The Astana International Finance Centre (AIFC), complete with a new Shanghai Stock Exchange (SSE) and Nasdaq-owned bourse, officially launched in Kazakhstan on July 5. Its founders hope the AIFC, which is modelled on Dubai’s International Financial Centre with its selling point being its legal regime based on English common law, will soon become a financial hub for the region. 

It has stirred some interest among international investors thanks to the promise of special economic perks designed to attract legal and financial services companies, international banks and traders. The launch day saw 50 companies, including JP Morgan, Goldman Sachs, City Bank and Lazard Asset Management, register on the AIFC. The centre hopes to bring the number of registered companies to 100 in the upcoming months and to 200 and far beyond starting from next year. 

The colourful launch ceremony in Astana featured a video visually implying ambitions for the Kazakh capital to become a hub on par with Hong Kong, Dubai, Singapore and other international financial centres. The lightshow, however, failed to remove doubts that still linger in media headlines about the AIFC’s and the associated Astana International Exchange’s (AIX’s) prospects.

Success or failure?

Kazakhstan’s previous attempts at launching a financial hub failed to set a good precedent as the nation’s first try at creating an Almaty-based financial centre collapsed in 2008 as the global crisis hit. The Kazakh authorities ended up focusing on bailing out the county’s largest banks. Most of the large Kazakh companies floated abroad in the past have since delisted.

“At the very onset of the AIFC two years ago, [a friend of mine said] that constructing a new building and instituting common law and waiting for a market to materialise is very much akin to buying a fish tank and expecting life to emerge,” Anuar Ushbayev, chairman of the board of Almaty-based independent investment banking and asset management firm Tengri Partners, said during an AIX panel held as part of a conference two days prior to the centre’s launch. “But as we see, over the past two years, several [recent] developments in this centre actually lead me to believe that there is a high chance of success.”

“The [stock] market is fragmented into two different exchanges now and the newer one [the AIX], obviously [just started operating] but it’s my strong belief that liquidity is likely to move to [the AIX],” he continued. Kazakhstan’s first stock market the KASE, based in Almaty, saw its equities trading average at merely $11mn this year. 

Ushbayev argued that the KASE suffers from lack of transparency and a number of barriers to entry for foreign investors, such as the need to hire brokers who possess the knowledge of the local language. These obstacles make it highly unattractive for any foreign investor and deter them from properly setting up shop in the Central Asian country. But the AIFC appears to be different, the Tengri Partners chairman, who identified himself as “bullish on Kazakhstan”, added. 

“AIFC seems to identify what are actually quite obvious points that need to address for the situation to change and allowing [most] trade to happen in a major settlement system such as Euroclear, obviously is a very good step towards achieving that,” Ushbayev concluded. He also added that having English as the language of operations was another boon to AFIC’s prospects. 

However, before Ushabayev’s cautiously optimistic projections can come to fruition, the 25.1% SSE-owned AIX faces the major task of drawing in enough liquidity to jumpstart the new stock market.  

IPOs and liquidity woes

Earlier, AIFC governor Kairat Kelimbetov revealed that the financial centre is seeking exclusive rights on initial public offerings (IPOs) of the largest state-run Kazakh companies, which are set to be floated in 2018-2020 with the goal of selling at least 25% stakes in each company. In the fourth quarter of this year, the ex-Soviet state hopes to float the world’s biggest uranium miner Kazatomprom, national carrier Air Astana and soon-to-be near monopolist of the local telecoms market Kazakhtelecom. At least five more IPOs of large state-owned companies are expected to IPO within the next two years, culminating in national oil producer KazMunaiGas’ (KMG’s) listing that is expected to bring the privatisation to an end in 2020. 

The KASE is highly illiquid as local companies normally rely on bank funding, since there are no prospects for raising funds on the KASE. To avoid repeating the mistakes made in the past, by securing exclusive rights to the upcoming IPOs the new bourse would have a “historic chance” to draw in sufficient liquidity to kick off the market, Kelimbetov believes. The governor’s vision could be close to reality thanks to AIX linking up with Europe’s largest securities settlement house Euroclear. The clearing house would allow foreigners to purchase Kazakh stocks without having to open accounts at Kazakh depositories as was the case prior to the launch of AIFC and AIX. 

“I agree with the governor’s perspective that having a single liquidity pool is the ideal scenario, absolutely, especially if you’re starting off with a [new] market,” general manager, Middle East and Africa at Nasdaq James Martin told bne IntelliNews during the panel. 

“Today’s technologies allow for liquidity to be drawn into AIX exclusively,” European Bank for Reconstruction and Development (EBRD) local currency and capital markets development associate Hannes Takacs said at a different panel on the same day.

Yet, for many foreign investors, a dual listing of the companies on either the London Stock Exchange and the Hong Kong Stock Exchange would be the preferable option. Chinese investors have taken a proactive role in backing Astana’s project as the other shareholder in AIX, aside from the SSE and Nasdaq, is the Silk Road Fund — a fund with specific interests in developing the Belt and Road Initiative (BRI). But even with this commitment to the new Astana exchange, most Chinese investors would doubtless like to see dual listings in Astana and Hong Kong for at least some of the companies.

Tax haven?

Aside from implementing English common law, the financial centre’s self-described “dream team” of judges are set to provide additional boost to the centre’s appeal for foreign investors. The AIFC Court is headed by Lord Harry Kenneth Woolf, who took an oath as the presiding judge of the AIFC in December. Woolf’s track record includes leading the Qatar Financial Centre Civil and Commercial Court. The other judges of the AIFC Court include Justice Lord Edward Faulks, Justice Sir Stephen Richards and Justice Sir Robin Jacob.

The AIFC’s general legal framework allows investors to be “in the AIFC” without necessarily having a presence on its territory; “some presence” is sufficient. 

Aside from the court, the centre is home to the AIFC International Arbitration Centre with an arbitration panel that covers both conventional dispute resolution and Islamic Finance. 

It is also no secret that the centre offers certain tax breaks for its members aside from simply granting financial services. Intended to be a regional hub, the centre’s regulatory framework bears resemblance to other financial centres that came before. This has led some to allege the hub to be a potential tax haven that aims to take advantage of shrinking options for investors to keep finances hidden away from tax authorities. The tax regime for firms and investors operating inside the AIFC includes a complete exemption from any corporation tax or income tax until 2066. Critics of the centre say this will encourage tax evasion.

If the centre does have role as a tax haven, it's probably not aimed at foreign investors as much as it’s meant to create a safe zone for the Kazakh elites themselves. With new laws on capital outflow coming into force in Kazakhstan and exposure to both Panama Leaks and Paradise Leaks, the money is potentially safer within the confines of a special tax regime “at home” than in offshore zones.

The measure would also effectively address the Kazakh government’s official announced anti-shadow capital efforts. That includes the withdrawal of capital located in 19 offshore territories under the Strasbourg anti-money laundering convention signed by Kazakhstan in 2016.

The AIFC will be based in the exotic buildings that hosted the Astana EXPO 2017 international fair last year. 

The AFIC launch ceremony: the screen lists the names of companies already registered at the AFIC. 

Panelists discuss the AFIC arbitration centre.