AIFC sets sights on central Asian financial hub status

Kazakhstan’s first president, Nursultan Nazarbayev, surprised many people when he announced, at an economic forum in May 2015, his ambition to turn the capital Nur-Sultan (the new name for Astana since March 2019) into the Dubai of central Asia.

For years, the Kazakh government had supported the development of an existing stock exchange in Almaty, the country’s traditional business hub and base for local financial institutions. However, the global financial crisis and the end of the commodity boom frustrated many of these efforts, convincing Mr Nazarbayev to change direction abruptly. 

“We are confident the Astana financial centre will be the core of the financial infrastructure in Kazakhstan, and in the future [will turn into] a financial hub of the whole central Asian region,” he said at the 2015 Astana Economic Forum.  

Up and running

Four years later, his vision is taking shape in the iconic area that hosted Expo 2017. Under the leadership of Kairat Kelimbetov and Nurlan Kussainov, the country’s former central bank governor and deputy governor, respectively, the Astana International Financial Centre (AIFC) is taking its first steps as a financial hub that offers portfolio and direct investors the protection of a separate jurisdiction based on the principles of English law, as well as a special tax regime, which will be in place until 2065.

A few hundred institutions have registered under the AIFC jurisdiction and independent courts have been established, while local workers now have the opportunity to refine their finance-related skills at the Bureau for Continuing Professional Development.

With its basic infrastructure in place, the AIFC has already established a profile among international financial centres. It now has to live up to expectations and follow successful peers (such as the Dubai International Financial Centre) to become a regional financial hub that can channel portfolio and foreign investment into Kazakhstan. 

Law and order

“The proof is in the pudding,” says James Martin, who left a 16-year tenure at Nasdaq to join the AIFC Authority as deputy CEO. “We have the structure set up; now we are trying to get international, respected players to come here, do business and prove we have done something right.”  

Launched in July 2018, the AIFC has covered much ground since it was first envisioned by Mr Nazarbayev. The country’s constitution was amended in 2015 to grant the prospective AIFC a special, separate jurisdiction based on the principles of English common law. An independent AIFC Court was then set up under the guidance of Lord Harry Woolf, who served as the highest judge in England between 2000 and 2005, and eight other English judges. At the same time, Barbara Dohmann, an experienced English barrister and arbitrator, was asked to lead the centre’s International Arbitration Court (AIC).

This architecture gives investors a familiar regulatory framework to work with, as opposed to the vagaries of traditional Kazakh jurisprudence, while guaranteeing an independent justice system should disputes arise. “The AIFC Court is effectively an ‘enclave’ in the existing judicial system of Kazakhstan,” Bakhyt Tukulov, head of dispute resolution at law firm Grata International, wrote in an August 2018 note. “Undoubtedly, submission to the AIFC Court or arbitration has serious advantages not only for foreign partners, but also for Kazakh parties, as the AIFC Court or arbitration will ensure independent, fair and high-quality justice, which is so important in Kazakhstan today.” 

Jewel in the crown 

In its first year of operation, the AIFC has incorporated about 200 companies spanning from fintech start-ups to global names such as China Construction Bank – the world’s second largest bank by assets, which obtained a branch licence to provide corporate finance services locally – and emerging cryptocurrency powerhouse Bitfury. AIFC authorities are aiming to reach 250 companies by the end of 2019, and 500 by the end of 2020. 

The jewel in the crown of the AIFC is the Astana International Exchange (AIX). Set up to become the stock market of reference for both the country and the rest of central Asia, the pedigree of its shareholders appears to signal its ambitions. The Shanghai Stock Exchange, the US Nasdaq, the Beijing-sponsored Silk Road Fund and Goldman Sachs all joined the AIFC Authority as shareholders and strategic partners in the exchange. 

The government is committed to using the AIX as a channel to complete the 2016 to 2020 privatisation process to list minority stakes in several of the most prominent Kazakh state-owned companies. This should garner the exchange much-needed early visibility and volumes. “The privatisation programme should create that initial momentum. But if we don’t get those initial public offerings [IPOs], we lose that opportunity,” says Mr Martin. 

National sovereign wealth fund SamrukKazyna sold a 15% stake in Kazatomprom, the world’s largest uranium producer, in a dual listing operation on the AIX and the London Stock Exchange in November 2018. The structure of the Kazatomprom IPO is expected to set a template for forthcoming privatisations. Telecommunications company Kazakhtelecom and flagship airline Air Astana are expected to go public later in 2019, Almasadam Satkaliyev, SamrukKazyna’s managing director for asset management, said in May. State oil champion KazMunaiGas is expected to follow in the first half of 2020. Meanwhile, Russian mining company Polymetal became the first foreign issuer on the AIX in April 2019. 

FDI mission 

Despite its relative youth as an international financial centre, the AIFC has already widened its mandate to embrace activities related to attracting FDI. The government set up an inter-ministerial Coordinating Council on Investment Issues in April, and appointed the AIFC as the working body of the council. Under this new structure, the AIFC will act as a one-stop shop coordinating the task of attracting FDI and promoting Kazakhstan’s investment image.

The numerous bodies that have so far shared different investment promotion responsibilities, from national investment promotion agency Kazakh Invest to SamrukKazyna and national holding company Bayterek, will fall under the coordination of the AIFC in its dealings with foreign investors.

In particular, Kazakh Invest will steer the development of a pipeline of projects agreed by each competent ministry. The AIFC will then structure each project as a marketable product and promote it among investors by leveraging the availability of project finance options in the AIFC ecosystem and the advantages of structuring it within its separate jurisdiction. 

“The AIFC will provide the international structure for a project and the risk mitigation element [of our laws based on the principles of English common law] that investors might be looking for. Here we have a special jurisdiction, independent courts, and the rulings are enforceable,” says Mr Martin. 

In its first year, the AIFC has already climbed the Global Financial Centre Index produced by London-based think tank Z/Yen and now features ahead of bigger, more established markets such as Istanbul, São Paulo and Moscow. Despite its early achievements, the way ahead remains uphill as the AIFC faces the challenge of fitting into the country’s broader economic development strategy as well as the global financial markets. Many international financial centres have struggled to strike this balance in the past; it is up to the AIFC to succeed where they failed.