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Central Asia: Astana IFC – a steppe too far?

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Can Kazakhstan cre­ate an inter­na­tion­al finan­cial cen­tre in the mid­dle of the steppes or is it just the lat­est cen­tral Asian pipe dream?

No one can accuse Kazakh pol­i­cy­mak­ers of lack­ing ambi­tion. In July, with great fan­fare, the country’s strong­man leader Nursultan Nazarbayev opened the Astana International Financial Centre in the cap­i­tal, Astana. 

AIFC, which will be housed in the for­mer Expo Centre known irrev­er­ent­ly as ‘the Death Star’, will be – accord­ing to the glitzy pre­sen­ta­tions that accom­pa­nied the launch – a region­al hub for asset man­age­ment, Islamic finance and fin­tech. And infra­struc­ture finance, pri­vate bank­ing and green finance.

Or, as the AIFC’s web­site puts it: “Astana has built a finan­cial field of dreams.” The ques­tion is: if you build it in the mid­dle of the cen­tral Asian steppes, will any­one come?

Certainly, a lot of dis­tin­guished guests turned up for the Astana Finance Days event that pre­ced­ed the AIFC launch, includ­ing the British judges and senior bar­ris­ters who – under the aegis of for­mer UK lord chief jus­tice Lord Woolf – will pre­side over the AIFC Court. 

The court, which opened in January, is the first in the for­mer Soviet Union to use English com­mon law and will have juris­dic­tion over all AIFC activ­i­ties. It will be com­ple­ment­ed by an International Arbitration Centre, also head­ed by British lawyers and fea­tur­ing a multi­na­tion­al pan­el of arbi­tra­tors.

Among the speak­ers at the Finance Days event were Lady Barbara Judge, the for­mer head of the UK’s Institute of Directors, who will chair the AIFC’s new inde­pen­dent reg­u­la­tor, the Astana Financial Services Authority, and its chief exec­u­tive Stephen Glynn.

Originally from Australia, Glynn has spent the last 13 years as part of the team respon­si­ble for the devel­op­ment of Dubai’s FSA and inter­na­tion­al finan­cial cen­tre, which have pro­vid­ed the inspi­ra­tion for much of Astana’s finan­cial make-over. 

He was joined in the Kazakh cap­i­tal in May by Tim Bennett, a vet­er­an con­sul­tant and for­mer head of the New Zealand Stock Exchange, who has been tapped to run the new Astana International Exchange (AIX).

AIX, which was also launched in July, counts Nasdaq and the Shanghai Stock Exchange as share­hold­ers and strate­gic part­ners. A third investor, China’s Silk Road Fund, was signed up dur­ing the Finance Days con­fer­ence. 

Add to all this recent agree­ments with Euroclear and Clearstream to set­tle Kazakh domes­tic gov­ern­ment debt, and it is clear that Astana is devel­op­ing the infra­struc­ture required for a ful­ly func­tion­ing finan­cial cen­tre. 

Whether or not it will be put to use, how­ev­er, remains to be seen. At present, AIX has no trad­ed secu­ri­ties – bonds and FX, as well as a hand­ful of high­ly illiq­uid equi­ties, are list­ed on the Kazakhstan Stock Exchange in the country’s old cap­i­tal, Almaty. 

The plan is – or was, as of July – to kick start the new bourse this autumn with the first IPOs in a promised $70 bil­lion pri­va­ti­za­tion pro­gramme. 

At the start of the sum­mer, Kazakh sov­er­eign wealth fund Samruk-Kazyna, which is over­see­ing the process, indi­cat­ed that Kazakhtelecom would come to mar­ket in October and that list­ings of ura­ni­um pro­duc­er Kazatomprom and nation­al car­ri­er Air Astana would fol­low this year.

That in turn would pave the way for the sale of stakes in some of Kazakhstan’s biggest com­pa­nies, includ­ing ener­gy giant KazMunaiGas and rail oper­a­tor Kazakhstan Temir Zholy, over the next two and a half years.  

The fact that things are start­ing to hap­pen in oth­er coun­tries in cen­tral Asia sup­ports the sto­ry of the Astana IFC 

 — André Küüsvek, EBRD

By late August, how­ev­er, there seemed to be some doubt over whether or not the autumn list­ings would go ahead as planned. A spokesper­son for Samruk-Kazyna said IPOs of the first three com­pa­nies were still “pos­si­ble” before the end of the year. 

Investors were also sur­prised to hear that Baljeet Grewal, a for­mer invest­ment banker and Asian Development Bank alum­nus, who had been the inter­na­tion­al face of Samruk-Kazyna and a dri­ving force behind the pri­va­ti­za­tion pro­gramme for more than two years, had left the fund in mid August. 

Samruk-Kazyna said Grewal’s depar­ture was because her con­tract had expired but declined to com­ment fur­ther or give details on who would replace her as the fund’s head of strat­e­gy and port­fo­lio invest­ments. 

The episode is unlike­ly to reas­sure west­ern fund man­agers, many of whom are already scep­ti­cal about Kazakhstan’s com­mit­ment to trans­paren­cy and reform. This wari­ness is war­rant­ed, giv­en Kazakh pol­i­cy­mak­ers’ track record of fail­ing to deliv­er on their promis­es. The cur­rent pri­va­ti­za­tion pro­gramme, in the works since 2015, is the sec­ond in less than a decade. 

A sim­i­lar­ly grandiose plan for sell­ing stakes in state assets, the so-called ‘People’s IPO’, was launched in 2011 but fiz­zled out after two small list­ings. 

Second attempt

The AIFC rep­re­sents Nazarbayev’s sec­ond attempt at cre­at­ing an inter­na­tion­al finan­cial cen­tre. As late as 2014, the Regional Financial Centre of Almaty was still being boost­ed as an Asian hub by AIFC gov­er­nor Kairat Kelimbetov in his pre­vi­ous role as head of the Kazakh cen­tral bank. 

AIFC gov­er­nor Kairat Kelimbetov

Central Asia vet­er­ans ques­tion if the Astana ver­sion will be any more suc­cess­ful than its pre­de­ces­sor, par­tic­u­lar­ly giv­en the city’s noto­ri­ous dis­com­forts. For all its famous futur­is­tic build­ings by big-name archi­tects, Kazakhstan’s new cap­i­tal – which cel­e­brat­ed its 20th anniver­sary this sum­mer – is noto­ri­ous­ly bad­ly designed. 

Public trans­port is non-exis­tent and traf­fic is appalling at any time of year, while in win­ter howl­ing gales from the steppes sweep through the city’s broad boule­vards, tak­ing tem­per­a­tures to below -40°C. “You’d think they could have put in some under­ground park­ing,” laments a US lawyer based in Kazakhstan.

Like most of the country’s busi­ness com­mu­ni­ty, he has so far resist­ed gov­ern­ment prod­ding to relo­cate to Astana. 

When I was in Astana ear­li­er this year, I could hard­ly find any­one to set up meet­ings with,” says one west­ern asset man­ag­er. “It has been able to attract diplo­mats, and the Kazakh state-owned com­pa­nies are there, but every­one else is still in Almaty.” 

This seems to be tac­it­ly rec­og­nized by the deci­sion of the Kazakh author­i­ties to allow firms to reg­is­ter vir­tu­al­ly for AIFC and its new stock exchange, rather than requir­ing a phys­i­cal pres­ence in Astana. 

Indeed, those want­i­ng to estab­lish an office in the cen­tre will have to wait at least until ear­ly next year, as the Expo build­ing is still being repur­posed. For the moment, AIX and the rest of the new AIFC bod­ies are camp­ing out in rent­ed offices behind Astana’s Congress Centre.

Bigger question

Apart from the spe­cif­ic phys­i­cal dis­ad­van­tages of Astana, how­ev­er, there is the big­ger ques­tion of whether or not cen­tral Asia needs an inter­na­tion­al finan­cial hub. Supporters of the project argue that AIFC can serve both as a region­al cen­tre and as a link between Europe and Asia. 

Kazakh offi­cials make much of their country’s posi­tion in the Belt and Road Initiative, which was unveiled by China’s pres­i­dent Xi Jinping in Astana in 2013, as well as its impli­ca­tions for the pros­per­i­ty of the sur­round­ing region

The AIFC’s west­ern back­ers agree. 

The flow-on effects for Kazakhstan from both the growth of local GDP and the need to sup­port eco­nom­ic growth in neigh­bour­ing coun­tries will be tremen­dous,” says one.  

If the pri­va­ti­za­tions don’t hap­pen this time then the whole AIFC con­cept goes down in flames 

 — Regional banker

Proponents also point to the recent open­ing up of Uzbekistan as a poten­tial oppor­tu­ni­ty for its Kazakh neigh­bours. 

The fact that things are start­ing to hap­pen in oth­er coun­tries in cen­tral Asia sup­ports the sto­ry of the Astana IFC,” says André Küüsvek, head of local cur­ren­cy and cap­i­tal mar­kets devel­op­ment at the European Bank for Reconstruction and Development.

A gov­ern­ment offi­cial from neigh­bour­ing Kyrgyzstan is equal­ly enthu­si­as­tic, par­tic­u­lar­ly about the AIFC’s com­mon law courts. 

It’s exact­ly what our region needs,” he tells Euromoney.

Other bankers note that region­al hubs have rarely had much suc­cess in the devel­op­ing world. 

Some ana­lysts are less con­vinced that there is a gap in the mar­ket for the AIFC to fill when tech­nol­o­gy is trans­form­ing inter­na­tion­al cap­i­tal mar­kets, a point that Küüsvek makes.

The argu­ment that it makes sense to have some­thing in Astana to fill the gap between Europe and Asia seems slight­ly out of date giv­en that we seem to be mov­ing into a non-time zone depen­dent world where every­thing works 24/7 and T+2 set­tle­ment has a lot less rel­e­vance because blockchain pro­vides you with almost imme­di­ate match­ing,” he says.

One of the pan­els at the Finance Days event

What every­one seems to agree on is that, for the AIFC to be a suc­cess, Kazakh pol­i­cy­mak­ers need to show they are seri­ous about reform by mov­ing ahead prompt­ly with the promised pri­va­ti­za­tions. 

The pri­va­ti­za­tion pro­gramme will be a test,” says a per­son involved. “If we get that right, it will kick start mar­ket devel­op­ment in Kazakhstan, so we need to prove that we can do it prop­er­ly.”

On the side­lines of the Finance Days event, a region­al banker puts it more blunt­ly: “If the pri­va­ti­za­tions don’t hap­pen this time then the whole AIFC con­cept goes down in flames.”

If state asset sales go ahead as planned, the next ques­tion mark is over who will par­tic­i­pate in the process. Despite inten­sive investor work by Samruk-Kazyna over the last year, reports sug­gest that west­ern fund man­agers will stay away.

Regional spe­cial­ists seem par­tic­u­lar­ly unen­thu­si­as­tic – unsur­pris­ing­ly, giv­en that many have been bad­ly burnt in Kazakh assets repeat­ed­ly over the last two decades. Eurobond buy­ers were bat­tered by two defaults by BTA Bank, while equi­ty investors arguably have even more to com­plain about.

Boasts by Kazakh offi­cials that the coun­try is now ranked num­ber one by the World Bank for the pro­tec­tion of minor­i­ty share­hold­ers ring hol­low with asset man­agers who spent years bat­tling for their rights as hold­ers of shares in KMG EP, which list­ed on the London Stock Exchange in 2006, before it was final­ly tak­en pri­vate by par­ent KazMunaiGas in May.  

Compared with oth­er fron­tier mar­kets, it is very devel­oped in terms of the ecosys­tem and infra­struc­ture, which makes it much more acces­si­ble for investors 

 — Karine Hirn, East Capital

Similarly, pledges of trans­paren­cy are met with cyn­i­cism by those who got caught up in the scan­dals sur­round­ing Eurasian Natural Resources Corporation, the Kazakh min­ing com­pa­ny that was delist­ed with the help of the Kazakh state in 2013, and whose tra­vails also impact­ed cop­per min­er and fel­low FTSE100 mem­ber Kazakhmys.

As investors, we have very long mem­o­ries when it comes to Kazakhstan,” says one west­ern fund man­ag­er. “We have had some good invest­ments and some bad ones, but it’s the bad ones we remem­ber.”

Even if pri­va­ti­za­tion offi­cials can con­vince investors of their bona fides this time, con­cerns about liq­uid­i­ty may still act as a deter­rent. Samruk-Kazyna has indi­cat­ed that all assets will be list­ed on AIX as part of the Kazakh government’s dri­ve to devel­op local cap­i­tal mar­kets but has also moot­ed the pos­si­bil­i­ty of dual list­ings in London or else­where. 

Investors say split­ting liq­uid­i­ty would be a mis­take in what will like­ly be rel­a­tive­ly small deals. At cur­rent val­u­a­tions, the 25% stake of Kazakhtelecom up for grabs would be worth around $200 mil­lion. 

It’s all very well to say they’re going to list on LSE or Nasdaq or Hong Kong, but when your free float is only $50 mil­lion to $100 mil­lion, you’re going to get lost in the cross­fire there,” says a cap­i­tal mar­kets spe­cial­ist.

If offi­cials do opt to list in Astana only, how­ev­er, poten­tial buy­ers may fret about the lack of local liq­uid­i­ty. Since pol­i­cy­mak­ers opt­ed to nation­al­ize and merge Kazakhstan’s 11 sec­ond-pil­lar pri­vate pen­sion funds in 2013, the coun­try has had lit­tle in the way of an insti­tu­tion­al investor base.

Succession

The oth­er press­ing ques­tion that will face those mar­ket­ing the pri­va­ti­za­tions con­cerns the future of Kazakh pol­i­tics. Nazarbayev, who has ruled the coun­try with an iron fist since inde­pen­dence in 1990, turned 78 in ear­ly July. Whether or not his suc­ces­sor – as yet unknown – will con­tin­ue his flag­ship poli­cies and hon­our his promis­es remains to be seen. 

The big ques­tion mark in Kazakhstan is about the suc­ces­sion,” says a vet­er­an west­ern investor in cen­tral Asia. “The lead­er­ship mat­ters – if you want to invest long-term, you have to have some kind of cer­tain­ty about the direc­tion in which the coun­try is head­ing.”

At the same time, bankers say a short­age of investible assets in fron­tier mar­kets will like­ly prompt fund man­agers to give Kazakh assets a fair hear­ing. Karine Hirn, chief exec­u­tive of East Capital, agrees. 

The real­i­ty of fron­tier invest­ing is chang­ing very fast,” she says. “Since we start­ed our first fron­tier fund four years ago, 34% of the index has either been upgrad­ed to emerg­ing mar­ket or will be short­ly. 

This presents an oppor­tu­ni­ty for Kazakhstan. Compared with oth­er fron­tier mar­kets, it is very devel­oped in terms of the ecosys­tem and infra­struc­ture, which makes it much more acces­si­ble for investors.”

There is also the pos­si­bil­i­ty that Kazakh offi­cials may decide they can man­age with­out picky west­ern investors. As well as London and New York, Samruk-Kazyna has con­duct­ed road­shows in St Petersburg, Moscow, Shanghai and Hong Kong. It was also notable that, of the first 12 bro­kers to sign up as mem­bers of AIX, the only two non-Kazakh firms came from Hong Kong.

And if pri­vate investor demand fails to mate­ri­al­ize, Kazakh offi­cials seem fair­ly relaxed about the pos­si­bil­i­ty of sell­ing large stakes in state assets to oth­er sov­er­eign wealth funds or Chinese pub­lic sec­tor buy­ers. 

Kazakhstan has in recent years proved adept at attract­ing invest­ment from Gulf coun­tries includ­ing Saudi Arabia and Qatar; and Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed was one of the star guests at the AIFC open­ing cer­e­mo­ny. 

Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed sits next to pres­i­dent Nazarbayev at the open­ing

Meanwhile, Samruk-Kazyna has report­ed­ly told fund man­agers that there will be no restric­tions on Chinese invest­ment in the pri­va­ti­za­tion pro­gramme. 

They say: ‘We under­stand that China will be very impor­tant in this process,’” says one. 

How that might play out domes­ti­cal­ly is anoth­er open ques­tion. While China may be pop­u­lar with Kazakh pol­i­cy­mak­ers – Belt and Road was the key theme of the Finance Days event and near­ly every pan­el fea­tured a Chinese speak­er – it is less so with the pop­u­la­tion as a whole, who feel threat­ened by their pow­er­ful neigh­bour.

An attempt by Nazarbayev to pri­va­tize land hold­ings in 2016 trig­gered mass protests – rare in a coun­try where dis­sent is heav­i­ly sup­pressed – over fears that the major­i­ty of buy­ers would come from China. 

More recent­ly, there has been grow­ing out­rage over reports of the treat­ment of eth­nic Kazakhs in west­ern China, many of whom have appar­ent­ly been caught up in the government’s noto­ri­ous “re-edu­ca­tion pro­grammes” for the local Muslim pop­u­la­tion in Xinjiang. 

If the sit­u­a­tion dete­ri­o­rates, it could add anoth­er lay­er of com­plex­i­ty to an already volatile and chal­leng­ing region and give investors yet anoth­er rea­son to think twice before invest­ing in Kazakh assets.

Above all, how­ev­er, it is the Kazakh government’s dis­mal record of deliv­er­ing on its promis­es that will like­ly prove the biggest bar­ri­er to suc­cess­ful asset sales and the devel­op­ment of Astana as a finan­cial hub. 

They are quite good at win­dow-dress­ing, but if you scratch the sur­face, there’s not much behind,” says a west­ern cen­tral Asia spe­cial­ist. 

Anuar Ushbayev, a board mem­ber at local invest­ment bank Tengri Capital, agrees. During a pan­el ses­sion at the Finance Days event, he expressed the frus­tra­tions of many with Kazakh pol­i­cy­mak­ing. 

There have been a lot of dec­la­ra­tions by state offi­cials about var­i­ous things that relat­ed to the invest­ment expe­ri­ence in Kazakhstan and they have spec­tac­u­lar­ly failed in fol­low­ing up on many of these dec­la­ra­tions,” he said. “We need to cre­ate a trans­par­ent and sta­ble envi­ron­ment, and prove that we can main­tain that over time. Only then will we see mean­ing­ful invest­ment in Kazakhstan.”

By Lucy Fitzgeorge-Parker

Full arti­cle: https://www.euromoney.com/article/b19wv4yfqypmzd/central-asia-astana-ifc-a-steppe-too-far?copyrightInfo=true
Visit http://www.euromoney.com/reprints for addi­tion­al dis­tri­b­u­tion rights. For more arti­cles like this, fol­low us @euromoney on Twitter.

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