On The Up: Kazakhstan’s Financial Infrastructure
Governor of the Astana International Financial Centre Mr Kairat Kelimbetov says its goal is to become one of Asia’s top ten financial centres
On 7 december 2015 Kazakhstan’s President Nursultan Nazarbayev signed a decree to create the Astana International Financial Centre (AIFC) in the country’s capital as part of the infrastructure created by Astana EXPO-2017. The AIFC’s aim is to become one of Asia’s top ten centres for financial services within the next ten years.
In order to achieve this goal, Kazakhstan possesses all the necessary internal and external competitive advantages (including geographical location, economic and political stability, favourable tax climate, along with significant public funds available for management), which can be used to establish a world-class financial centre.
This initiative will provide a fresh approach to diversifying the country’s economy, will help form a fully-fledged financial system (in addition to the banking sector) and will further integrate Kazakhstan into the global economy, as well as strengthening Astana’s position as a major business centre in Central Asia and the CIS region.
In turn, this will create highly skilled jobs and improve the transparency of the business environment along with ethical business standards, which will attract a highly skilled workforce from abroad, generally improving living standards in Astana.
The AIFC is designed to provide opportunities to both local and foreign players who will provide services in line with its core pillars including: capital markets, asset management, financial technologies (‘fintech’), private banking and Islamic finance.
Already established, the JSC ‘AIFC Authority’ will oversee the AIFC’s day-to-day activities and represent its interests. There are also plans to establish the Astana Financial Services Authority, which will be responsible for the regulation of financial services and related activities in the AIFC. In addition, work is scheduled to start preparing the necessary legal framework for the establishment of the AIFC Court and Arbitration Centre, which will be completely independent from Kazakhstan’s judicial system and based on common law. This will ensure fairness and justice, and should greatly enhance Kazakhstan’s credibility in the eyes of foreign investors.
The AIFC’s end goal is to attract direct foreign investment to help develop both Kazakhstan and the whole Central Asia region. With the assistance of international financial centres like Hong Kong and Singapore, we plan to attract new fintechs and investors. Dubai is a role model for our centre, and accordingly we are working with the NASDAQ Dubai Stock Exchange and consider Dubai International Financial Centre as our strategic partner in the Persian Gulf. As well as working with financial centres in New York, Chicago and Toronto, we are in close cooperation with the London IFC, London Stock Exchange and financial community, among other European countries.
The AIFC is aware of the vast experience that the London IFC can offer it, and accordingly, we are interested in attracting UK expertise, knowledge and investment. In March 2016 the AIFC Authority, the European Bank for Reconstruction and Development (EBRD) and the CityUK Corporation signed a Memorandum of Understanding (MoU) on establishing and developing the AIFC. Since then, Kazakhstan and the UK have had number of important exchanges on how to better engage UK expertise and companies into the AIFC’s development, including the AIFC Forum in London in March. Before that, a roundtable in Astana in January with a UK delegation headed by UK Commissioner for EXPO-2017 Professor Charles Hendry took place.
Building a new international financial centre is an ambitious and challenging project and will require both the government and private sector’s full commitment. However, the volatility of global financial markets has made the process more complicated. Trading volumes have been extremely low, and there is a limited range of high quality and liquid financial instruments, while the derivatives market is virtually non-existent.
Accordingly, establishing a liquid and well-balanced capital market is one of the key priorities of the AIFC’s development strategy. The IPO launch of new state-owned companies would significantly increase activity in the domestic stock market (involving the population in the process), thereby increasing market capitalisation and liquidity of traded stocks.
Relatively few IPO launches of Kazakh companies have taken place so far, and this can be attributed to their lack of transparency, reluctance to disclose financial statements, failure to meet listing requirements, high leverage of debt and equity capital, low level of corporate governance and defaults of listed companies. To tackle these issues, the AIFC will ensure stable issuing and placement of government treasury bonds, initiate issuing of infrastructure bonds and privatise state-owned companies through IPO with a requirement to place at least 25 per cent of the total outstanding shares on the AIFC Exchange.
We will also look at the possibility of introducing the role of the Unified Accumulative Pension Fund as an active player in the secondary capital market. An important step will be localisation of international asset management companies with allocation of the National Fund assets under their management.
Kazakhstan has accumulated over US$80 billion of sovereign reserves. Along with pension assets, this means there are over US$100 billion of assets to be managed. While oil prices are low, these assets will play an essential role for the local economy, and making sure they are managed in the most efficient manner is critical. New asset class managers will be required to accommodate growing asset class diversity of the reserves’ portfolio. We intend to work closely with the National Bank of Kazakhstan and Kazakh government in granting mandates to external managers. Preference will be given to managers with offices in Kazakhstan. Additionally, global investment banks will be invited as lead managers for the IPOs of state-owned enterprises and provide financial consulting to these companies.
The AIFC’s establishment will only be successful when all ingredients are used in the right proportions and mixed in the correct way to satisfy the needs of the most demanding clients in the financial markets, and accordingly, will have a positive impact on the operations, prosperity and corporate growth for all involved.
The AIFC will provide the following favourable privileges for investors that are new to the CIS region:
- modern infrastructure created on the basis of Astana EXPO-2017
- tax exemption for 50 years (corporate income tax on income from financial and auxiliary services, individual income tax, land and property taxes)
- free rent for office space for two years
- simplified currency, visa and labour regimes for participants and employees of the AIFC
- Astana offers easy air connections to key financial centres around the world via direct flights
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