LSE-listed subsidiary, KMG E&P, on unfavourable terms, but its offer was voted down after months of controversy.

There are myriad other issues that potential investors need to be aware of before reaching for their pockets. A sound understanding of the country and its decision-making processes, including the involvement of well-connected individuals, normally referred to as politically exposed persons, in key industries, is a prerequisite. Despite all the recent improvements, Kazakhstan still remains a high-risk jurisdiction and is ranked 131^st out of 176 in Transparency International’s Corruption Perceptions Index. As the Latin saying goes, ‘praemonitus, praemunitus’ – ‘forewarned is forearmed’.

George Voloshin is the head of the Paris Office of Aperio Intelligence, a London-based corporate intelligence consultancy.