Kazakhstan has the potential to become Central Asia’s leading financial center. The vision is in place.

Arken Arystanov, Chairman of the Regional Financial Center of Almaty, is working hard to turn Kazakhstan into a leading star in Central Asia.

Formed in 1991 by the break up of the Soviet Union, Kazakhstan is a nation on the move, with a solid plan to grow its economy and modernize its financial markets. This Central Asian nation aims to become a regional financial center, and although there are still many bumps in the road, it has taken its first steps to achieving that lofty goal by 2020. Kazakhstan’s progress to date has been steady, growing its GDP by an average rate of 10.2 percent and annual per capita income by approximately USD 4,000 between 2000 and 2006. With increased prosperity, Kazakhstan’s credit rating and economic climate have improved and, since 2000, direct foreign investment into Kazakhstan has more than tripled, the majority going into the oil and gas sector, which represents the country’s largest industries.

Since 2001, the organized securities market in Kazakhstan has also experienced rapid growth. The market capitalization of non-government securities listed at the Kazakhstan Stock Exchange (KASE) has been particularly active, increasing by almost 44 times, reaching USD 78.7 billion in May 2007. This is impressive, particularly since a mere 15 years ago almost all resources were owned by the state. Approximately 83 percent of this growth is represented by the equity market.

While its future is promising, Kazakhstan still has a number of obstacles to overcome if it is to further develop its economy and become one of the 50 most competitive countries in the world. It must further diversify and modernize its economy, improve education levels, implement an effective foreign policy and integrate Kazakhstan into the global economy.


To attract foreign investors, securities issuers and securities brokers and dealers to the local market, the Regional Financial Center of Almaty (RFCA) was set up in 2006 with the intent of establishing Almaty as a regional financial center by 2020. Arken Arystanov, Chairman of the RFCA, is a 41-year-old visionary with a doctorate in economics and vast experience in the country’s financial services sector. “Developing Kazakhstan’s stock market is crucial for further modernization and diversification of its economy,” he explains.

The RFCA’s objective is to create an attractive environment for investing. Despite being a new entity, it already provides special incentives such as some tax exemptions for investors and reimbursement of audit expenses for security issuers who meet certain requirements. To lure these key people, the RFCA aims for flexibility and efficiency.

“RFCA registration procedures have been shortened and made easy,” Arystanov says. “A specialized financial court has been established to settle civic issues that arise between participants. Its decisions can be overruled only by the Supreme Court of Kazakhstan.” And this is only the tip of the iceberg. “We will further develop the institutional infrastructure of the center, and we plan to establish a national rating agency, clearing house and insurance fund for investors,” he says. “The center will also have a stock exchange, corresponding to internationally recognized stock exchange standards.”


As a new entity, the RFCA faces several challenges. “To correspond to leading international financial centers, it ill need to improve its existing infrastructure such as the stock exchange, implement advanced stock market technologies such as efficient settlement procedures and online trading, and launch new financial instruments like derivatives, real estate investment trusts and exchange traded funds,” Arystanov says. “It will also have to amend existing stock market regulations to remove barriers that limit the development of the stock market.”

By 2010, the RFCA’s institutional infrastructure should be in place. Arystanov also plans to attract up to 50 leading investment banks and asset management companies by that time. However, he says, while international players will play a key role in the future development of the country’s securities market, “at the same time we will need to raise domestic leaders in the securities market who will successfully compete with foreign participants.”

There is still much work to be done to put these lofty ambitions into practice. Arystanov says that currently, as stipulated by legislation, the RFCA’s trading floor is located at KASE, the country’s lone stock exchange. “Unfortunately, KASE is a noncommercial enterprise, where one shareholder has just one vote, regardless of the number of shares owned,” he says. “This makes it difficult to get approval on necessary decisions to further develop the exchange. As a result, the trading activity at KASE remains relatively low.”

Establishing a new stock exchange that meets international standards should boost securities market activity, Arystanov says. Under current plans, the exchange will be established as a commercial enterprise, with KASE and other international stock exchanges as shareholders.



To attract foreign investment, the RFCA will develop Kazakhstan’s securities market in several directions, including introducing advanced stock exchange technologies, establishing an investment insurance fund to safeguard investors’ money, increasing liquidity by introducing new financial instruments, such as derivatives and, finally, launching national educational programs to educate potential investors. “With more investors coming to the securities market, the issuers will be assured of getting fair prices for their securities,” Arystanov says.

Kazakhstan has the potential to become a leading star in Central Asia. Arystanov says that with a steadily growing economy, an increasingly sophisticated financial sector that is bringing institutional investors to the stock market and greater prosperity among the locals who will be better equipped to invest, Kazakhstan is an attractive location for both domestic and foreign issuers, and Almaty is positioned to become a serious regional contender. The vision is in place, the ideas are flowing and now it is just a matter of time and hard work to ensure that these goals become a reality.

 

OMX’s role as adviser With operational experience in the Baltic States and having delivered technology to emerging markets across the globe, OMX is well positioned to cooperate with other developing markets. OMX leverages its unique expertise gained from exchange operations, a worldwide customer base and technology development to provide advisory services to both mature and newer markets. OMX has been advising the Regional Financial Center of Almaty (RFCA) since fall 2006 on how to realize its vision and strategy to develop the securities market in Kazakhstan. The focus is on building a strong domestic securities market, attractive to international investors. The projects to date include all the main stakeholders in the market - such as members, issuers, investors, the government and Central Bank.

Kazakhstan Natural resources: Petroleum, natural gas, coal, iron ore, manganese, chrome ore, nickel, cobalt, copper, molybdenum, lead, zinc, bauxite, gold, uranium Population: 15,284,929 (July 2007) Languages: Kazakh (state language) 64.4%, Russian (official, used in everyday business) 95% Government: Constitutional republic Geographic size: World’s ninth largest country GDP (official exchange rate): USD 77.2 billion (2006) GDP – real growth rate: 10.6% (2006) Budget: Revenues – USD 18.41 billion; expenditures – USD 16.93 billion Sources: CIA’s The World Factbook, National Bank of Kazakhstan, Ministry of Finance Kazakhstan

By Alannah Eames Photos Lina Fänge

MarketView 2007:2