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Business Kazakhstan 2018

Business

Kazakhstan 2018 An official publication of the Government of the Republic of Kazakhstan In partnership with: Astana International Financial Centre Samruk Kazyna | Kazakh Invest | The City of Astana

A new era of finance and investment The Embassy of Kazakhstan in the United Kingdom of Great Britain and Northern Ireland

AI F

Astana International Financial Centre JOINT-STOCK COMPANY “SOVEREIGN WEALTH FUND “SAMRUK-KAZYNA”

Supporting partners

Islamic Corporation for the Development of the Private Sector

City of Astana


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Business

Kazakhstan 2018 AI F

Astana International Financial Centre JOINT-STOCK COMPANY “SOVEREIGN WEALTH FUND “SAMRUK-KAZYNA”

An official publication of the Government of the Republic of Kazakhstan In partnership with: Astana International Financial Centre | Samruk Kazyna | Kazakh Invest | The City of Astana

Editor and Writer Alan Spence Managing Editor Barry Davies Art Director J-P Stanway Managing Director Andrew Howard

Printed by Pensord

Embassy of the Republic of Kazakhstan to the United Kingdom 125 Pall Mall, London SW1Y 5EA kazembassy.org.uk

Published by

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© 2018. The entire contents of this publication are protected by copyright. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means: electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. The views and opinions expressed by independent authors and contributors in this publication are provided in the writers’ personal capacities and are their sole responsibility. Their publication does not imply that they represent the views or opinions of the Government of the Republic of Kazakhstan, Global Media Partners or Integrative Media and must neither be regarded as constituting advice on any matter whatsoever, nor be interpreted as such. The reproduction of advertisements in this publication does not in any way imply endorsement by the Government of the Republic of Kazakhstan, Global Media Partners or Integrative Media of products or services referred to therein.

BUSINESS KAZAKHSTAN 2018

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AI F

Astana International Financial Centre

Capital Markets

Fintech

Asset Management

Private Banking

Islamic Finance

Green Finance

“Taking Kazakhstan to the next level” AIFC Governor Kairat Kelimbetov at the AIFC’s International Presentation, Astana, 5 July 2018

8 Kunaev Street, Block B BC “Emerald Quarter” Astana, Republic of Kazakhstan tel: +7 (7172) 61 3779 fax: +7 (7172) 61 3662 web: www.aifc.kz email: info@aifc.kz


Contents Preface

11

Nursultan Nazarbayev President of the Republic of Kazakhstan

Introductions

12 13

Kairat Abdrakhmanov Foreign Minister of the Republic of Kazakhstan

Kairat Kelimbetov Governor, Astana International Financial Centre

14 15

Akhmetzhan Yessimov Chairman of the Board, National Welfare Fund Samruk-Kazyna

Saparbek Tuyakbayev Chairman, Kazakh Invest

16

HE Erlan Idrissov

17

Nikhil Rathi

Ambassador of the Republic of Kazakhstan to the United Kingdom

Chief Executive Officer, London Stock Exchange plc; Director of International Development, London Stock Exchange Group

Chapter one

Growth and modernisation 19

30

Kazakhstan: Embracing innovation Established as the most successful economy of the former Soviet countries, Kazakhstan is looking to digitalisation and diversification to ensure its continuing development in the long term

Reviving the Silk Route: A catalyst for investment Kazakhstan’s geographic location in central Asia means the country is in prime position to benefit from China’s Belt and Road Initiative to develop transport infrastructure and increase connectivity across continents

BUSINESS KAZAKHSTAN 2018

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JOINT-STOCK COMPANY “SOVEREIGN WEALTH FUND “SAMRUK-KAZYNA”

8 Kunaev Street, Block B BC “Emerald Quarter” Astana, Republic of Kazakhstan tel: +7 (7172) 55-40-55 web: www.sk.kz


CONTENTS

Chapter two

Financial reforms 34

A new model for finance: Funding the Fourth Industrial Revolution Ensuring sufficient funding for Kazakhstan’s digitalised future requires a new paradigm for its financial sector, creating an investment climate to generate sustainable growth

Chapter three

Astana International Financial Centre 40

The AIFC: Raising Kazakhstan’s economy to a new level

An official briefing prepared for Business Kazakhstan 2018 by the Astana International Financial Centre, marking the AIFC’s official International Presentation on July 5 2018, and setting the AIFC’s launch within the context of major Kazakh and external economic developments that look set to underpin its emergence as Eurasia’s leading financial centre

MAPACHE/SHUTTERSTOCK

Chapter four

Samruk-Kazyna 51

BUSINESS KAZAKHSTAN 2018

Creating wealth for Kazakhstan’s future generations

An official briefing prepared for Business Kazakhstan 2018 by Samruk-Kazyna examines the operation and role of Kazakhstan’s sovereign wealth fund under its new Transformation Programme as it pursues its strategic goals of promoting corporate efficiency, effective portfolio management and sustainable development – and organises the forthcoming privatisation of its major industrial holdings

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CONTENTS

Chapter five

Kazakh Invest 59

FDI: Cornerstone of Kazakhstan’s strategic development

This official briefing for Business Kazakhstan 2018 by Kazakhstan’s foreign direct investment (FDI) promotion and unitary facilitation agency, Kazakh Invest, focuses on the country’s drive to attract an ever-increasing volume of foreign direct investment with greater emphasis on high valueadded processing, manufacturing and service industries as a cornerstone of the strategically balanced and sustainable long-term development of the Kazakh economy

Chapter six

Astana: Smart City 68

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A capital fit for the future In the two decades since Astana became the new capital of Kazakhstan, the city has developed rapidly as an important business and government centre, embracing smart technologies to enhance sustainability

Expo 2017: The story continues... The success of Expo 2017 Astana: Future Energy will be measured not only in its impressive attendance figures, but also in its legacy of encouraging transformational energy policies worldwide

BUSINESS KAZAKHSTAN 2018

NICK MELNICHENKO/SHUTTERSTOCK

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PREFACE

Nursultan Nazarbayev President of the Republic of Kazakhstan

W

e created an independent Kazakhstan, which became a brand that inspires trust and respect in the world.

In 2017, our country became a nonpermanent member of the United Nations Security Council. We became the first state amongst the countries of the CIS and Eastern Europe to be chosen by the international community to host the International Specialised Exhibition, Expo 2017. A successful functioning model of a market economy has been built in Kazakhstan. In 2017, the country, having overcome the consequences of the global crisis, returned to the trajectory of strong growth. At the end of the year GDP growth was 4% and industrial production grew by 7%. The era of oil abundance is almost coming to an end. The country needs a new quality of development. Global developments show it should be based primarily on the broad implementation of the BUSINESS KAZAKHSTAN 2018

Fourth Industrial Revolution. This brings both challenges and opportunities. It is important to further improve the investment climate and the development of the stock exchange. This is one of the main tasks of the Astana International Financial Centre, which began its work this year. Using best international practices, it should become a regional hub, applying English law and adopting modern financial technologies. The successful listing of the Samruk Kazyna Sovereign Welfare Fund companies in IPOs will also contribute to the development of the stock market. 2018 is the 20th Anniversary of our capital – Astana. Its formation as one of the most important centres of Eurasia’s development is a source of our common pride. The world has come to an understanding that it is cities that compete for investors. They chose not a country, but a city in which it is comfortable to live and work.

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INTRODUCTION

Kairat Abdrakhmanov Foreign Minister of the Republic of Kazakhstan

and west, that share our guiding principles of peace, security and prosperity. A clear demonstration of the diplomatic success of this policy of positive engagement with the international community has seen Kazakhstan elected to the United Nations Security Council as a non-permanent member for 2017-18. Meanwhile, the creation of the AIFC, based on English law and with English its official language, is a clear demonstration of the remarkable economic possibilities that flow from such positive and open international engagement. The AIFC’s creation has been, in part, due to the great reservoir of mutual goodwill that exists between Kazakhstan and many locations around the world with a direct interest in the financial services and investment and funding opportunities it will offer. They range from the world’s financial capitals – including London, New York, Chicago, Hong Kong, Shanghai and Singapore – to the member countries of the Organisation of Islamic Cooperation (of which Kazakhstan is a member), which, amongst their other interests, are focusing on the potential of the AIFC’s Islamic finance hub.

T

he Astana International Financial Centre (AIFC) has generated a high level of interest and support around the world from, amongst others, international financial centres and institutions, investment funds and banks, major corporates, fintech companies, and specialists in all aspects of financial innovation and trading. Whilst focusing on Kazakhstan’s domestic project, trade and corporate funding needs, AIFC aims to play an increasingly active role in regional finance and, indeed, looking further ahead, global finance. Since its inception 26 years ago, Kazakhstan has consistently pursued a foreign policy of multi-vector engagement with countries north and south, east

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Meanwhile, the launch of the AIFC coincides with the increasing roll-out of China’s One Belt One Road (OBOR) investment and trade strategy, which will require vast funding of every type to maximise the development potential of the land and maritime corridors the strategy aims to create. Kazakhstan’s good relations with all the countries located on both corridors will also play a strong role in attracting potential OBOR-related business to the AIFC. And so the virtual cycle continues. As AIFC’s international relations and networks continue to strengthen, the Centre will become an increasingly valuable element in Kazakhstan’s matrix of global links, adding another import layer of engagement with the international community in the pursuit of peace, security and prosperity. BUSINESS KAZAKHSTAN 2018


INTRODUCTION

Kairat Kelimbetov Governor, Astana International Financial Centre

AIFC: A next-generation financial hub

I

am glad to announce the opening of the Astana International Financial Centre (AIFC) in the heart of Eurasia. In the two years of preparation for the opening of a fully functional financial centre, we have introduced a transparent legal system of English law, created an independent financial regulator, launched a high-tech exchange in partnership with Nasdaq and the Shanghai Stock Exchange, and formed a favourable tax and visa regime. The AIFC will become a next-generation financial hub and a reliable partner for global financial players, focusing on capital markets, asset management, Islamic finance, green finance and fintech innovation. The AIFC provides a number of privileges for creating favourable conditions conducive to the growth of foreign investment. Matching the best practices of advanced financial centres, we operate in a special legal regime based on the principles of English law and the standards of leading financial centres, provided by highly qualified judges with practical experience in countries with jurisdiction of English law.

BUSINESS KAZAKHSTAN 2018

A distinctive feature of English law is the use of a flexible and transparent approach to resolving disputes, as well as the primacy of protecting the rights and interests of investors. At the same time, AIFC operates an independent regulatory regime that ensures fairness and efficiency of the financial market. One of the stimulating factors for investors is corporate and individual tax exemption for 50 years. In addition, the AIFC exercises a simplified visa and labour regime. A specialised vehicle, the Expat centre of the AIFC, was established to simplify entry and localisation of foreign employees of the AIFC, and their family members. English, as the official language of the AIFC in its territory, will help integration with the global community and facilitate business for foreign investors. The AIFC Exchange will open up a large and promising market for Eurasia to the world investment community. It will provide access to global capital markets and the possibility of attracting new investments to the countries of the continent.

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INTRODUCTION

Akhmetzhan Yessimov Chairman of the Board, National Welfare Fund Samruk-Kazyna

The comprehensive privatisation plan for 2016-20, approved by the Government of the Republic of Kazakhstan, includes 876 companies. Among them, 200 belong to Samruk-Kazyna, 40 of which are large assets, and 160 medium and small companies. To date, more than 140 assets have been withdrawn from the Fund’s group of companies, 77 of which were sold. The total revenue was about $400 million. About 50 assets will be privatised by the end of this year.

K

azakhstan is the largest economy in Central Asia, generating 60% of the region’s GDP. Samruk-Kazyna, with a total asset value of around $70 billion, manages the largest national companies of Kazakhstan in the oil and gas, transport and logistics sectors, chemical and nuclear industries, mining and metallurgy, energy, machinery manufacturing and real estate. The strategic mission of the Fund is to increase the national welfare of the Republic of Kazakhstan, and to support the modernisation of its economy. Therefore, we continuously focus on improving the efficiency of the Fund and its portfolio companies, and on adherence to international best practice in transparency and corporate governance. To date, the financial indicators of the Fund are comparable with those of our peer international sovereign wealth funds, such as Temasek and Khazanah. The development of the Fund and its portfolio companies is taking place against the backdrop of major positive changes in Kazakhstan. Our country is actively expanding its private sector, reducing state involvement in industry and increasingly modernising the economy.

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It is important to note that this plan does not apply to companies that are candidates for an IPO. The six largest national companies’ IPOs will be carried out in stages up to 2022. In the first stage, we are planning to take public Kazakhtelecom, the national telecommunications operator; Air Astana, the national air carrier; and KazAtomProm, a national uranium company that meets about 40% of world uranium demand. When assessing the exact timing for an individual company’s IPO, we consider its readiness against a number of criteria, including financial conditions, strategy, asset perimeter, regulatory environment etc. Mineral prices and capital market readiness are also taken into account. Our country is interested in attracting investors who aim to create and develop long-term businesses, producing globally competitive products. Kazakhstan ranks 36th out of 190 countries in the World Bank’s Ease of Doing Business 2018 rating, rising from 77th position in 2015. Now we are three and two positions respectively behind Switzerland (33rd place) and Japan (34th place) and ahead of many developed economies. The country ranks first in protecting minority investors. Overall, therefore, the ongoing privatisation programme presents unprecedented opportunities for making profitable investments in Kazakhstan. I invite you to invest in Samruk-Kazyna assets – we have a lot to offer investors, and are open to dialogue, new ideas and proposals. BUSINESS KAZAKHSTAN 2018


INTRODUCTION

Saparbek Tuyakbayev Chairman, Kazakh Invest

However, regional and global competition for FDI continues to increase and it is no longer sufficient to just promote the many benefits of investing in Kazakhstan, ranging from the government’s numerous incentives to the country’s geo-logistical importance to China’s Belt and Road Initiative, which links the latter with Europe via 3,000km of Kazakhstan. Therefore, in August 2017, the Government of Kazakhstan introduced the new National Investment Strategy (NIS), developed with the assistance of the World Bank, to further enhance the investment climate in Kazakhstan and attract investment focused on increasing efficiency and competitiveness. To achieve this, the NIS not only specified a number of primary investment targets with active potential for increased efficiency – amongst them food, industry, oil and gas downstream, metallurgy – but also identified the priority countries where relevant investors were most likely to be located.

I

n just over a quarter of a century since its economic birth as a sovereign nation, Kazakhstan has risen to become the industrial engine house of Central Asia. Initially dependent on revenue from natural resources, in the main oil and gas, it has increasingly focused on creating a sustainable, diversified and technology-driven economy, which will elevate Kazakhstan in to the ranks of the world’s top 30 most-developed nations by the middle of this century – the objective of President Nazarbayev’s over-arching Strategy 2050. Foreign direct investment (FDI) has been and will remain vital to Kazakhstan’s development, particularly in its pursuit of the transformational industrial efficiency and competitiveness flowing from rapid breakthroughs in a range of digital technologies – including artificial intelligence, robotics, nanotechnology and biotechnology. Kazakhstan has done well in attracting FDI since Independence: indeed, around 70 per cent of all FDI in Central Asia is located in Kazakhstan.

BUSINESS KAZAKHSTAN 2018

Simultaneously, Kazakh Invest was launched as a onestop-shop, with an international network of foreign representatives and regional offices to operationally implement the new strategy and introduce new approaches to attract investment. Internationally, Kazakh Invest works closely with Kazakhstan’s embassies and an increasing number of investment counsellors seeking investors appropriate to the country’s closely defined requirements. Also, in Kazakhstan itself, the agency has a close network with regional and city leaders and links into the country’s Special Economic Zones. Kazakhstan’s market is ready for investment inflows. We have stable institutions, a favourable investment and business climate, legal framework, a well-qualified workforce, developed infrastructure, broad export opportunities to the neighbouring markets, and sophisticated government that is dedicated to investors’ well-being and growth. We maintain constructive dialogue with existing investors and we will be happy to welcome new companies in Kazakhstan. Come to Kazakhstan – a land of great opportunities – to grow together.

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INTRODUCTION

HE Erlan Idrissov

Ambassador of the Republic of Kazakhstan to the United Kingdom

the highest standards of independence, transparency and free-market principles, and for English to be the official language of the market, make the AIFC and the City of London natural collaborators. Indeed, the first meeting of the Legal Advisory Council of the AIFC was held in the Kazakh Embassy in London last year. Prior to the emergence of the AIFC, Kazakhstan had already built strong ties with the UK’s financial industry, with Kazakh companies trading on the London Stock Exchange and City institutions providing specialist advice and services across a range of areas – including, in particular, Kazakhstan’s privatisation plans, which will help underpin the country’s transformational change towards a more private-sector-based economy. One of the innovative features of the AIFC is its fintech research and development hub, and this is another area of potential cooperation between the AIFC and London, as demonstrated by the AIFC’s participation in the CityUK/London Stock Exchange-organised Eurasia Fintech Forum in London in March this year.

The United Kingdom and Kazakhstan: natural collaborators in the financial sector

A

s the Ambassador of Kazakhstan in London, it is with great pleasure and satisfaction that I continue to witness ever-closer ties between Kazakhstan and the United Kingdom – and, in particular, the cooperation between the City of London’s financial services industry and the Astana International Financial Centre (AIFC) – the first such centre to be launched in the vast Eurasian space between Frankfurt and Hong Kong. Kazakhstan’s decision that the AIFC would be governed by English common law to ensure

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The AIFC’s fintech hub is multipurpose. Not only will it act as a creative crucible to develop and commercially mobilise fintech research and innovation as an integral part of the AIFC’s own growth and evolution, but it will also provide business opportunities for corporates and financial institutions around the world. Additionally, it will act as a further catalyst of private-sector growth in Kazakhstan, particularly amongst young entrepreneurs, some of whom will rise in time to become the country’s future business leaders. Coupling the above with other areas of potential close cooperation on the AIFC’s focal agenda – including Islamic finance, green finance and asset management – financial-sector collaboration between Kazakhstan and the UK indeed looks set to enjoy a bright future. BUSINESS KAZAKHSTAN 2018


INTRODUCTION

Nikhil Rathi

Chief Executive Officer, London Stock Exchange plc; Director of International Development, London Stock Exchange Group

Training and education is a key element in the successful development of any capital market, and this partnership has allowed LSEG’s Academy, with the support of TheCityUK, to supply a range of bespoke training and education services to AIX in its national and international mission. LSEG’s commitment to Kazakhstan is visible through our continuous work with Kazakh exchanges and issuers, with our open-access approach supporting the development of domestic capital markets in collaboration with partner exchanges. This was clearly demonstrated in 2017 when the London Stock Exchange hosted sovereign wealth fund Samruk-Kazyna’s first Investor Day, promoting Kazakh capital markets to the London financial community and enhancing the level and quality of engagement between Kazakh companies and the UK investment and advisory community.

P

resident Nazarbayev’s visit to the UK in November 2015 heralded an exciting new chapter for collaboration between the UK’s and Kazakhstan’s capital markets, creating a strong foundation for future relations between the London Stock Exchange Group (LSEG), the Astana International Financial Center (AIFC) and the Astana International Financial Exchange (AIX). LSEG has a long history of collaboration with Kazakhstan. For over 10 years, we have drawn on our extensive capital markets knowledge and expertise to support Kazakhstan’s ambition to become a major regional financial centre, and enhance the competitiveness and sustainability of its economy. Indeed, in November 2017, LSEG’s Academy training centre announced a new partnership with The CityUK and AIFC to provide professional training to AIX.

BUSINESS KAZAKHSTAN 2018

Given the 12 Kazakh companies listed on the London Stock Exchange with a combined market capitalisation of $12.7 billion, along with 14 Kazakh bonds that have raised $12.6 billion – including the first index-linked Eurobond in Kazakh tenge from the European Bank for Reconstruction and Development – the London Stock Exchange is a strong partner of Kazakhstan. As the world’s most international exchange, with almost 850 international companies listed on our markets, we are uniquely placed to support Kazakh issuers and the government in its privatisation programme. Through the London Stock Exchange, Kazakh issuers have access to the world’s largest pool of international capital, as well as robust, transparent and trusted markets, and an advantageous time zone that bridges Asia, Africa, Europe and North America. Moreover, there is an unparalleled group of international investors in London with detailed knowledge of Kazakh investment, who are keen to provide a deep additional channel of funding for the economic development of the country.

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CHAPTER ONE

Growth and modernisation


GROW TH AND MODERNISATION

Established as the most successful economy of the former Soviet countries, Kazakhstan is looking to digitalisation and diversification to ensure its continuing development in the long term

Kazakhstan: Embracing innovation

K

azakhstan is gearing up to maximise the opportunities and meet the challenges created by the Fourth Industrial Revolution as digitalisation becomes embedded in practically all aspects of socio-economic life and development, and – for those countries that positively embrace it – drives economies to new levels of qualitative and quantitative achievement. At the core of this will be the symbiotic relationship between digitalisation and major systemic innovation in Kazakhstan’s financial sector. On the one hand, digitalisation will be crucial to the development of the country’s new financial infrastructure and investment culture – exemplified by the creation of the Astana International Financial Centre (AIFC). On the other hand, transformational change in Kazakhstan’s financial sector will need to generate vast new funding flows to help ensure the broadest possible application of digitalisation across Kazakhstan industry and society to maximise its contribution to the country’s long-term development plan. “Today humanity is entering an era of new industrial revolution... modern technologies

BUSINESS KAZAKHSTAN 2018

are changing the world... this is is an historic chance for us to join the 30 most-developed countries,” President Nursultan Nazarbayev announced in his 2018 State of the Nation address earlier this year. After becoming the most successful economy to emerge from the collapse of the Soviet Union just over 25 years ago, Kazakhstan’s over-arching development plan, Strategy 2050, was launched in 2012 with the objective of the country becoming one of the world’s top 30 most-developed nations by the middle of this century. Initially, there were those who doubted that Kazakhstan would even survive its painful birth, let alone establish itself on an economic trajectory designed to lift it in to the higher echelons of the world’s most-developed countries within 60 years of its creation as an independent sovereign state. In the years before the world economic crisis of 2008 and its aftermath, Kazakhstan’s annual growth was amongst the highest in the world, averaging around 7% annually during the early 2000s. As with all economies, the international banking crisis, coupled with deep recession, took its toll

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GROW TH AND MODERNISATION

The energy sector has been the generator of much of Kazkahstan’s prosperity since independence (PHOTO: KMG EP)

The Baiterek Tower is the centrepiece of Astana’s modern and constantly evolving skyline

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on the country, but a combination of indigenous natural resource wealth, ambitious economic development plans and judicious fiscal and monetary management policy combined to keep the ship steady through the economic storm. Another key factor throughout Kazakhstan’s short history as a nation – in good times and bad – has been its ability to attract transformational levels of foreign direct investment (FDI), which, on a net accumulated basis, now stand at approaching $300bn. Initially focusing on the hydrocarbons sector, FDI subsequently spread more generally across industry as a whole, with a focus on processing and infrastructure. This has been achieved through the steady liberalisation of FDI laws and the provision of incentives – including tax reductions and waivers, and government subsidies – coupled with a multi-vector foreign policy designed to promote engagement with nations around the world. The country currently stands

at a creditable 36th in the World Bank’s Ease of Doing Business Survey, out of 189 states. In 2017, rising oil prices, allied with the increasing impact of industrial diversification, witnessed growth return to 4%, significantly higher than the Organisation for Economic Co-operation and Development (OECD) global gross domestic product (GDP) figure of 3.5% for the same period. The country is blessed with huge reserves of oil, gas, uranium, ferrous and non-ferrous metals and other minerals, as well as vast tracts of fertile land capable of making Kazakhstan one of the answers to the world’s food security problem. However, such natural resource riches are, in themselves, no guarantee of sustained growth and socio-economic development and achievement. Indeed, in some countries such raw material wealth, which is always subject to the machinations of commodity-market price cycles, has been BUSINESS KAZAKHSTAN 2018


GROW TH AND MODERNISATION

BUSINESS KAZAKHSTAN 2018

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GROW TH AND MODERNISATION

Kazakhstan has 12% of the world’s uranium reserves and meets 40% of global demand, meaning the industry makes a major contribution a major systemic disincentive to industrial diversification and modernisation. This has not been the case with Kazakhstan, a country conscious from early in its independent life that the benefits from its natural resource reserves are not an end in themselves, but a means to an end – the establishment of a highly-developed, self-sustaining modern economy competing and co-operating at the highest international level. Throughout its brief history, Kazakhstan has increasingly focused on industrial diversification, launching early in the 2000s a programme of accelerated growth for those industries that, in particular, could evolve from the country’s raw-material base. These include processing and manufacturing from hydrocarbons’ production and different levels of beneficiation of the country’s ferrous and non-ferrous metal production – all increasing returns in the domestic value chain and helping to manage the risk that comes with a high dependency on raw-material exports. The uranium industry is a good example of such industrial innovation. Kazakhstan possesses 12% of the world’s uranium reserves and meets 40% of global demand, meaning the uranium industry makes a major contribution towards foreign revenue. That said, plans to increasingly move away from exporting raw uranium and focus on

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the production and export of uranium fuel in the form of pellets will make a major incremental value-added contribution to the industry’s income, whilst creating higher levels of employment and enhancing the skills of the workforce. This trend across Kazakh industry, where processing and manufacturing now accounts for 40% of output, has been a major factor in helping the country withstand the impact of global economic and financial crises during the last decade.

Managing resilience Over the past decade or so, the country has introduced a series of national programmes and initiatives, not only to maintain the Kazakh economy solidly on the road of development and reform, but also to build its resilience at times of global crisis. In response to the global banking crisis of 2008-09, the country gained international praise for the way in which it countered the impact of the crisis on the Kazakh economy and its financial system by facilitating significant fiscal stimulus, whilst simultaneously operating a tight monetary policy. Measures included bank recapitalisation and stimulus packages for industry, including agribusiness and SMEs. Together, this helped the economy turn around from a position of post-crash contraction to 7% growth in 2013. BUSINESS KAZAKHSTAN 2018


GROW TH AND MODERNISATION

GDP growth since Kazakhstan’s independence annual % 15.00

10.00

5.00

0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-5.00

Key Kazakhstan World

-10.00

source: World Bank

-15.00

When the price of oil collapsed on world markets between mid 2014 and the start of 2016, from over $100 a barrel to below $30, Kazakhstan responded with a powerful stimulus package within the framework and philosophy of the 100 Concrete Steps and Nurly Zhol (Bright Path) development programmes to counter the impact of falling oil revenues on economic growth. As mentioned, the over-arching economic master plan is that expounded by President Nazarbayev in 2012 – Strategy 2050. This, in turn, is powered by strategy subsets and cross-linking initiatives, including the Strategic Development Plan to 2025, and national programmes BUSINESS KAZAKHSTAN 2018

covering modernisation, industrialisation and, most recently, digitalisation. “We have all the necessary programmes”, President Nazarbayev commented in his State of the Nation address, adding that the next move must be to secure their “successful navigation and adoption in a new world – the world of the Fourth Industrial Revolution”. “Industrialisation should become the flagship of the introduction of new technologies... the most important issue is the development of our own ecosystem of developers of digital and innovative solutions,” stated the President.

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GROW TH AND MODERNISATION

China’s Belt and Road Initiative was announced by the country’s president, Xi Jinping, with his Kazakh counterpart, Nursultan Nazarbayev, in Astana in 2013 (PHOTO: ILYAS OMAROV/AFP/ GETTY)

The objective is to increasingly focus such development around university innovation centres, including at Nazarbayev University and the International Technology Park in Astana. Moreover, the new AIFC has launched a state-of-the art fintech research and innovation centre to help fuel the development of the new Astana Stock Exchange and the expansion of Kazakhstan’s emerging financial services industry. Digitalisation is not only at the core of seizing the economic opportunities offered by the Fourth Industrial Revolution, but it is also of immense importance in simultaneously driving the expansion of the country’s private sector – another key element in the country’s industrial growth policy.

Strategic focus The individual areas of strategic focus are not unfamiliar, but the emphasis of

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approach is different with new digital, cutting-edge technology, the means by which the country will be increasingly addressing everything from improvements in agricultural yields and energy production and consumption efficiency to the application of blockchain technology to boost the unhindered competitive transhipment of goods across Kazakhstan. The targets also include the deployment of digital technology in education to, amongst other objectives, address Kazakhstan’s ambition for future generations to speak not only Kazakh and Russian, but also English – the language of international trade and business, and the official language of the AIFC. Regarding the next step in the development of the country’s health service, the President closely focused on the approach now required. “It is necessary to increase the BUSINESS KAZAKHSTAN 2018


GROW TH AND MODERNISATION

availability and effectiveness of healthcare services through the integration of information systems, the use of mobile digital applications, the introduction of electronic health passports and the transition to “paperless” hospitals. In the past 25 years, Kazakhstan has energetically assembled a multi-vector foreign policy that has laid the foundations of strong diplomatic relations around the globe in the pursuit of peace and security, and, crucial to its economic development, increasingly integrated the Eurasian nation into world trade and investment markets – with huge levels of FDI one of the most important tangible outcomes of this policy. The country renounced the use of nuclear weapons shortly after independence, and with the assistance of the US, Russia and the UK dismantled its vast stockpile of nuclear warheads, and became a signatory of the International Nuclear Non-Proliferation Treaty and a major campaigner for a nuclear-weapons free world. The policy forcefully underpinned Kazakhstan’s friendly intentions globally, and became a cornerstone of relations, particularly with western nations. As Kazakhstan’s diplomatic stature grew, its membership of international and regional forums expanded rapidly beyond its initial global debut as a member of the United Nations, leading to close links with nations large and small, as well as international institutions. The country retains strong ties and friendships with former members of the Soviet Union through the Commonwealth of Independent States and was a founder member of the Eurasian Economic Community – subsequently the Eurasian Economic Union (EEU) – which comprises (in addition to Kazakhstan) Russia, Belarus, Armenia and Kyrgyzstan, an emerging free trade area in goods and services. Kazakhstan’s membership of the EEU, which has a combined population of over 180 million, is another powerful argument BUSINESS KAZAKHSTAN 2018

for investing in the country and its extended access to such a large, additional tariff-free market. A member of the Organisation for Peace and Security in Europe, Astana proudly chaired the body in 2010; as a member of the Organisation of Islamic Co-operation it helps bridge relations between the West and the Islamic world; a member of NATO’s Partnership for Peace initiative, it also has close economic ties with the European Union and special bilateral strategic links with both the United States and the United Kingdom. Meanwhile, its relationship with its neighbour to the east, China, becomes ever closer – so much so that China’s Belt and Road Initiative (BRI) trade and development masterplan, stretching by land from China’s east coast to the North Sea and winding by sea through key countries of the Far East across to Africa was announced by China’s Xi Jinping Kazakhstan’s average annual in 2013 in Astana at GDP growth since the Nazarbayev University, beginning of the with the Kazakh President 21st century alongside him.

6.9%

A member of the Bretton Woods institutions – the International Monetary Fund, the World Bank, the International Finance Corporation and the Multilateral Investment Guarantee Corporation – from the outset, Kazakhstan is well anchored in a series of other international financial agencies, including the Asian Development Bank, the Islamic Development Bank and the European Bank for Reconstruction and Development. It is also a founder member of the China-based Infrastructure Development Bank – a key source of funding for projects along the land and maritime arms of China’s BRI initiative. Following a series of complex technical negotiations, Kazakhstan became a member of the World Trade Organization in late 2015,

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GROW TH AND MODERNISATION

Astana: smart achievements This year, Astana celebrates its 20th anniversary as Kazakhstan’s new capital – a gleaming, hi-tech city that rises proudly amidst the flat, endless steppe that surrounds it; a celebration of futuristic architecture, interwoven with symbols and shapes of traditional Kazakh culture, such as those of the Khan Shatyr Entertainment Centre and the Kazakhstan Central Concert Hall. Overall, the message is newness, affirmation, dynamism and smart – all of which chime well with the city’s ambitions to become one of the region’s – and the world’s – financial centres. The development of Astana as a ‘smart city’, mobilising modern technology to create an efficient, effective, environmentally advanced

The transparent tented structure of the Khan Shatyr Entertainment Centre, designed by Norman Foster, resonates with Kazakh history as a traditional nomadic building form

Officially opened in 2009, the Kazakhstan Central Concert Hall has an auditorium that seats 3,500 people, as well as housing exhibition halls, cinemas and shops

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place to live and work is, in itself, a laudable achievement, which President Nazarbayev believes should form the basis of a “Smart City Standard”, with its intrinsic best practices disseminated to other Kazakh cities to help them follow suit. It is also intended that the city, a smart beacon of modernity, will, in itself, attract investors, domestic and foreign. “The world has come to realise it’s not the country, but the cities which attract investors where it is comfortable to live and work. “Smart cities will become a driving force of regional development, dissemination of innovations and improving lives of people countrywide.” BUSINESS KAZAKHSTAN 2018


GROW TH AND MODERNISATION

paving the way for further expansion of the country’s international trade engagement. Its global economic credibility has been additionally enhanced by its ever-closer technical co-operation with the Paris-based OECD, the much-respected international body devoted to the promotion of economic and social wellbeing. Most recently, Kazakhstan achieved its most coveted objective. In 2017, it was successfully elected as a non-permanent member of the United Nations Security Council, taking its seat in January this year and assuming the role of the Presidency of the Council during January – a position that rotates through the membership on a monthly basis. Kazakhstan’s successful campaign was based on its commitment to and involvement with four different types of security: nuclear security; energy security; water security and food security. Its promotion of a nuclear weapons-free world and hosting Astana Expo 2017: Future Energy – an international exhibition covering all aspects of future energy supplies and conservation – placed its credentials in these two categories beyond doubt. Domestic irrigation and potable water projects, coupled with plans to fully exploit the agribusiness potential of the country’s rich farmland underscored its commitment to water and food security.

Digitalisation, financial services and funding The Fourth Industrial Revolution and reforms and new innovations in the Kazakh financial sector are closely linked. Digitalisation will play a core role in the continuing development of the financial sector’s infrastructural, operational and trading technology. Conversely, the emergence of a new financial sector will be the key to raising the necessary funding to support the new age of Digital Kazakhstan. The AIFC is at the cutting edge of Kazakhstan’s financial services sector revolution, comprising a new Stock Exchange and a series of specialist facilities that will focus on a range of funding types, BUSINESS KAZAKHSTAN 2018

including corporate, project and trade finance, with both conventional and other “windows”. Importantly, these also include green finance, in keeping with the country’s strong environmental principles, and Islamic finance, which is rapidly increasing in importance not only in the Islamic world, but also in conventional financial centres, such as London. The AIFC, based on English common law with English as its official language, is located in the iconic glass sphere that formed the centrepiece of the Expo 2017. It is fitted with the latest technology to ensure security and efficiency and to generally underpin the resilience and integrity required of all major international financial centres. Kazakh Invest is the government’s official FDI agency, whose high level delegations, often including key ministers, constantly visit key current and potential markets to generate business. The agency, discussed in detail in a separate section in this publication, is continuing to streamline its FDI promotion policies, whereby it proactively matches (sometimes niche) opportunities in Kazakh industry or agribusiness with a range of targeted foreign sectors and industries as a more efficient means of engaging with potential investors. Kazakhstan’s national wealth fund, Samruk Kazyna (whose policies and their significance are profiled later in the publication), is also playing a central role not only in the provision of investment for strategically important industrial operations, but also in helping to shape the evolution of the country’s new financial sector. This is achieved in part through its transformational privatisation programme, including initial public offerings for some of the country’s major industrial conglomerates and service industries, such as uranium producer KazAtomProm and national airline Air Astana. Not only will these generate new funds for re-investment elsewhere, but they will also help expand the private sector as a potentially potent instrument of economic development.

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Interview

Creating a cashless economy Mastercard has been involved in the development of Kazakhstan’s cashless economy for over 20 years. Its 2017 cooperation agreement with the Astana International Financial Centre – says Nina Villems, Mastercard Vice President and Managing Director, Kazakhstan, Armenia and Belarus – will not only ensure that AIFC members have access to the latest innovations in cashless technology, but will create a template for smart city developments throughout Kazakhstan 28

What has been the history of Mastercard’s involvement in Kazakhstan prior to its cooperation agreement with the AIFC? Kazakhstan is one of our priority markets. We have been working in Kazakhstan for more than 20 years and consistently developing the cashless economy in the country. Mastercard started its activity in the middle of the 1990s, and in 2012 opened an office in Almaty. We cooperate with almost all the financial institutions, trade and service enterprises and other market participants in order to introduce our innovative payment solutions to the Kazakh market. In recent years, the number of banks participating in the payment system has more than doubled. Our presence is strong; we implement targeted programmes in partnership with banks and merchants; develop special offers and unfold Mastercard programmes for mass and premium segments; and introduce new BUSINESS KAZAKHSTAN 2018


INDUSTRY PERSPECTIVE

technologies to the market, such as digital money transfers via social networks and one-touch payments with smartphones.

What are the key elements of the cooperation agreement between Mastercard and the AIFC? Developmentally how are they progressing? What is the status of the Resident Card? An agreement on cooperation between Mastercard and the AIFC was concluded in 2017, with the main aim of introducing even more innovative payment technologies and develop the cashless economy in Kazakhstan. We plan to work jointly on the creation of the infrastructure of the AIFC, ensuring the availability of innovative financial services. This will contribute to the successful development of the AIFC and will make the site an example of an innovative infrastructure for smart cities of the future throughout Kazakhstan. We will create a Resident Card – a multifunctional card that combines financial and nonfinancial services, required by the AIFC, and this card will work as a key to the smart infrastructure of the AIFC. The first version of the AIFC Resident Card has already been successfully created.

Specifically, how will Mastercard assist with the development of the AIFC’s FinTech innovation platform, and can you give examples of current projects and their status and significance? Resident Card is one of the examples of our collaboration. The agreement with the AIFC also declares our support for establishing a FinTech start-ups BUSINESS KAZAKHSTAN 2018

We can bring valuable insights and expertise from other markets accelerator at the AIFC platform. However, it is still too early to talk about any specific projects, since the AIFC’s activity is just unfolding. But we are sure that in the near future our cooperation in this direction will be successfully implemented. As a technological company with global presence, we can bring valuable insights and expertise from other markets. This knowledge can help create an efficient environment for residents of the AIFC. We believe that such technologies as biometric identification with a wide range of functions – payment confirmation, access to various services, mobile banking, Masterpass technology, Moneysend digital HUB with multiple functions – could be of interest in Kazakhstan.

More generally, how widespread is cashless economics to date in Kazakhstan? And how do you read the level of cultural acceptance? How do you see Mastercard’s future contribution to Kazakhstan’s cashless economy in both the retail/consumer and businessto-business markets? The cashless economy benefits the state, business and ordinary citizens, and in Kazakhstan we see great interest and practical

steps for introducing modern digital technologies. The cashless economy is developing in Kazakhstan and we are contributing to this process. We believe that the cashless economy promotes the formation of a more open, safe, efficient and transparent environment for all participants in the economy. The country has recently adopted the state programme Digital Kazakhstan, aimed at developing a digital ecosystem to achieve sustainable economic growth, increase the competitiveness of the economy and improve living standards. We believe that projects we develop in Kazakhstan contribute to the successful implementation of these goals. We are very proud that, jointly with our Kazakh partners, we have introduced the innovative technologies of the world payments industry and that the most advanced achievements are accessible to Kazakhstan people, enabling them to make purchases in easy, convenient and safe ways.

www.mastercard.kz 29


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Kazakhstan’s geographic location in central Asia means the country is in prime position to benefit from China’s strategy to develop transport infrastructure and increase connectivity across continents

Reviving the Silk Route

A catalyst for investment

K

azakhstan is a core element in China’s Belt and Road Initiative (BRI) trade-investmentdevelopment strategy, from which it will increasingly accrue great economic benefits, including many additional billions of dollars in development funding. Located at the heart of Eurasia between China and Europe, an enormous 3,000km length of the east-west stretch of BRI crosses Kazakhstan’s territory, making the country, in essence, the central Asian pivot for the projection of BRI to all points west into Europe and south-west into Iran and the Middle East. Moreover, many believe that the launch of the Nurly Zhol infrastructure-orientated stimulus programme during the depths of the last global economic crisis puts Kazakhstan in a better position than some other countries along the route to take

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advantage of construction programmes. The latter will vary, taking in projects linked to logistical improvements and innovation, as well as industrial plants and factories across the trans-Kazakhstan development corridor, which the One Belt arm of China’s trade and investment master plan is set to act as a fundamental and formidable catalyst. The importance with which China itself clearly views Kazakhstan’s involvement in its BRI strategy was underlined by China’s President Xi Jinping when he chose Astana as the location for its unveiling during an official visit in 2013 – at Nazarbayev University with President Nazarbayev standing beside him. Chinese investment in many countries located on the two main limbs of BRI is not new by any means, whether across the Eurasian landmass or throughout southeast Asia and across the Indian Ocean to BUSINESS KAZAKHSTAN 2018


GROW TH AND MODERNISATION

To date, Kazakhstan has been the largest recipient of Chinese foreign direct investment in central Asia Africa. However, the sheer scale, intensity and strategicality of the plan – measured in terms of funding, project numbers and industrial and commercial impact – amounts to potentially the most transformational economic master plan since the Marshall Aid programme mobilised by the United States to rebuild Europe after the devastation of the Second World War. That said, BRI’s global reach and capacity looks set to far exceed that of Marshall Aid.

Increasing investment To date, Kazakhstan has been the largest recipient of Chinese foreign direct investment (FDI) in central Asia, with China’s FDI stock rising to well over $16bn in recent years. The spread of FDI is very much in keeping with the strategic roll-out of BRI, with approaching 40% of investment focused on transportation and logistics – in other words, laying the foundations of fast, efficient and secure connectivity to lift future trade and industrial investment to dramatically higher levels over a relatively short period of time.

specifically to process containerised cargo, substantially adding to Kazakhstan’s transit capacity. With a daily container-handling capability of well over 16,000, the Khorgos Gate contributes a cluster of services, including the formation of container trains, assembling container capacity from different sources within China, transhipment of containers and the handling of commercial and security documentation. Moreover, further expansion plans are under way, following the 2017 purchase of a 49% share of the terminal by China’s Cosco Shipping and Lianyungang Port.

Train times... By 2020, several thousand freight trains each year are expected to run between the European Union and the East Coast of China.

• Indeed, follow-through Chinese investment to achieve the latter is already strongly resonating through central Asia and, in particular, in Kazakhstan, where China’s FDI stock in the financial and manufacturing sectors together totals around 35% of overall capital injection annually.

In mid March, the first train from Amsterdam ceremoniously departed from the Netherlands’ capital, comprising 41 freight containers owned by Dutch Transport and Nunner Logistics carrying a variety of goods – from fertiliser to pharmaceuticals and medical products. The journey was scheduled at 16 days.

Significantly earlier – in January 2017 – the first container train from China arrived in London through the Channel Tunnel, having travelled 12,000km

One of the most spectacular New Silk Road logistics projects to date has been the $220m Khorgos Gate – a key dry port hub on the Kazakhstan-Chinese border designed BUSINESS KAZAKHSTAN 2018

across France, Belgium, Germany, Poland, Belarus, Russia and Kazakhstan.

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GROW TH AND MODERNISATION

Trains with different gauges from China and Kazakhstan have loads transferred at the dry port hub in Khorgos, Kazakhstan (PHOTO: THEODORE KAYE/ALAMY)

A potentially matching development on the opposite side of Kazakhstan is emerging at and around Aktau in the Mangystau Region, adjacent to the Caspian Sea – an area sometimes aspirationally referred to as “The Crossroads of Eurasia”. East-west transit traffic is booming after the recent opening of a new container port, Kuryk – located a few miles south of Aktau – which, in 2017, its first year of operation, far exceeded cargoprocessing target of 1m tonnes. Kuryk enables the direct handling of containers from trains and trucks to ferries, and future expansion plans at Kuryk and in Aktau will soon facilitate further substantial increases in handling capacity. In addition to improvements in rail links around Kazakhstan, Chinese investment is

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also being deployed in support of strategic rail hubs in Shymkent and Astana, whilst the China Investment Bank has injected $1.6bn of investment into the construction of the capital’s light railway system. According to the World Bank’s International Finance Corporation, BRI-related Chinese investment in logistics alone will generate an increase in Kazakhstan transit traffic from 105,000 TEU (Twenty-foot Equivalent Units) in 2016 to 240,000 TEU by 2030. Add to this the many more billions of dollars that will be injected into other sectors of Kazakh industry and infrastructure, and the overall direct and catalytic impact of BRI is set to be one of the single most important factors in Kazakhstan’s pursuit of its economic targets to 2050. BUSINESS KAZAKHSTAN 2018


CHAPTER TWO

Financial reforms


FINANCIAL REFORMS

Ensuring sufficient funding for Kazakhstan’s digitalised future requires a new paradigm for its financial sector, creating an investment climate to generate sustainable growth

A new model for finance Funding the Fourth Industrial Revolution

T

he successful digitalisation of Kazakhstan’s economy will require substantial innovative funding to maximise its benefits to the country and its people. Such funding will stem from a number of fundamental systemic changes in both the operational principles and practises of the country’s financial and investment sector, greater and closer collaboration with international financial institutions, and major new innovations to build and diversify funding capacity. Speaking earlier this year in his State of the Nation address, President Nursultan Nazarbayev spoke of the need to “reload” the country’s financial sector, focusing on major changes in bank policies and governance, and the role of the new

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Astana International Financial Centre (AIFC) in underpinning changes in the country’s investment climate to drive, amongst other objectives, a fundamental increase in the volume of stock-exchangebased business turnover. High levels of liquid turnover on the stock exchange are being sought for conventional reasons – they encourage both domestic and foreign investors to participate in the market, providing cashraising opportunities for large corporates, as well as small and medium-sized enterprises (SMEs). But for Kazakhstan, there are other, more fundamentally strategic, reasons why the country is looking to the AIFC BUSINESS KAZAKHSTAN 2018


FINANCIAL REFORMS

to bring about a major step change in stock-exchange activity. Firstly, the country is seeking to rapidly grow the contribution of its private sector to the high, sustainable growth rates needed to achieve the Strategy 2050 development goal of Kazakhstan becoming one of the world’s 30 most well-off countries. The new Astana Stock Exchange is set for an important role in the funding of new SMEs – an essential seedcorn of private-sector market growth often associated with the energy and drive of ambitious young entrepreneurs seeking to morph into major industrial players. In this respect, the AIFC’s innovative fintech research and development hub BUSINESS KAZAKHSTAN 2018

will play a significant part as a source of start-ups in one of the world’s fastestgrowing business sectors.

Kairat Kelimbetov, governor of the Astana International Financial Centre

Secondly, the AIFC is setting out to encourage and develop asset-management skills and opportunities as part of its commitment to building private-sector investment capacity – and a healthy, highturnover stock exchange will play a key element in achieving this objective.

(PHOTO: GUO CHENG/XINHUA NEWS AGENCY/ PA IMAGES)

Thirdly, the AIFC’s stock exchange is viewed as an important location for floating state assets to be sold off by Kazakhstan’s wealth fund, Samruk-Kazyna, as part of the country’s economic and industrial restructuring. In turn, the revenue from such sales will act as a further source of

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360 Legal Thinking Finance & Investment Worldwide °

Capital Markets | FinTech | Litigation & Regulatory Disputes | Asset Management | Private Banking | Green Finance | Insurance

We are extremely proud and privileged to be associated with the development of the Astana International Financial Centre. As a consequence of our work with the AIFC, we are well placed to advise on AIFC law and to act on disputes before the AIFC Court and Arbitration Centre.

andrew.oldland@michelmores.com +44 (0) 20 7659 7660 | www.michelmores.com


FINANCIAL REFORMS

future funding, which Samruk can mobilise for strategic, pump-priming investments in new and existing corporates deemed to be in the best interests of the country and the Kazakh people. Additionally, of course, the stock exchange will not only be a source of funding for Samruk, but also its asset flotations will provide a major source of valuable traded stocks, further fuelling long-term volume and liquidity.

Bank reforms Another key element in the country’s new financial paradigm is the “reloading” of the country’s banking sector. In his State of the Nation speech, President Nazarbayev focused on a series of measures that he said should be taken to achieve this.

play a crucial role in future industrialisation and overall development: the AIFC’s Islamic finance and green finance hubs. Islamic finance continues to grow in importance around the world, with even non-Islamic financial capitals, including London, looking to increase volumes of business funded on the basis of Islamic financial principles. Whilst a secular nation, Kazakhstan’s population is around 60 per cent Muslim, and the country has close ties to Islamic nations through its membership of the Organisation of Islamic Cooperation and multilateral development institution the Islamic Development Bank and its privatesector arm, the Islamic Corporation for the Development of the Private Sector.

The AIFC is setting out to encourage and develop asset-management skills To begin with, he called for “bad loans” to be cleaned out from bank portfolios: “At the same time, the owners of banks should bear economic responsibility, accepting losses.” He also stated that “supervision of the activities of financial institutions by the National Bank should be tough, timely and effective”. Amongst other new policy initiatives, the President urged a new approach towards the linkage between the cost of corporate borrowing and the likely returns on investment in related sectors: “The National Bank and the Government should jointly address the issue of providing long-term business finance at rates which take in to account the long-term profitability in... the economy”. Returning to the AIFC and further innovative change in financial-sector funding capacity, two other areas of its activities are set to BUSINESS KAZAKHSTAN 2018

Such close connections – the Islamic Development Bank and the ICD are both funders of Kazakh projects – look set to underpin a mutually beneficial symbiotic relationship between the AIFC and these and other Islamic funding institutions, including private-sector Islamic banks. The first meeting of the Advisory Council on Islamic Finance of the AIFC took place in Astana earlier this year and was chaired by Daud Vicary Abdullah – the former Chairman of the Kuala Lumpur-based International Centre for Education in Islamic Finance – and attended by a team of global experts on Islamic banking, including Abdelilah Belatik, Secretary-General of the General Council for Islamic Banks and Financial Institutions, and Mohamed Jamil Berro, former CEO of Al Hilal Bank.

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FINANCIAL REFORMS

directions, particularly into processing and manufacturing. The high skill levels and technology transfer often associated with foreign direct investment (FDI) will make the latter an increasingly important component of the drive to access the benefits of the Fourth Industrial Revolution.

The Chinese Pavilion at Expo 2017 Astana included displays of successful green projects (PHOTO: WU ZHUANG/XINHUA NEWS AGENCY/ PA IMAGES)

The Advisory Council’s role is to provide advice on documentation and all other aspects of conducting Islamic finance operations at the AIFC, as well as helping to attract membership and business to the new market, which could become the largest Islamic finance market in Eurasia. Importantly, both financially and symbolically, Kazakhstan has this year focused on the issuance of a $300m sukuk or Islamic sovereign bond – a precursor of much sukuk business to come.

Green funding The AIFC’s green funding ambitions reflect Kazakhstan’s long-standing interest in sustainable, environmentally friendly development, which sits at the heart of its national growth policy, particularly in the energy sector. The AIFC’s green finance hub is designed to bring together green or ethical investors with green companies or projects seeking finance. Whilst initially focusing on Kazakh business, the objective is for the green finance hub to serve the wider Eurasian region – and beyond. Elsewhere, Kazakhstan has traditionally been successful in raising foreign direct investment in industry, infrastructure and services – initially focusing on the energy industry and then expanding and diversifying in many different

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With this in mind, Kazakhstan’s national investment marketing agency, KazInvest, has also been introducing new innovations and techniques not only to attract higher levels of FDI, but investment that meets key strategic requirements in industry or infrastructure. This, in some cases, involves proactive global searches to match needs with companies and organisations that can meet them.

Investment from China Finally, China’s Belt and Road Initiative (covered in detail in the previous section) is continuing to open up a vast new funding front for the trans-Kazakhstan section of the “One Belt” rail transport corridor from China’s east coast to western Europe. This front, which could ultimately be worth many billions of dollars in various types of funding, primarily involves financing and investment directly from Chinese corporations or financial institutions or from special funding bodies in which China plays a powerful role. These include the Silk Road Fund, for which China provided all the initial paid-in capital, and the Chinaled, Beijing-based Asian Infrastructure Investment Bank (AIIB). The AIIB and Islamic Development Bank are amongst a cluster of international development institutions that continue to play supportive roles in the development of the Kazakh economy. Amongst others, the European Bank for Reconstruction and Development and the World Bank and its group members – the International Finance Corporation and the Multilateral Investment Guarantee Agency – are longtime backers of the country. BUSINESS KAZAKHSTAN 2018


CHAPTER THREE

Astana International Financial Centre AI F

Astana International Financial Centre



ASTANA INTERNATIONAL FINANCIAL CENTRE

This official briefing was prepared for Business Kazakhstan 2018 by the Astana International Financial Centre, marking the AIFC’s official International Presentation on July 5 2018, and setting the AIFC’s launch within the context of major Kazakh and external economic developments that look set to underpin its emergence as Eurasia’s leading financial centre

The AIFC:

Raising Kazakhstan’s economy to a new level

T The former architectural centrepiece of Expo 2017 is now the futuristic home of the AIFC (PHOTO: MAPACHE/ SHUTTERSTOCK)

he international balance of economic power has clearly been shifting in the past decade, with a growing emphasis on a multi-polar global economy. Emerging market economies are gaining greater dominance in shaping global economic growth. While developed markets deal with sluggish and fragile economic growth, there is a historic opportunity for emerging markets to gain importance over the next decade. For Kazakhstan, this is a clear opportunity to showcase its competitiveness and attractiveness on the regional and global stage. Kazakhstan, a country located at the heart of the Great Silk Road, is accelerating its integration into global markets. Today, the country plays a strategic role in recreating a trade corridor connecting East and West

BUSINESS KAZAKHSTAN 2018

through China’s Belt and Road Initiative (BRI) and has set a goal of creating a favourable environment for commerce with its neighbouring countries as a member of Shanghai Cooperation Organisation. Moreover, Astana has a formidable opportunity to become the delivery unit for BRI infrastructure financing. Eurasian Economic Union states, including Kazakhstan, benefit from a large pool of wealth, and there is a rising demand for sophisticated investment products and tailor-made solutions in the region. The upcoming massive privatisation programme of state-owned enterprises will allow the country to reduce the share of state ownership down to the 15% level of OECD states and create healthy competition for businesses.

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ASTANA INTERNATIONAL FINANCIAL CENTRE

The Belt and Road Initiative will underpin the AIFC as a regional centre (PHOTO: XINHUA/SIPA USA/ PA IMAGES)

Today, there is not any stock exchange with a large investor base in the region, and therefore re-launching capital markets in Kazakhstan is one of the top priorities. The capital of Kazakhstan was relocated from Almaty to Astana in 1997. In 20 years, the city has become the political centre of Kazakhstan. Now Astana will also be connected to leading global financial centres via regular and convenient direct flights, as part of President Nazarbayev’s 100 Concrete Steps initiative. Astana, with a population of one million people, is transforming into a smart city by mobilising innovations and new technology to make it sustainable and self-reliant. Located at the heart of Eurasia, Astana covers the time zone between Hong Kong and London. Meanwhile, Kazakhstan’s economic and geographical position within the Eurasian Economic Union and its key role in BRI project implementation further underpin the great potential for Astana to become a regional financial centre.

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Fundamentally, the establishment of the AIFC is aimed at raising the economy of Kazakhstan to a new level and transforming Astana itself into a financial centre comparable to the best in the world. The state-of-the-art complex that AIFC occupies on the former Expo 2017 site is designed in futuristic style, embodying green-energy future technologies. Its symbolic location further develops the theme of green energy, green finance and high-tech technologies in the financial sector. The AIFC’s site covers 1,632 hectares, almost the entire left bank of Astana. Prior to the huge inflow of international guests visiting Expo 2017, Astana’s transport system was transformed, with the priority being accessibility to the Expo site. Currently, Astana is connected by direct flights to and from all major cities, including the world’s top financial centres, such as London, New York, Dubai, Frankfurt, Beijing, Hong Kong and Singapore. Moreover, the new Open Sky policy will further increase Astana’s connectivity and flight frequency. BUSINESS KAZAKHSTAN 2018


ASTANA INTERNATIONAL FINANCIAL CENTRE

AIFC’s focal areas of operation are capital markets, asset management and private banking, Islamic finance, green finance and fintech research and innovation.

Asset management and capital markets A successful financial centre cannot be built without a well-developed asset management market as its foundation. Therefore, the AIFC strongly believes that localisation of foreign asset management companies on AIFC territory will give an effective boost to the development of local asset management and capital markets, and subsequently will facilitate the inflow of funds from sovereign wealth funds and other institutional and large private investors to the market. The competitive advantages that the AIFC offers – significant funds available for management, a favourable tax climate, legal privileges, as well as economic and political stability – look set to attract large asset management companies, especially those interested in tendering for the management of National Fund of the Republic of Kazakhstan and Integrated Accumulative Pension Fund assets. Our aim is to offer a wide range of investment management services and opportunities to institutional and private clients, asset managers and investment professionals across the traditional and alternative asset sectors for the whole Eurasian space and Central Asian markets. Thus, AIFC presents promising opportunities for global, as well as local, private equity, hedge fund and realestate fund managers to add diversity to their portfolios.

In addition to the above-mentioned, the AIFC also supports the development of the private banking sector in conjunction with the development of the asset management market and expertise. The AIFC creates an ideal platform for private banking services and solutions in fulfilling the demands of sophisticated local and foreign private clients and family offices of the region. There is huge potential for private banking in the AIFC, since it aims to provide financial services to Central Asian countries, together with Russia and China, with their large numbers of affluent individuals potentially interested in the private banking products. Such individuals comprise around two million people in Central Asia and Russia and over 29 million people in China. In order to develop individual investment markets and private banking, the AIFC has studied the global experience and existing regulatory regimes in the world’s leading financial jurisdictions, such as Switzerland, Germany and Luxembourg. Moreover, it has established relations with local providers of private banking services to promote the development and exchange of knowledge and best practices in the management of private wealth.

Islamic finance Kazakhstan has considerable potential to develop its Islamic Finance Hub. According to the 2009 census, 70% of the population identify themselves as Muslims. According to the Gallup Poll 2010, 43% of Kazakhstan population believe that the religion plays an important role in their daily life. Similar percentages elsewhere include Malaysia 96%, Saudi Arabia 93%, UAE 91% and Turkey 82%.

Kazakhstan has considerable potential to develop its Islamic Finance Hub BUSINESS KAZAKHSTAN 2018

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ASTANA INTERNATIONAL FINANCIAL CENTRE

The opening of the AIFC is intended to boost the development of Astana as a business and finance hub (PHOTO: 1001SLIDE/ ISTOCK)

Roughly 10% of the Muslims of Kazakhstan are ready to buy Islamic finance products under any conditions, and about 15% if the conditions are no worse than those offered by traditional banks. To attract the other 75% of the Muslim population, as well as non-Muslims, it will be necessary to provide more attractive conditions in comparison with traditional products. However, an important condition regarding the development of Islamic finance is that the target audience for its products all use bank services, not only the practicing Muslim population. The main impediments for development of Islamic finance in Kazakhstan are low awareness amongst the population, poor adaptation of the regulation of Islamic finance, prohibition of traditional banks from selling Islamic products, and no guarantee of the Islamic bank’s deposits on the part of the state.

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Development of Islamic finance in Kazakhstan will require the mobilisation of all market elements (demand, supply and infrastructure) to stimulate the capital inflow and will primarily involve the development of an alternative banking sector, as well as changes in the traditional sector. This will involve the creation of between 110 and 130 jobs at the AIFC. To develop the holistic Islamic finance sector, AIFC will implement a robust legal and regulatory framework in accordance with the best Islamic finance practices and principles, create appropriate infrastructure and increase public awareness about the principles and products of Islamic finance. The legal and regulatory framework will accord with the best Islamic finance practices and principles and is being prepared with the technical assistance of the Asian Development Bank. BUSINESS KAZAKHSTAN 2018


ASTANA INTERNATIONAL FINANCIAL CENTRE

Potentially, the total Islamic finance assets could reach $45.8 billion by 2025, of which the assets of the banking system will account for $36.6 billion, or approximately 10% of all banking assets in Kazakhstan in 2025. The volume of capital markets (Sukuk and funds) is forecast at $9.2 billion by 2025. In order to position itself as an Islamic finance hub in the region, AIFC has hosted many international events including IFN Forum CIS 2017, Global Islamic Finance Awards (GIFA) 2017, and the Sukuk Model Law Regional Consultation Workshop. All these activities provided opportunities to establish contacts with regulators and government representatives from other countries and to present the BUSINESS KAZAKHSTAN 2018

AIFC to the international Islamic financial institutions. In March 2017, the AIFC Governor Kairat Kelimbetov was appointed as a Governor of the Islamic Development Bank for Kazakhstan, which provides sustainable connections with Islamic finance world.

Kazakhstan has aligned national strategic plans and programmes with green economic objectives (PHOTO: CHOLPAN/ SHUTTERSTOCK)

Green finance Kazakhstan has been an early and enthusiastic proponent of sustainable development, aligning national strategic plans and programmes with green economic objectives to enable a transition to a green, low-carbon economy. These efforts are underpinned by ambitious low-carbon and sustainability targets and guided by the

45


ASTANA INTERNATIONAL FINANCIAL CENTRE

“Concept on Transition to a Green Economy” policy framework (Green Economy Concept, (GEC), as well as Kazakhstan’s nationally determined contribution (NDC) under the Paris Agreement, covering action in greenhouse gas (GHG) emissions, water, agriculture, energy efficiency, electricity and waste management. Achieving Kazakhstan’s NDC under the Paris Agreement and the targets embedded in the Green Economy Concept (GEC) will require large-scale mobilisation and intermediation of funding for green investments, particularly from the private sector. Public resources are finite and dependence on public investment in the long-run must be avoided to ensure sustainable green growth.

10%

In this regard, the AIFC, together with the European Bank for Reconstruction and Development, has Forecast of Islamic banking developed a Concept assets as a percentage and a Road map of of all banking assets in a green financial Kazakhstan in 2025 system in Kazakhstan. The overall objective of the project is to support Kazakhstan in achieving the ambitious targets set out in its GEC and NDC under the Paris Agreement, through the mobilisation of sufficient volumes of domestic and international green finance and establishment of an array of financial services that are required to make the necessary investments in lowcarbon technologies, energy efficiency and renewable energy feasible. The Concept was presented to the stakeholders in September last year and covers: • Accessing the demand for green investments; • Identification of green financing market and regulatory gaps and barriers by reviewing current financial, trading and market regulations and institutional arrangements, and comparing against

46

• •

international best practices; Identifying and recommending green and climate finance monitoring, reporting and verification and tracking systems, anticipating the Paris Agreement transparency; Introduction of green financing standards; Development of the domestic and international markets for Kazakh green bonds; Development of the carbon market service.

Given its unique regulatory status and the high political priority on achieving success, the AIFC is well-placed to play a central, coordinating role. A key driver of success for Kazakhstan’s Green Financial System will be a strong market policy dynamic that will endorse green finance in areas with active local market engagement. The AIFC has an important role in supporting this dynamic by acting as a fulcrum for emerging policy, green financial solutions and domestic market demand. Astana International Exchange will provide certain benefits to its participants, including, amongst others, tax privileges for investors, a complete value chain of services, access to the capital pool, synergy between local and foreign market participants, and opportunities to cooperate with leading underwriters. For its first green financial instrument, the AIFC has selected defined green bonds, which are an important instrument for implementation of social and environmental projects, including municipal projects. Other instruments include emission allowances to be traded on the AIFC exchange platform (AIX). Much attention is also being paid to green economy institutions that will be closely involved in implementing green financial systems in Kazakhstan. Thus, the BUSINESS KAZAKHSTAN 2018


ASTANA INTERNATIONAL FINANCIAL CENTRE

International Green Technology Centre will be established by the Ministry of Energy and the AIFC. This institution will play a role of mediator between local and global companies in technology transfer, finding counter-partners and investors. Given the AIFC’s unique institutional status, strong political support and commitment to develop green finance, the AIFC Authority will serve as a national champion for Kazakhstan’s Green Financial System.

Fintech Financial technology companies have a great influence on the growth of financial services and radically change them by taking new, innovative ideas and turning them into successful new businesses that create high-value and knowledge-intensive jobs. According to a PwC report, more than 82% of global financial services companies expect to increase fintech partnerships by 2020, 77% expect to adopt blockchain as part of a production system or process and annual ROI on fintechrelated projects is expected to be 20%. Fintech development in Kazakhstan is at an early stage and is currently only testing markets for the adoption of radically new products. One of the key elements in AIFC strategy is promoting fintech development in Central Asia by creating the most favourable conditions for fintech start-ups – including modern infrastructure, flexible regulations and investment promotion. The AIFC FinTech Hub is aiming to attract start-ups from all over the world, bringing entrepreneurs together with international investors and industry experts – a great talent pool that will help to develop a more mature, diverse and knowledgeable investment market in Kazakhstan, with a pipeline of opportunities for venture capital funds and financial institutions. The regulatory framework of the financial technology industry is at the stage of constant development and adaptation to BUSINESS KAZAKHSTAN 2018

new challenges, where protection of both consumers and investors is required. In order to effectively support the development of the industry, regulation must be based on an integrated approach and take into account the specifics of each direction and the interests of all participants in the process. In order to enable start-ups to function in a supportive environment, special ‘regulatory sandboxes’ allowing testing within the framework of provisional legislation were created in the AIFC’s ecosystem. This approach makes it possible to facilitate interactions between regulators and start-ups using technologies and business processes that would normally not be possible, based on current legislation. For example, in many countries the mining, buying and selling of cryptocurrency, and high-frequency crypto trading, are on the borderline of legality and are not defined by law.

Special ‘regulatory sandboxes’ will enable testing within the framework of provisional legislation. For example, the mining, buying and selling of cryptocurrency is not defined by law in many countries (PHOTO: LUCADP/ SHUTTERSTOCK)

The AIFC FinTech Hub is actively working on establishing relationships with several international fintech hubs in Singapore, Israel, United Kingdom, Dubai and Russia, in order to build a ‘digital bridge’, promote fintech and develop educational programmes to improve local human resource capital.

47


INDUSTRY PERSPECTIVE

The Islamic Corporation for the Development of the Private Sector (ICD) supports economic development in its member countries, including Kazakhstan

Promoting growth

A

mongst the many public- and privatesector Islamic financial institutions and banking operations, the Jeddahbased Islamic Corporation for the Development of the Private Sector (ICD) is set to play an increasingly significant role in the growth and diversification of Kazakhstan’s private sector – a key element of the country’s long-term economic development plan, Strategy 2050. ICD supports the economic development of its member countries, which includes Kazakhstan, by providing finance to private-sector projects,

fostering competition and entrepreneurialism, and providing advice to both governments and private-sector organisations on how to promote business and also encourage cross-border investment. ICD’s official motto – “Enabling enterprise, building prosperity” – is very much in keeping with President Nazarbayev’s belief that it should be possible for every citizen of Kazakhstan to “learn a new business, open a new business or expand its scope of activities” in order to increase the presence of SMEs in Kazakhstan’s economic structure.

Additionally, of course, ICD’s increasing involvement in the Kazakh economy will help underpin another important aspect of the country’s new financialsector paradigm – greater focus on Islamic financial instruments, as underlined by the launch of the Astana International Financial Centre’s Islamic Finance hub. The following are examples of ICD’s activity in Kazakhstan: • In October 2016, ICD signed a memorandum of understanding with Kazakhstan’s new Astana International Financial Centre (AIFC), whereby the two organisations agreed to cooperate to explore the possible development opportunities for private-sector Islamic services in ICD member countries, including in the Gulf Cooperation Council member states, where AIFC Governor Kairat Kelimbetov described ICD as its strategic partner;

• In March 2017, the ICD signed a

Khaled Al-Aboodi, Chief Executive Officer of the ICD, and Kairat Kelimbetov, Governor of the AIFC, signed a memorandum of understanding in 2016, agreeing their cooperation

48

memorandum of understanding with the Association of Financiers of Kazakhstan, whereby the two organisations jointly agreed to support the development of Kazakhstan’s financial institutions; BUSINESS KAZAKHSTAN 2018


INDUSTRY PERSPECTIVE

• In October 2017, Ukrainebased boutique investment bank Dragon Capital Partners mandated ICD to establish a joint Shariah-compliant $100m investment fund, designed to fund joint ventures in Kazakhstan in partnership with other foreign investors;

figures in 2017 it had $13.3m in outstanding facilities to 70 micro-, small- and mediumsized enterprises; $1.8 million to the agricultural sector; and $0.5 million in the industry and infrastructure sector.

• During last year, the company also created seven new jobs, increased its total number of full-time employees to 19, of which 12 were women at the bank level, and its operations contributed $0.2 million to the government in the form of taxes;

• ICD was responsible for helping to create the first Islamic Leasing Company in Kazakhstan – Kazakhstan Ijara Company JSC – which was incorporated in April 2013 with a registered charter capital value of $40m with the objective of bringing Islamic Ieasing services to all sectors of the Kazakh economy. After just one year of partnership with ICD, Ijara Leasing had made significant progress. According to latest

• In August 2017, Kazakhstan’s Zaman Bank became the country’s second Islamic Bank (the first was Al-Hilal Bank, a Kazakh/UAE joint venture formed in 2010) following its conversion from

a conventional to an Islamic Bank by ICD, which was mandated in 2013 to projectmanage the changeover, with an eventual envisaged stake of 35% in the operation. Keeping in view Kazakhstan’s growingly important role in the Islamic world, the country’s concerns for promoting food security for itself and other Islamic countries, the significant potential of Kazakhstan’s food and agriculture sector, and the Government’s profile as a prominent investor and promoter of socio-economic development in Kazakhstan and the region; we, at ICD, are keen to secure the Government of Kazakhstan’s invaluable support and a prominent investment commitment for this very important initiative.

Islamic Corporation for the Development of the Private Sector The Islamic Corporation for the Development of the

services to governments and private-sector groups on

Private Sector (“ICD”) is a multilateral development

policies designed to encourage the establishment, expansion

financial institution and is part of the Islamic Development

and modernisation of private enterprises, development

Bank (“IDB”) Group.

of capital markets, best management practices and to

ICD was established in November 1999 to support the

enhance the role of the market economy. ICD operates to

economic development of its member countries through

complement the activities of the IDB in member countries

the provision of finance for private-sector projects,

and also that of national financial institutions.

promoting competition and entrepreneurship, providing

In November 2014, Fitch rated ICD AA/F1+ with a stable

advisory services to governments and private companies,

outlook. In April 2015, Moody’s assigned a Aa3/P-1 rating

and encouraging cross-border investments.

to ICD with a stable outlook. In December 2015, Standard &

ICD has an authorised capital of $4bn. Currently, the shareholders of ICD are the IDB (50%), 54 Islamic countries

Poor’s Ratings Services assigned its ‘AA’ rating to ICD with a stable outlook.

(30%) and five public financial institutions (20%). ICD fosters sustainable economic growth in its 54 member countries by financing private-sector investment, mobilising capital in the international financial markets, and providing advisory services to business and governments.

FOR MORE INFORMATION

ICD financing projects are selected on the basis of their

TEL:

(966-12) 6361400

contribution to economic development, considering

TEL:

(966-12) 6441644

factors such as job creation, Islamic finance development,

FAX:

(966-12) 644 4427

contribution to exports etc. ICD also provides advisory

Islamic Corporation for the Development of the Private Sector

EMAIL: icd@isdb.org

www.icd-ps.org


CHAPTER FOUR

SamrukKazyna

JOINT-STOCK COMPANY “SOVEREIGN WEALTH FUND “SAMRUK-KAZYNA”


SAMRUK-K A ZYNA

This official briefing for Business Kazakhstan 2018 by Samruk-Kazyna examines the operation and role of Kazakhstan’s sovereign wealth fund under its new Transformation Programme as it pursues its strategic goals of promoting corporate efficiency, effective portfolio management and sustainable development – and organises the forthcoming privatisation of its major industrial holdings

Creating wealth

for Kazakhstan’s future generations

S

amruk-Kazyna (SK) is the sovereign wealth fund of the Republic of Kazakhstan, with a total asset size of approximately $70bn. SK has the largest portfolio of high-quality assets in Kazakhstan, spread across a wide range of industries, including: oil and gas, uranium and mining, transportation and logistics, power and distribution, and telecommunications. Its primary objective is to create longterm sustainable wealth for the people of Kazakhstan and, as such, is continuously working to enhance its assets, attract

BUSINESS KAZAKHSTAN 2018

strategic partners and to meet world-class standards in efficiency, transparency and corporate governance. Indeed, its companies are going through significant changes, which will maximise profitability and enhance shareholder returns. Moreover, SK is on the cusp of a major privatisation programme of its main industrial assets, which will not only substantially strengthen its ability to achieve wealth for the nation, but also guide and assist the development of strategically important industries.

51


SAMRUK-K A ZYNA

National flagship air carrier Air Astana is part of Kazakhstan’s Privatisation Plan

Transformation Programme In 2014, SK embarked on a large-scale Transformation Programme, which ranges from realigning organizational structures, setting new benchmarks, and recalibrating business models at a macro level to finetuning business processes, and enhancing technology and resources at a micro level. This has resulted in SK adopting best practices from global peers in line with its aspiration to become a leading sovereign wealth fund. Additionally, the transformation has enabled SK to optimise value in its companies and raise their competitiveness. The Fund sets the target indicators of a portfolio structure, allocates matrices, ensures the alignment of investments with socioeconomic development targets, and initiates measures to enhance the

52

competitiveness of companies prior to privatisation. In line with these transformational changes Samruk-Kazyna JSC has developed a new Development Strategy for 20182028 taking into account the experience of leading sovereign funds, which are commercially focused on operational and investment activities. The Strategy comprises three main initiatives: The first initiative involves increasing the profitability of the companies by strengthening financial stability and increasing companies’ operational efficiency, optimizing and re-engineering business processes, and ensuring synergy among portfolio companies of the Fund and enhancing their investment attractiveness. BUSINESS KAZAKHSTAN 2018


SAMRUK-K A ZYNA

Supporting Kazakhstan’s Sustainable Growth Strategy

Samruk-Kazyna’s operations are fundamentally in support of

Kazakhstan’s ambition to become one of the world’s top 30 most-developed countries includes approved state programme Digital Kazakhstan (PHOTO: ERIC LAFFORGUE/ALAMY)

Kazakhstan’s economic aspirations for the future of the country and its

of Kazakh society to embrace the

and internationally. A further

people – maximising the long-term

challenges and opportunities of

example of both is its collaborative

value of the national wealth fund

the Fourth Industrial Revolution.

role, with elements of China’s Belt

and promoting long-term

In essence, this involves the

and Road Initiative to help steer

sustainable development.

comprehensive, incremental

logistics and other development

digitalisation of the economy,

projects on Kazakhstan’s 3,000km

an ambitious goal and policy agenda,

with the application of new

of east-west New Silk Road.

Strategy 2050, for Kazakhstan to

technologies, such as artificial

become one of the world’s top 30

intelligence, quantum computing

sets ambitious objectives for the

most-developed countries – an

and blockchain, to access the

Fund, which will require continuing

envisaged growth trajectory currently

unprecedented efficiencies and

transformation to maintain its global

underpinned by a series of plans,

competitiveness that they are

competitiveness, and relentless

policies and initiatives, including the

capable of generating – and which are

application of its strategic remit.

Strategic Development Plan of the

fundamental to the country’s future.

This will focus on identifying new

In 2012, President Nazarbayev set

Republic of Kazakhstan until 2025

SK will be a key element in

Kazakhstan’s Strategy 2050

growth initiatives, diversifying

and the approved state programme

promoting the government’s

investment portfolios, increasing

Digital Kazakhstan.

digitalisation policy – see

returns to shareholders, and

Digitalisation Engine on page 56.

strengthening the presence of

Moreover, in this year’s State of the Nation Address, President Nazarbayev called for all sectors

BUSINESS KAZAKHSTAN 2018

Indeed, overall, SK has a role as a strategic pivot both in Kazakhstan,

Kazakhstan and the Fund on the international stage.

53


SAMRUK-K A ZYNA

Railways operator Kazakhstan Temir Zholy is one of the six largest national companies going public during 2018-20

The second initiative, portfolio structure optimisation, is an important step for the Fund to move to active investment portfolio management. It is planned to complete the privatisation programme, revise the portfolio of investment projects and attract strategic partners through the sale of non-strategic assets.

In order to implement third initiative, income diversification, the Fund plans to invest in developing various sectors of the economy of Kazakhstan and projects of strategic importance (in accordance with key Kazakhstan represents state programs) and in the medium- and longterm intends to create partnerships with leading sovereign wealth of GDP in Central Asia funds and investment companies to make joint direct investments abroad that strategically link to the industries of Kazakhstan.

60%

54

Sustainable development initiatives, corporate governance and corporate culture are keystones of sustainable development and critical factors affecting the portfolio value. In order to efficiently and successfully manage the economic, environmental and social aspects of its activities, the Fund will introduce high ethical standards and build a trust-based corporate culture, set in place the most advanced standards to improve corporate governance, invest in human capital and take all measures to ensure environmental sustainability. The Fund will continue to provide sponsorship and charity support. Relying on the best practices, the Fund will finance social projects in health, education, professional development of youth and community development, projects in the field of environmental protection, art and cultural heritage, as well as research, innovation, science and technology, and projects aimed at supporting disadvantaged groups. BUSINESS KAZAKHSTAN 2018


SAMRUK-K A ZYNA

Meanwhile, the Fund was ranked 15th in the Sovereign Wealth Fund Institute’s (SWFI) Top 100 Public Investors List 2017. Indeed, SK was ranked higher than some of its peers, including. Khazanah, Mubadala and RDIF.

Positive change The transformational development of the Fund and its portfolio companies is occurring against the backdrop of significant positive change in Kazakhstan. Kazakhstan is actively expanding the private sector, reducing the share of the state and taking great strides in the modernization of its economy. The business climate in Kazakhstan is going from strength to strength. The country is now ranked 36th out of 190 economies in the World Bank’s “Ease of Doing Business 2018” rating, up from 77th place in 2015. It is now just two and three places behind Switzerland and Japan respectively, and ahead of many established economies. It has rich resources, professional services and a stable socio-political climate which is conducive to investment. Kazakhstan represents 60% of GDP in Central Asia and is ranked in the top three countries for the protection of minority investors’ rights. Moreover, Kazakhstan is the first country in the CIS region to receive an investment grade sovereign rating and has a non-permanent seat at the UN Security Council. It is a party to the Paris Climate Accord, and a member of the WTO.

Privatsation Programme The Government of Kazakhstan adopted a five-year Comprehensive Privatisation Plan in late 2015. According to the Plan, around 900 state-owned or state-run enterprises must be privatised between 2016 and 2020. The goal of the Plan is to reduce the Government’s participation in highly competitive industries and sectors, and thus make way for private capital and business. As part of this economic transformation, SK is now implementing the privatisation programme covering around 200 of its assets. BUSINESS KAZAKHSTAN 2018

The first half of 2016 was dedicated to setting up an appropriate decisionmaking structure, along with adopting rules and mechanisms for privatisation. Since 2016, a large amount of privatisation work has been completed by SK, and around 80 medium- and smaller-sized companies have been sold and 64 legal entities earmarked for liquidation or reorganisation. Total proceeds from privatisation have so far reached around US$400m. However, the most important part of the Privatisation Plan still lies ahead, with the six largest national companies going public in the 2018-20 period. These are: • Kazakhtelecom (the national telecommunications company); • KazAtomProm (the world’s leader in uranium mining); • Air Astana (the national flagship air carrier); • Kazpost (national postal operator); • KazMunaiGaz (national oil and gas company); • Kazakhstan Temir Zholy (national railways company). Three more companies will also be offered for strategic sale/partnership – SamrukEnergy, Tau-Ken Samruk and Qazaq Air. Kazakhtelecom, KazAtomProm and Air Astana have already started their preparation for the possible public offering of shares in 2018. However, before making final decisions on possible IPO/SPO deals, SK will consider a number of external and internal factors that could negatively affect expected privatisation revenues. The main benefits that SK gains from the massive privatisation of its assets are: • Enhanced competitiveness and performance of portfolio companies; • Reinvestment of privatisation proceeds into new projects and industries; • Enhanced transparency and the quality of corporate governance within portfolio companies;

55


SAMRUK-K A ZYNA

Digitalisation Engine In December 2017, the Government of the Republic of Kazakhstan approved the State Program Digital Kazakhstan, the main objective of which is to improve the quality of life of the Kazakh people and promote the competitiveness of the national economy through the development and application of digital technologies. Digital Kazakhstan is a large-scale state programme, which involves the public sector, the quasi-public sector, and private business. Within this national initiative, SK assumes the role of implementation “engine� for the largest national companies. In April 2018, the Fund reviewed its Transformation Programme, which has been expanded and includes

Digitalisation will boost productivity at KazAtomProm

digitalisation along with the business transformation projects. There are many definitions of digitalisation, but

KZT12bn by 2025, reflecting productivity

customer relationship management

for the Fund it has its own meaning: it

increases and reductions in production

(CRM) system later this year, and by

should be aimed at solving business

costs. This year, the company plans to

2020 a transportation management

problems with solutions based on

complete the introduction of the first

system that will search and select

digital technologies and provide direct

digital mine and, in 2019, digital mines

the best logistics routes.

benefits to operational activities. The

will also be introduced at two more

Fund sees digitalisation as an essential

production facilities.

way for portfolio companies to achieve

Kazakhstan Temir Zholy JSC,

Digitalisation at NC KazMunaiGas JSC (KMG) is aimed at increasing the production of hydrocarbons

their strategic goals, in essence to

the national railway company, is

through significant growth in labour

increase long-term value.

implementing various projects based on

productivity, a reduction in down-time

digitalisation, covering key business

during transportation and processing,

projects, the Fund participates in 18,

areas: passenger, cargo and multi-modal

and the optimisation of equipment

covering all areas of the Programme.

transportation, railway infrastructure

application and production processes.

Of these, 12 are investment projects

and corporate governance.

Out of 120 Digital Kazakhstan

initiated by portfolio companies.

Moreover, this year, in cooperation

The implementation, for example, of an intelligent deposit project will

with GE, KTZ is implementing the

ensure the creation of a full-scale

industry company, Kazatomprom,

Trip Optimizer system that reduces

automated system for gathering

digitalisation represents a significant

absolute fuel consumption by 5%.

data from the field, optimising the

For the national nuclear

increase in labour productivity

KTZ is also implementing a project

operation of wells and field equipment,

through the use of robotics, and the

to automate the management of multi-

integrated modelling analysis, and

collection of big data for the future

modal transport by the single window

the planning and monitoring of field

use of artificial intelligence in the

principle, that will reduce time for

development in real time.

management of mining and other

order processing and optimal supply

The perimeter of the project

enterprises of the company.

chain management, another element

covers the priority fields of subsidiaries

of the Digital Kazakhstan programme.

of KMG, which provide more than

As a result of the introduction of digital mining, Kazatomprom expects to receive an economic benefit of

56

KTZ is additionally planning to complete a project to implement a

90% of outstanding recoverable oil reserves and production.

BUSINESS KAZAKHSTAN 2018


SAMRUK-K A ZYNA

Facilitated access to new technologies and know-how through partnerships with strategic investors.

To maximise the benefits from privatisation, SK is constructing the programme on the following common principles: • Selling controlling stakes in nonresource sector companies and the blocking stakes in the resource/ infrastructure sectors; • Diversification of privatisation options, • Strict adherence to corporate governance standards; • Hiring professional management with appropriate industrial experience and expertise. Moreover, SK believes that the success of the Programme will reflect a number of positive factors: BUSINESS KAZAKHSTAN 2018

• • • •

Minority shareholders are heavily protected in Kazakhstan (number one in the ranking of protection of minority investors, in the World Bank’s “Ease of Doing Business” report); Easy access to the largest emerging market strategically positioned in Central Asia; Unconditional support and involvement of the Government, seeking to reduce its participation in the economy and enacting regulation to improve the investment climate; Developed infrastructure connecting China, Russia and Europe; An opportunity to invest in the key players of the national economy; Samruk-Kazyna’s guarantee to comply with corporate governance standards; A wide variety of available privatisation options.

Passenger aircraft from Air Astana, decorated to celebrate Expo 2017

57


CHAPTER FIVE

Kazakh Invest


K A ZAKH INVEST

This official briefing for Business Kazakhstan 2018 by Kazakhstan’s foreign direct investment (FDI) promotion and unitary facilitation agency, Kazakh Invest, focuses on the country’s drive to attract an ever-increasing volume of foreign direct investment with greater emphasis on high value-added processing, manufacturing and service industries as a cornerstone of the strategically balanced and sustainable long-term development of the Kazakh economy

FDI:

Cornerstone of Kazakhstan’s strategic development

F

DI – with its myriad benefits from the provision of various forms of capital to technology and skills transfer – has been a core element in Kazakhstan’s accelerating economic progress since the country’s independence in 1991. Indeed, FDI in Kazakhstan and the country’s accelerating economic progress are tightly locked together in a virtuous circle – FDI helps promote economic progress, and economic progress helps promote FDI, which in the 2005-17 period rose by $264bn. Though initially triggered by the country’s huge reserves of natural resources, principally in the energy sector, FDI these days reflects a range of factors beyond the magnetic pull of the natural resource sector.

BUSINESS KAZAKHSTAN 2018

These include: • political and economic stability and security – and international respect for Kazakhstan’s increasing diplomatic and economic status; • the Government’s commitment to creating a benign business environment, welcoming and advantageous to foreign investors; • the creation of a series of Special Economic Zones that offer major incentives, including tax waiver; • the new Astana International Finance Centre, with its specialist financial services and incentives; • the massive economic impact and future opportunities in Kazakhstan stemming from the New Silk Road Initiative;

59


K A ZAKH INVEST

Kazakhstan’s manufacturers have access to a potential market of 500m people

• •

a modern, multi-modal transport system that maximises logistics efficiency; access to a potential market of 500m people within a 2,000km radius of the centre of Kazakhstan, and a market of 180m people within the Eurasian Economic Union, comprising Kazakhstan, Russia, Belarus, Armenia, Kyrgyzstan. In May, a Temporary FZA was signed between the Eurasian Economic Union and Iran.

Stability and security Kazakhstan is a politically and economically stable and secure country. Hugely respected internationally for its stance on nuclear weapons’ disarmament, climate change, and water, food and energy security, it became the first Central Asian country to serve as a Non-Permanent Member of the United Nations Security Council – its two-year tenure coming to an end at the close of 2018. Its multi-vector foreign policy – which adopted “peace and prosperity” as its mission – has won Kazakhstan many friends during its short

60

history. These range from its neighbours Russia and China to the European Union and the United States – as well as countries near and far at all points of the compass from Kazakhstan’s vibrant “smart” capital, Astana, which recently hosted the world energy exhibition Astana Expo 2017: Future Energy. Moreover, the increasing evidential success of its foreign policy laid the foundations of ever-closer global trade and investment ties, which have consistently helped develop and underpin Kazakhstan’s domestic economy, which is currently recovering well from the oil-price collapse of 2014-16. This year, GDP growth is forecast to rise around 4%, with a further increase approaching 4% in 2019. Industrial diversification is set to enhance economic growth and stability – a trend that will be driven, in part, by Kazakh Invest’s plan to match 50 niche projects with appropriate foreign investors, in line with BUSINESS KAZAKHSTAN 2018


K A ZAKH INVEST

Transport infrastructure

St. Petersburg

Russia

Duisburg

10 days

Cargo transportation time from Lianyungang in China to St Petersburg in Russia via Western Europe – Western China transcontinental auto corridor, up to 10 days

Kazakhstan Seaport of Batumi Armenia

Uzbekistan Kyrgyzstan Turkmenistan Iran

Lianyungang China

Afghanistan

45 days

the country’s National Investment Strategy 2018-22, developed in partnership with the World Bank and formally introduced in August 2017. Its prime objective is to promote efficiency and, thus, competitiveness within Kazakh industry through the strategic deployment of FDI across a range of sectors.

Investment-friendly climate The Government of Kazakhstan provides a range of incentives to attract FDI from fiscal incentives to relaxed rules on the employment of foreign labour, depending on location, circumstances and the nature of the industrial sector involved. Moreover, policies and practices to further improve Kazakhstan’s investment climate, protect investors’ rights and liberalise business legislation for entrepreneurs are constantly under review. Since 2017, for example, the Government introduced a 30-day visa-free regime for visitors from 45 countries, including all 35 members of the Organisation for Economic Co-operation and Development (OECD). BUSINESS KAZAKHSTAN 2018

A one-stop-shop Investors’ Service Centre now provides a full range of assistance in obtaining the public services for investors, covering such all potential areas as land, labour, offices, finance and business services, logistics and visas. Moreover, an Investment Ombudsman exists to ensure that investors are treated fairly, and their rights and legitimate interests protected. In the World Bank’s Doing Business report, the country was also ranked 36th out of 190 countries for the ease of doing business after a strong rise up the rankings in recent years. In 2017, after five years of continuous collaboration with the Paris-based OECD, Kazakhstan joined the OECD Investment Committee and became the 48th country to join the OECD Declaration on International Investment and Multinational Enterprises, which promotes fair and effective FDI regimes amongst its membership to maximise the attraction and benefits of crossborder investment to all parties. Indeed, Kazakhstan is the only member of the OECD Committee among Central Asian countries.

61


K A ZAKH INVEST

FDI: Focusing on diversification Kazakhstan’s ability to attract foreign direct investment (FDI) since first becoming an independent sovereign state 26 years ago has been a core element of its economic success. This has seen the country develop to the point where it accounts for 60% of Central Asia’s gross domestic product, and possesses the highest FDI per capita of any country in the CIS. In 2005-17, gross foreign direct investment (FDI) flows in to Kazakhstan totalled US$264.4bn, with each of the last two years witnessing around $21bn in FDI, according to Kazakhstan’s National Bank. The largest volume of gross FDI annual inflow during this period was $28.9bn in 2012, before declining to $15.2bn in 2015. Albeit some internal structural issues did

Kazakhstan’s efforts to attract FDI will bring advantages such as the active transfer of technologies and knowledge, and new highly skilled jobs (PHOTO: IVAN KISLITSIN/ SHUTTERSTOCK)

contribute to this trend, the extent of the decline primarily reflected However, Kazakhstan is

the share of the processing industry

in particular, the collapse in world

continuing to take measures to

in the total FDI inflows is, on balance,

raw material prices, particularly for

encourage the broadening and

growing – in recent years raising its

oil, gas and metals. However, much

diversification of the country’s

share of overall FDI inflows from 4.4%

stronger energy prices dramatically

industrial base, with a view to not only

in 2005 to 25% in 2017. However,

reversed the FDI trend in 2016, when

increasing overall industrial output,

the various plans and strategies

FDI growth advanced by around 38%

but reducing its exposure to natural

outlined above all contain goals and

over 2015 (See Figure 1 ).

resource price risks.

roll-out plans designed to generate

global economic conditions and,

Generally during the 2005-2017

Such measures are an integral

continuous sustainable development

period, the largest FDI inflows were in

element of the country’s overall

of processing, manufacturing and

professional, scientific and technical

long-term economic plan, entitled

service industries which will, long

sectors (33% or $87.2bn), mining

Strategy 2050, as well as other

term, lead to a strategic rebalancing,

(28.7% or $76bn), processing (13.4%

state planning documents, including

and thus strengthening, of the

or $35.5bn), trade (9.4% or $24.7bn),

the Strategic Development Plan

Kazakh economy.

financial and insurance sectors

of Kazakhstan until 2020, The

(4.8% or $12.6bn), construction

State Programme of Infrastructure

Kazakhstan will focus greater

(3.4% or $9.1bn).

Development “Nurly Zhol” for

efforts on attracting FDI which

In line with this policy,

2015-2019, The Plan of the Nation

will underpin increased diversification

in particular, oil and gas prices

“100 Steps”, the State Programme

– a policy which will also bring

and the performance of FDI flows,

of Industrial-Innovative

other advantages, including capital,

clearly demonstrates the country’s

Development of Kazakhstan for

active transfer of technologies and

continuing dependence on energy

2015-19, and the State Programme

knowledge, an improvement in

exports and its exposure to

of Agriculture Development.

global competitiveness and new

The close correlation between,

global market risks.

62

As can be seen from Figure 2,

highly skilled jobs.

BUSINESS KAZAKHSTAN 2018


K A ZAKH INVEST

Figure 1 FDI Gross inflow in Kazakhsatn from the foreign investors for 2005-17 35.0

28.9

30.0

26.5

25.0

21.3

24.1

22.2

23.7

19.4

20.0

20.9

20.8

2016

2017

15.2

15.0 10.0

21.4

12.1 7.9

5.0 0.0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SOURCE: NATIONAL BANK OF THE REPUBLIC OF KAZAKHSTAN, 2018

Figure 2 FDIs in the Republic of Kazakhsatn from 2005-17, ($billion) 35 .0

28.9

30.0

26.5 24.1

25.0

21.3

21.4

22.2

23.7 20.9

19.4

20.0

20.8

15.2

15.0

12.1 10.0 7.9

5.7 5.0

0.3 0.0

2005

2006

2.1

1.1

0.7

2007

2008

Total Gross FDI Inflow inbns of $

1.8 2009

3.5

2.2

2010

2011

2012

2.5

2013

3.7

2014

2.6

2015

4.1

2016

5.2

2017

Gross FDI Inflow processing sector only inbns of $

SOURCE: NATIONAL BANK OF THE REPUBLIC OF KAZAKHSTAN, 2017

BUSINESS KAZAKHSTAN 2018

63


K A ZAKH INVEST

The Government also maintains a continuous dialogue with the investor community in order to accommodate its needs and further enhance the investment climate. Thus, since 1998 President Nazarbayev himself chairs the annual meetings of the Foreign Investors’ Council, whilst the Prime Minister holds monthly meetings with the Council on Investment Climate Improvement that includes foreign investors’ representatives.

Special Economic Zones In a major initiative to promote long-term investment, the government created 11 special economic zones (SEZs), which offer a broad range of incentives. The zones are as follows: • SEZ “Astana-New City” and SEZ «Astana-Technopolis» in the capital of Kazakhstan Astana (light, automotive, aviation, chemical industries etc.); • SEZ “National Industrial Petrochemica Technopark” in Atyrau Oblast (petrochemical industry); • SEZ “Khorgos-Eastern Gates” in Almaty Oblast (logistics); • SEZ ICBC “Khorgos” (International Center for Boundary Cooperation) in Almaty Oblast; • SEZ “Taraz Chemical Park” in Zhambyl Oblast (chemical industry). • SEZ “Pavlodar” in Pavlodar city (chemical and petrochemical industry); • SEZ “Information technologies park” in Almaty City (technological instrumentmaking industry); • SEZ “Saryarka” in Karaganda Oblast (metallurgy and machine building); • SEZ “Aktau Seaport” in Mangystau Oblast (light, chemical, metallurgical industries); • SEZ “Ontustik” in South Kazakhstan Oblast (light and textile industry). The attractive incentives that apply to the above include: • Zero corporate, land and property tax (up to five years) and an exemption on VAT;

64

Customs duty exemption for goods imported into the SEZ or exported to the territory of the Eurasian Customs Union; Non-fiscal incentives, including free land for the period of SEZ’s lifetime, and simplified procedures for the hiring of foreign labour.

AIFC opportunities Meanwhile, this year’s opening of the Astana International Financial Center (AIFC) is set to have major positive implications for FDI in Kazakhstan. To begin with, the AIFC itself represents a unique, innovative venue at the heart of Eurasia where banks and financial service companies can participate in the AIFC’s multi-faceted operations from its capital markets and asset management hub to specialist Islamic and green finance facilities. Additionally, the AIFC’s fintech research and spin-out hub could prove a magnet for hightech companies around the world seeking to develop and implement latest cutting-edge financial sector technologies. The AIFC will operate under English law – a unique innovation for the region and the CIS – with a preferential tax regime, AIFC Court and International Arbitration Centre. Moreover, investors here are provided with unprecedented conditions for doing business. But aside from being a venue in itself for FDI, the AIFC could well become an important place for foreign corporates and institutions to wholly or partly raise capital and other funding for their existing or new operations in Kazakhstan.

New Silk Road Initiative The development of Kazakhstan’s east-west transport links is closely interwoven with New Silk Road Initiative – the country’s ambitious plan to build many thousands of kilometres of land and maritime transport links to boost trade and investment. Billions of dollars have already been invested by foreign investors in Kazakhstan’s transport and logistics industry, bringing a major economic boost BUSINESS KAZAKHSTAN 2018


K A ZAKH INVEST

to the Kazakh economy which is set to continue amidst mounting transit traffic and major industrial development along the east-west transport corridor.

Transport infrastructure Kazakhstan is the world’s largest state with no access to the open sea. However, it has countered what is sometimes seen as an economic disadvantage (90 per cent of the world’s commerce is maritime-based) by embracing the great opportunities offered by Kazakhstan’s location at the heart of Eurasia, a position of geo-logistical preeminence between China and Europe, as well as north to Russia and south to the Indian sub-continent and the Middle East. On independence, Kazakhstan took over a poor transportation system that could neither provide effective access to international markets, nor efficiently facilitate domestic goods supplies. Since independence, however, it has increasingly developed a comprehensive, modern system of modern transport infrastructure, including roads, railways and ports – both sea ports on the Caspian and inland dry ports - which not only links all parts of the country, but, strategically integrates in to the transport systems of its neighbours. BUSINESS KAZAKHSTAN 2018

Now there is a multimodal Eurasian transport corridor, transiting Kazakhstan, comprising five rail and six international automobile routes, including the modern “Western Europe - Western China” transcontinental highway.

Agriculture has been defined as a priority sector for FDI in Kazakhstan

Through these corridors, from the East to the West and also from the North to the South, the country has secured access to the markets of Europe, South East Asia, China, Russia, Turkey and the Gulf states. Today, it takes only 12-15 days for Chinese goods to travel to Europe via Kazakhstan, compared with 45-60 days by sea.

Market of 500 million people A further driver for FDI is the expansion of Kazakhstan’s “domestic” market from the population within its own borders – currently standing at around 18 million – to one in excess of 500 million. This again reflects the benefits of the country’s multi-vector foreign policy building close relations with Kazakhstan’s neighbours, and in particular and more formally, the creation of the Eurasian Economic Union with a market of over 180 million people. There are about 70 million people living in Central Asia. In the recent years, trade

65


K A ZAKH INVEST

relations with the eastern part of China populated by about 300 million people have experienced an active growth

Priority areas for future FDI Last year, the government of Kazakhstan, together with the World Bank, developed the National Investment Strategy for 2018-22, which defines priority sectors for the attraction of foreign investments to maximise FDI’s impact on the underlying development of the country’s economy within the context of its long-term goals and aspirations. These are as follows: • agro-industrial complex and food industry (rural economics, stockbreeding, consumer goods industry); • machinery and equipment industry; • chemical and petrochemical industries; • infrastructure; • mining and metals sectors.

Based on the above, and working with international business advisory firm Deloitte, Kazakh Invest last year identified 50 niche projects covering all sectors of the economy comprising: • Agro-industrial complex – 16 projects ($921. 5 million) • Chemical and petrochemicals – 9 projects ($16,276 million) • Mining and metals – 9 projects ($1, 470 million) • Public-Private Partnership – 6 projects ($1,004 million) • Tourism – 1 project ($32.5 mllion) • Power engineering– 1 project ($465.4 million) • Other sectors – 2 projects ($146.4 million)

This year, Kazakh Invest is preparing a new pool of projects. More information is available at the website www.Invest.gov.kz

Kazakh Invest Kazakh Invest acts as a one-stop

of offices and representatives –

as part of its overall growth and

shop for international corporates and

particularly those in priority countries

development objectives, particularly in

financial and other service operations

for sourcing investment, including the

the advanced technology sector. Here,

seeking to establish long-term direct

UK, the US, France, Germany, UAE,

digitalisation has assumed the highest

investments in Kazakhstan.

Turkey, China – and its international

priority of all, both as technological

networks of corporate ambassadors

service industry in itself and a

who assist with targeting investors.

fundamental means by which industry

Created in 2017 to administer the implementation of the National Investment Strategy 2018-22

In Kazakhstan, Kazakh Invest links

as a whole can benefit from the global

and develop new approaches to

into regional and city leaders and

digital revolution – the so-called

attracting foreign direct investment

their economic development offices,

Fourth Industrial Revolution.

(FDI), Kazakh Invest is the sole

as well as the country’s Special

authority dealing with foreign direct

Economic Zones and Industrial Zones,

part of the country’s new financial

investment (FDI) negotiations relating

which specialise in different areas of

paradigm, also closely integrate

to the panoply of support which the

industry and commerce, and provide a

into the potential funding and other

Government of Kazakhstan offers

range of financial and tax incentives.

services and opportunities offered by

foreign investors.

Under its new operational policies

Kazakh Invest’s role and policies,

the new Astana International Financial

Kazakh Invest is increasingly using

Centre, as well as the transformational

by the Prime Minister himself, who

strategic proactive match-making

privatisation plans of Samruk Kazyna,

closely monitors its activities.

between international companies and

the country’s sovereign wealth fund,

industrial sectors the Government is

which involve selling off its major

seeking to strengthen and advance

industrial holdings.

The Board of Directors is chaired

Fundamental to this role is Kazakh Invest’s international network

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BUSINESS KAZAKHSTAN 2018


ASTANA: SMART CIT Y

CHAPTER SIX

Astana: Smart City

BUSINESS KAZAKHSTAN 2018

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ASTANA: SMART CIT Y

In the two decades since Astana became the new capital of Kazakhstan, the city has developed rapidly as an important business and government centre, embracing smart technologies to enhance sustainability

A capital

fit for the future

A

stana was officially launched as Kazakhstan’s new capital 20 years ago this year, taking over from Almaty, the short-lived capital of newly independent Kazakhstan, but a long-lived centre of culture and trade in the southeast corner of the country, and the regional government centre during the days of the Soviet Union. Nestling beneath the Trans-Ili Alatau mountains occupying Kazakhstan’s nearby border to the south with Kyrgyzstan and ranging east to the Chinese border a few hundred miles away, Almaty was, and remains, a much-loved city by Kazakhs and foreigners alike. However, President Nazarbayev, the driving force behind the creation of Astana, believed that Almaty’s replacement should be centrally located, making the new capital as accessible as possible to a population of less than 18 million spread across an area the size of Europe. He also believed that the new capital should reinforce the geostrategic advantages of the

68

country’s location between East and West. He envisaged its construction as a projection and celebration of the successful creation of Kazakhstan itself as a proud, confident sovereign nation through a vast unifying project of national endeavour – symbolically rising from the middle of the country’s deserted northern steppe.

Astana has risen from the steppe to become a key business hub (PHOTO: KIRILL NEIEZHMAKOV/ SHUTTERSTOCK)

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ASTANA: SMART CIT Y

Twenty-five years ago, when the idea of a new capital was conceived, scientists were still a long way from evolving the smart city technologies of today. However, there was a mounting expectation that the pace of technological innovation could soon revolutionise the way cities were built, operated, run and powered, and that a brand-new – largely greenfield – construction site would provide the best opportunities to harness, integrate and deploy such breakthroughs. Astana, previously Akmola, met all these criteria. Initially a settlement on the River Ishim in the northern steppe dating back to the 1830s, when it was a defensive fortress for Siberian Cossacks, Akmola was a small town developed based largely on the tracks and picketed roads that marked it out as a rudimentary transport junction. This was further underpinned in the late 19th century with the construction of a railway north to Tyumen in Russia, helping to increase the population threefold to around 6,000 people before the First World War.

before becoming Astana (“Capital City” in Kazakh) in May 1998. The following year it was awarded the title “City for Peace” by UNESCO. “One of the myths to dispel about Astana is that it lives at the expense of the state budget,” Asset Issekeshev, the City’s Akim (Mayor), recently told the Astana Economic Forum. Issekeshev pointed out, despite the huge investment that the government has put in to Kazakhstan’s new capital over its 20-year lifespan, Astana has paid back in taxation far more than the totality of incoming public money. The state, he said, had invested around 2.3 trillion tenge ($6.5bn) in Astana, yet the futuristic, gleaming capital, which epitomises the young country’s confidence and ambition, had contributed 2.5 times more than that amount to the state’s coffers. “In other words,” said Issekeshev, “Astana is a donor city... as businessmen say, Astana is an economically efficient project.”

Rising population During the Second World War, Akmolinsk (as it was known in the days of the Soviet Union as well as, latterly, Tselinograd) was spurred industrially by production retreating from the war-torn wreckage of the western Soviet Union. Also, in the 1950s and 1960s, the roll-out of the Soviet Union’s Virgin Lands Policy was a further factor in its urban development – with, again, its geo-logistical position making it a key administrative centre for the new land policy.

Astana is one of the fastest-growing cities in the world, with its population trebling to well over one million people in the past 20 years – the equivalent of around 5.5% of the country’s entire population. The area occupied by the city has expanded commensurately over this time, with $5bn of investment in thousands of new houses and apartment blocks steadily driving residential development work further out into the abutting plains of the steppe.

After the collapse of the Soviet Union, the town’s name reverted briefly to Akmola,

Shortly after Astana’s official inauguration, the government ran a competition to choose

Astana is one of the fastestgrowing cities in the world BUSINESS KAZAKHSTAN 2018

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ASTANA: SMART CIT Y

Smart temperatures

The glass of the giant sphere Nur Alem, the central feature of Expo 2017 Astana, incorporates photovoltaic elements that convert solar energy into electricity. The top of the structure also houses two noiseless wind generators (PHOTO: NICK MELNICHENKO/SHUTTERSTOCK)

With its central continental location,

indeed, smart. Astana’s shopping

Astana enjoys none of the moderating

and entertainment malls provide

influences of seas and oceans on

a great source of leisure all year

its temperatures, so much so that

round with new, smartly calibrated

winter temperatures can regularly

heating and air-conditioning systems,

drop to -35°C, and swing up to

increasingly generating ambient

35°C in summer. Astana’s winter

temperatures in line with internal

temperatures make it the second

and external conditions.

coldest capital city in the world – a

Across all sectors Astana was

position it took from Ottawa when

included in the top 21 most intelligent

its capital status was confirmed.

cities in the world by the Intelligent

The world’s coldest capital remains

Community Forum in 2016. And, of

Ulaanbaatar in Mongolia.

course, Kazakhstan is increasingly

Whilst a smart city is unable to

turning to smart green energy

do anything about the temperatures

production, so smart use of

it faces (at least, not presently), it

power comes in addition to its

Khan Shatyr Entertainment Centre uses sustainable energy technology

can address them in a way that is,

smart generation.

(PHOTO: VASCA/SHUTTERSTOCK)

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BUSINESS KAZAKHSTAN 2018


ASTANA: SMART CIT Y

a designer for the new city. This was won in October 1998 by the Japanese architect Kisho Kurokawa, creator of, amongst other iconic projects, the Van Gogh Museum in Amsterdam and the Nakagin Capsule Tower in Tokyo. His proposal involved the preservation and redevelopment of the old city and building a new one to the south and the east of the River Ishim. Kurokawa’s driving principle and philosophy was the symbiosis of the old and new – a living architectural link between the city’s history and its future, its foundations and its aspirations. This was increasingly reflected in the architecture of individual monuments, public buildings and developments. The Bayterek Tower in the centre of the city is probably the best example – a futuristic steel tower representing a poplar tree reaching to the sky, in the high brances of which sits a golden ball representing an egg laid by a Samruk – a bird of good fortune from Kazakh mythology.

Vibrant business hub Astana, however, is not only about symbolism and futuristic design. It is a working capital city that, as Akim Issekeshev points out, more than pays its way. What was once a railway junction in the middle of the steppe is now a vibrant place to do business, based on smart, modern transport and communications infrastructure and its geo-logistical position.

Astana is now served by two modern railway stations. Nurly Zhol is a fine example of applied smart technology, with 70% of its electricity requirement coming from green energy, including solar and geothermal heat, extracted from the soil, whilst watercapture technology keeps the cavernous structure’s windows clean. As government institutions and offices moved to Astana, so did Almaty’s former diplomatic community, the headquarters of the country’s major businesses – such as KazMunaiGas and KazAtomProm – and offices of the main foreign investors, led by the oil and gas community. These were accompanied by companies representing all aspects of trade, commerce and finance, as well as, inevitably, construction giants and utility companies, plus all manner of telecoms and IT concerns and consultants with – these days – the latest plans for smart ethereal connectivity and the Internet of Things foremost in their minds. The new capital has also benefited rapidly from Kazakhstan’s multi-vector foreign policy, attracting top-level meetings of prestigious international organisations, such as the Organisation for Security and Co-operation in Europe, the Organisation of Islamic Cooperation, the Asian Development Bank, the World Islamic Economic Forum and the Shanghai

Kazakhstan is promoting the use of electric vehicles, which will soon be produced in the country

A new airport was built – and, last year, further upgraded in the run up to Expo 2017 Astana – and the country’s new national airline, Air Astana, steadily expanded not only its national and regional timetables, but reaching far beyond.

Transport connections Rail links to all parts of the country from the new capital were upgraded, with express services introduced between Astana and Almaty. Following the recent opening of the new railway station, Nurly Zhol, which is closer to the capital’s business district and can cater for 35,000 passengers a day, BUSINESS KAZAKHSTAN 2018

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ASTANA: SMART CIT Y

The spherical Nur Elem building, constructed for Expo 2017 Astana, took design a step further than the domes built for previous expos (PHOTO: MAPACHE/ SHUTTERSTOCK)

Cooperation Organisation, including the latter’s heads of government meeting that took place in June last year.

boosting agricultural yields to harnessing drones to delivering essential medical supplies to isolated locations.

Additionally, it has created its own Astana Economic Forum, now renamed as the Global Challenges Summit, which takes place each May, attracting top speakers – which this year included Apple co-founder Steve Wozniak and former United Nations Secretary-General Ban Ki-moon – and thousands of delegates from around Eurasia and the world.

Moreover, Kazakhstan is rapidly developing its interest in blockchain and cryptocurrency technology, and recently hosted the Blockchain Conference Astana, the second major Central Asian blockchain summit, with the Astana International Financial Centre as one of its leading supporters. Such technologies could play a major role in the development of Astana’s power supply, transport and communications, as well as a vast range of other industrial, business, commercial, retail and residential sectors.

Innovative exhibition The city also hosted Expo 2017 Astana: Future Energy with its custom-built exhibition park and facilities dominated by the central feature, Nur Elem – the world’s largest glass sphere, with a diameter of 80 metres – designed by Chicago-based Adrian Smith + Gordon Gill Architecture. Another big annual event in Astana is the Eurasian Media Forum, coupled with a plethora of business and industry events covering all aspects of technological breakthroughs and innovations – from

72

That government, business, industry and finance have now all come together in critical mass in Astana, which, combined with the city’s commitment to building one of the world’s smartest, multi-efficient capitals, bodes well for Astana’s aspiration to create Eurasia’s first international financial centre – not only as a national and regional supplier of key financial services, but as a global player in the Eurasian time space. BUSINESS KAZAKHSTAN 2018


ASTANA: SMART CIT Y

The success of Expo 2017 Astana: Future Energy will be measured not only in its impressive attendance figures, but also in its legacy of encouraging transformational energy policies worldwide

Expo 2017:

The story continues...

“L

ast year, we hosted Astana Expo 2017 with the Future Energy theme initiated by President Nursultan Nazarbayev. Its main mission was to draw public attention to the use of sustainable energy sources, and today we open a new solar power plant on the day of unity of the people of Kazakhstan.” With these words the Governor of Mangystau Eraly Togzhanov unveiled one of Kazakhstan’s biggest green energy projects to date – a two-megawatt solar power plant on 1 May 2018, Kazakhstan Unity Day. Located at the village of Batyr in the Munaily District of the Mangystau Region, the plant, which is 90% equipped with Kazakh-manufactured components, is capable of providing electricity to hundreds of buildings. The plant’s launch is one of many continuing examples of Kazakhstan’s firm commitment to green energy generation and its smart consumption – a commitment that was fundamental to the country winning the opportunity to host Expo 2017 Astana: Future Energy, attended by more than four million people from all over the world,

BUSINESS KAZAKHSTAN 2018

with visitors ranging from inquisitive members of the Kazakh and foreign public to global energy experts from academia, industry and government. Expo 2017 was a magnificent showcase for Kazakhstan and its capital. It was a platform that not only demonstrated Kazakhstan’s own future energy technology and innovations, but also acted as a beacon for future foreign direct investment in the capital and the surrounding region, and created for the capital a self-contained, state-of-the-art, eco-friendly business suburb now housing the Astana International Financial Centre. But the ultimate success of any great exhibition rests not so much in the spectacle of iconic architecture, the magnificent exhibits, the final attendance figures and the quality of the expert debate and discussion that takes place alongside the exhibition – Expo 2017 had 12 Future Energy Forums throughout the period of the event. These are all very important measures of success in themselves, but it is how they combine to deliver a solid and lasting legacy – and the extent of its reach. In the case of Expo 2017,

73


ASTANA: SMART CIT Y

energy experts believe it will be the event’s major contribution towards the increasing adoption of transformational energy policies worldwide.

provided significant input to the Astana Manifesto, covering accrued knowledge, innovations, and critical pathways towards transformational change.

To the great credit of Kazakhstan “there will be a legacy of the exhibition”, according to Dr Rajendra Pachauri, President of the World Sustainable Development Forum and the chair of the steering committee that assembled the Astana Manifesto of Values and Principles, based on three months of discourse and debate by leading energy experts.

Speaking after the concluding event, Professor Lutz Engelke, CEO of Triad Berlin and organiser of the Astana Future Energy Forum, commented that “in Kazakhstan in just 10 weeks a kind of ‘Energy Davos’ has come together. With our partners, we have succeeded in bringing together leading energy experts for a pioneering discussion about the future of energy. The Manifesto summarises their knowledge as a foundation for the continuing discourse with regards to the coming Expo 2020 in Dubai – beyond which it must also continue to take place.”

Amongst many others, World Energy Council future energy leaders made a major contribution to the 12 Future Energy Forums All together, the programme attracted 500 top speakers and over 3,000 delegates, covering topics including renewables, sustainable use of energy resources, energy efficiency and business models for the post-fossil-fuel society. They also

74

Expo 2017 Astana: Future Energy took place in an innovative complex of buildings – all designed with energy efficiency in mind

Meanwhile, the recent opening of the solar plant in Mangystau Region is a further step towards Kazakhstan achieving its target of generating 50% of its electricity from renewable energy sources by 2050. BUSINESS KAZAKHSTAN 2018



A world-leading IPO market 100+ IPOs

£40.4bn+

£14.8bn+

9/10

20

44

We saw over 100 IPOs on London Stock Exchange in 2017, an increase of 54% by number of IPOs compared to 2016, and more than anywhere else in Europe

More than £14.8bn was raised through IPOs, nearly 4 times higher than the next European competitor

North American companies chose London for their listing in 2017

£5bn+

Over £5bn has been raised on AIM in follow-on fundraising from existing issuers in 2017, +27% compared to 2016

More than £40.4bn was raised in London through IPOS and follow on capital combined this year, 34% higher than in 2016

London’s IPOs became even more international in 2017, with 9/10 of the top IPOs by size coming from outside of the UK

In 2017, 44 companies floated on AIM, the world’s leading international growth market, raising nearly £2bn