AIFC Boost To Kazakh Financial Hub Ambition

Kazakhstan’s New Financial Exchange To Be Powered By Nasdaq

KAZAKHSTAN is set to realise its big ambition to become the international financial hub in the Commonwealth of Independent States (CIS) region, following in the footsteps of the globally recognised financial hubs of London, New York and Singapore.

Preparations are underway, with the Astana International Financial Centre (AIFC) expected to be launched in 2018 after the Central Asian country hosts the Astana Expo 2017 in its capital city from June 10 to September 10 next year.

The creation of AIFC (step No. 70) is part of the 100 steps planned under five institutional reforms for the country, as announced by Kazakhstan President Nursultan Nazarbayev on May 20.

The AIFC, targeted to become the financial hub for CIS countries as well as the region, will serve as a platform for Kazakhstan to join the top 20 financial centres in the world and achieve its goal to be among the top 30 global economies by 2050.

As with the case of Malaysia, the former Soviet republic aims to reduce dependency on oil revenues given the current state of the industry.

The country now turns towards developing its financial system beyond the banking sector and promoting Astana as a leading place to do business in the CIS region.

Hence, the establishment of AIFC is part of Kazakhstan’s structural reforms currently being carried out to diversify its economy and ensure steady growth, as well as promote a full-fledge financial system.

“The aim of AIFC is to attract foreign investment, open up the Kazakh banking sector and make it easier for insurance companies and Islamic finance institutions to do business,” the economic counsellor at the Embassy of Kazakhstan in Malaysia, Dr Serik Amirov, told Business Times in an interview recently.

The AIFC will see the establishment of the AIFC Stock Exchange to act as a platform for all placements and trading of stocks.

Serik said AIFC had been in cooperation with a leading international consulting firm to develop
a financial model for the AIFC
stock exchange, the business case and analysis of basic terms for strategic partnerships, particularly with other international financial centres.

Oliver Wyman, an American international management consulting firm, has presented its vision on the AIFC stock exchange’s services and products, customers, major development phases as well as profits and costs over 10 years.

The new trading infrastructure would allow trading in securities, commodities and derivatives, as well as carry a full value chain of services that include listing, organisation of trades, clearing, settlement and depository procedures, said Serik.

He also said AIFC was implementing active negotiations with major global stock exchanges, including Bursa Malaysia.

“AIFC has plans to work with Bursa Malaysia and we do believe that the partnership between the AIFC stock exchange and Bursa Malaysia will support the development of Islamic securities (sukuk and Islamic index) market and commodities exchange setup in AIFC,” he added.

The establishment of the AIFC stock exchange will see Kazakhstan’s sovereign wealth fund, Samruk-Kazyna, listing at least five assets, including KazMunayGas (KMG), Kazatomprom and Air Astana.

“All process details association with the listing of these companies are under discussion with Samruk-Kazyna,” Serik said.

KMG is Kazakhstan’s state-owned oil and gas company, similar to Petroliam Nasional Bhd in Malaysia.

The company is 90 per cent owned by Samruk-Kazyna while the rest belongs to Kazakhstan’s National Bank.

Meanwhile, Samruk-Kazyna owns 100 per cent of Kazatomprom, Kazakhstan’s national operator for import and export of uranium, rare and rare earth metals and nuclear fuel components for power plants.

Air Astana is the flag carrier of Kazakhstan and it operates from two hubs in Almaty and Astana. The airline is 51 per cent owned by Samruk-Kazyna and 49 per cent by BAE Systems Plc.

BAE Systems is a British multinational defence, security and aerospace company based in London.

There was also an expectation that companies from the CIS region would be listed on the AIFC stock exchange, said Serik.

Meanwhile, Kazakh nationals are encouraged to invest in Samruk-Kazyna’s assets after those companies are listed on the AIFC stock exchange under a programme called the “People’s IPO”.

According to Serik, the People’s IPO offers hundreds of thousands of ordinary Kazakh citizens the opportunity to own shares in the country’s largest companies and is also a new investment instrument for the people.

“People’s IPO allows increased transparency of national enterprises and intensifies public control over their activity. People’s IPO shareholders’ can only be the Republic of Kazakhstan citizens. They have the priority right for shares buying,” Serik added.

Capital markets and asset management are two key pillars of AIFC with private banking and Islamic finance as complimentary pillars.

The plan is to grow the local Kazakh capital market and increase its liquidity to boost economic growth while creating a platform required for all other pillars such as asset management, private banking and Islamic finance.

The capital markets is expected to have a direct gross domestic product (GDP) contribution of US$11.6 billion (RM48.7 billion) from 2016 to 2025 with creation of 900 to 1,100 jobs by 2025.

“Currently, the AIFC authority is carrying out a number of projects devoted to the development of capital markets. These projects are targeted towards developing the Kazakhstani capital market infrastructure and activities, as well as increasing its attractiveness for foreign investor community,” Serik said.

At the same time, Kazakhstan has also set plans to develop its private banking sector and create an Islamic finance market.

The AIFC would give an opportunity for the region’s high net-worth individuals to place their accumulated wealth in Kazakhstan. The financial centre also provides a platform for international private banking companies to set up their offices within the centre.

The AIFC also aims to become a regional hub for Islamic finance by creating favourable conditions for the operation and development of Islamic financial institutions.

Local analysts have said Kazakhstan policymakers are using Malaysia as a role model to become an Islamic financial hub in the CIS region.

Despite that, they believed that Kazakhstan would not be a serious rival to Malaysia as its GDP is less than half the size of Malaysia’s at US$184.4 billion as of last year.

Meanwhile, the AIFC is adopting the principles of common law — the United Kingdom’s law and standards — to ensure easier investment activities, so as to put Kazakhstan in the global financial map.

The AIFC will also be rendered by an independent AIFC court.

According to the AIFC website, judges at the AIFC Court will have exclusive jurisdiction over disputes between AIFC participants, bodies and/or their foreign employees as well as disputes relating to operations carried out in AIFC and regulated by AIFC law and disputes transferred to AIFC Courts by agreement of parties, except criminal and administrative proceedings.

“With other pre-conditions in place, availability of a modern exchange infrastructure based on international standards will provide easy access to Kazakhstan’s capital market for global investors and attract foreign capital into the AIFC market allowing large local issuers to secure sufficient funding in Astana and avoid dual listing on other markets,” said Serik.

Once the AIFC is launched, all the capital market listed on the current Kazakhstan Stock Exchange (KASE) will be moved to Astana.

Meanwhile, KASE, which is based in Almaty, will become a currency exchange centre.

“KASE tried to reform itself for many years, but in the conditions
of tight regulations and lack of capacity (i.e. human resources, know-how, etc), it hasn’t been able to succeed for several years,” said Serik, adding that it needed many improvements.