Clare Nuttall in Almaty -

As the recession recedes and Kazakhstan's major companies turn their minds to fundraising, the Kazakhstan Stock Exchange (KASE) is hoping for an increase in activity towards the end of this year. But with competition from international stock exchanges still strong, the KASE is looking for a strategic partner and plans to lobby the government to put pressure on domestic companies to issue on the local exchange.

The KASE, along with the rest of the Kazakh economy, was negatively affected by the global economic crisis, seeing a drastic decrease in the volume of trading during 2009. Andrey Tsalyuk, vice president of the KASE, forecasts a return to 2008 levels by the end of this year, mainly driven by currency market and repo market transactions. "Our economy is based on raw materials, and our partners are now emerging from the crisis, but unfortunately the impact of the crisis on the stock and bond markets has not ended," says Tsalyuk. "However, we expect to see more positive trends emerge as the banks recover, and some major Kazakh companies are preparing for IPOs in 2011."

Recent deals on the KASE include sovereign wealth fund Samruk-Kazyna's placement of 10-year domestic bonds worth KZT61.4bn ($418m) on September 27, as well as an domestic bond placement by state energy company KazMunaiGas and the listing of bonds by the Almaty akimat (city administration).

However, the most-anticipated deal, the expected IPO of KazMunaiGas (this parent company has already done a London IPO of its subsidiary KazMunaiGas Exploration Production), is more likely to take place outside Kazakhstan, probably again in London. The head of Kazakhstan's state holding company Samruk-Kazyna, Kairat Kelimbetov, said in late October that an IPO of up to 20% of the company was planned in 2011. This would be a return to the pre-crisis years, which saw a series of multi-billion-dollar IPOs by Kazakh banks and other companies, on the London Stock Exchange.

Meanwhile, despite the efforts of the KASE and the Regional Financial Centre of Almaty (RFCA), the agency set up to develop Almaty as a regional financial hub, the local exchange remains relatively illiquid.

Platform for change

The two organisations launched a long-term strategy to develop the exchange for the period 2007-10. "When the strategy was drawn up, it did not take into account the possible crisis. Nevertheless, we are planning to complete it by the end of this year," says Tsalyuk.

The most important step taken under the programme was to merge two trading platforms - the KASE and the special trading floor of the RFCA - into a single trading floor. New listing rules were introduced in 2008, and the procedure for becoming a member of the stock exchange was simplified. All the business processes including risk management and internal audit have been revised. The only major step not taken was the planned IPO of the KASE itself; the idea was abandoned after research showed it to be unfeasible.

One outstanding issue often raised by investors is the introduction of T+3 settlement. Tsalyuk says the KASE is working on this. "First, we plan to introduce T+0 with pre-deposit, like on [Russia's] Micex, which would allow us to reduce the number of non-fulfilled deals. At the same time we have been working on a project to introduce T+3 with partial collateral. Given the low level of liquidity, trade with a central counter-party is difficult. We will therefore try to introduce T+3 without a CCP using the mechanism of risk margining for the time being," he explains.

With the current development strategy nearly completed, the KASE is now drawing up plans for the future beyond 2010. On the technical side, the aim is to make the exchange more convenient for participants, and to provide direct access for foreign investors. "We have a so-called triangle of the most important issues: perfecting the settlement system, direct access to the market for foreign investors, and acquiring a well-known trading system that will facilitate trading by foreign investors and provide settlements at a high level," says Tsalyuk. "These three issues are the cornerstone of our new strategy."

The KASE will also focus on business development and marketing of the exchange. Together with the RFCA, the KASE management team has launched a PR campaign, GR (government relations) campaign and IR campaign. "The most important point we want to make is that the shares of our companies must be purchased by local investors as well as investors from outside Kazakhstan. The market infrastructure is practically prepared for this now, and will be 100% prepared by autumn 2011, so by then we will be competing with foreign exchanges on a level playing field," says Tsalyuk.

Tsalyuk also wants to see the Kazakh government follow Russia's lead and enact legislation that would help the domestic IPO market. "We will lobby for a ban on the placement of issues outside Kazakhstan. The post-crisis development of Kazakhstan will be impossible without this step. The government must assist companies listing on the local market. The probability of such a ban is not high. However, I think it will benefit not just the KASE, but also the country. The first step would be to hold IPOs of state-owned companies on the local market."

The KASE plans to attract a large international stock exchange as its strategic partner, and is already in discussions with several exchanges. It is also considering selling a stake to an institution such as the European Bank for Reconstruction and Development (EBRD) or the International Finance Corporation (IFC).