Stock exchanges: Kazakhstan finds two is a crowd

In early November, Asiamoney paid a visit to the Astana International Exchange (AIX), Kazakhstan’s second stock exchange. It was created in October 2017 as part of an effort to attract foreign capital to the country. We were there to find out how successful the exchange had been – but first we had to find it.

The exchange is part of the International Financial Centre and is housed on the site of the Astana Expo 2017, a mass of overlapping, curved buildings that surround the Kazakhstan Pavilion, a huge glass sphere that locals call ‘the museum of future energy’.

The complex is one of several ‘wow-factor’ buildings designed to put Astana on the map, and it is an impressive feat of modern architecture. It is also largely empty. Building after building that we passed showed little but untouched desks and bare shelves.

The same was true of the exchange itself, once we had found it. The interior had all the trappings of a modern exchange building: big glass windows, large screens, sleek curves. It lacked only one thing – people.

It is clear the exchange is a work in progress. It is, in fact, just part of another, even more ambitious, development: a government push to make Astana the financial hub of the country, and perhaps the whole of Central Asia.

Some dismiss this as a vanity project by former president Nursultan Nazarbayev. The exchange, they argue, is a solution without a problem. The Kazakhstan Stock Exchange (Kase), a rival based in Almaty, the former capital, has hardly set the world on fire.

As one bank chief executive puts it: “Kazakhstan barely has a capital market. Why does it need two stock exchanges?”

Tim Bennett, AIX chief executive, has clearly been asked this question before. In a side room on the ground floor of the exchange, a place that itself seems to be undergoing a slow transformation from storage space to meeting room, he talks about how the AIX can help develop the country’s capital markets and gives an honest account of some of the problems he faces in making that happen.

Bennett, an affable New Zealander, took over as CEO in April 2018, moving to Nur-Sultan, the Kazakh capital previously known as Astana. He had the right experience, having run the New Zealand stock exchange between 2012 and 2016, following a career as a consultant with BCG and Oliver Wyman.

He has hired people at an impressive rate, expanding his team from roughly 15 employees when he joined to about 75 by the time he met Asiamoney in November. But he admits the exchange is still at an early stage of development. The AIX may not need many more people, but it certainly needs more deals.

In November 2018, just a few months after Bennett joined, the AIX hosted its first listing: sovereign wealth fund Samruk-Kazyna’s sale of shares in Kazatomprom, a state-owned uranium producer.

The fund sold a mix of ordinary shares denominated in Kazakh tenge and global depository receipts in dollars, keeping the shares only for the AIX but splitting the GDRs between the local bourse and the London Stock Exchange.

The deal was worth $451.3 million across both exchanges, although London – unsurprisingly – got the lion’s share.

This was followed in October 2019 by a secondary listing of shares and depository receipts in Kazakhstan’s largest lender Halyk Bank, another deal that was split with the LSE. It was a clear win for the AIX, since Halyk was already listed on Kase, its local rival.

Four natural resource companies – Equus Petroleum, Kazchrome, KCR Investments and Sozak Oil and Gas – took steps towards raising money from shareholders by launching pre-IPO listings that do not raise capital.

Samruk-Kazyna has returned twice to sell more GDRs in Kazatomprom. ATF Bank, Halyk, Kazakhtelecom and the Kazakhstan Mortgage Company are among those names that have listed domestic bonds on the exchange.

These deals tend to be small individually – or, in some cases, worth no money at all – but since November 2018, there have been a total of 38 deals covering IPOs, GDRs, introductory listings and bonds.

That is a good result for an exchange that has been trading for just a year. It is clear, however, that the government’s ambitions go further. 

The exchange was announced alongside the creation of the Astana International Financial Centre (AIFC) by Nazarbayev, the 79-year-old president who officially retired in 2019 but who still retains a grip on power.

The AIFC has outlined six policy pillars it wants to develop: capital markets, asset management, private banking, financial technology, Islamic finance and green finance. The idea is simple but incredibly difficult: build a financial hub for Central Asia.

Several bankers say the government is essentially copying the playbook of the Dubai International Financial Centre; others point to even more lofty and unrealistic ambitions of becoming the next Hong Kong.

Such grand plans may sound familiar. Kazakhstan made an earlier attempt at developing a financial hub, announcing the Almaty Regional Finance Centre (ARFC) in 1995, although it was six years before a series of decrees and new laws began to enshrine its status.

Almaty was in many ways a more logical choice – a historical trading centre, it was already home to the country’s banks. But the project was ultimately a disappointment, having little impact on the development of Kazakhstan’s still-tepid capital markets.

“It failed for the reasons we may fail too, although we have a much better chance,” says Bennett. “Firstly, there is a group of people here who make a relatively good living from a relatively small financial services market. We’ve got the promise of doubling or tripling in size, but it requires them to make money differently, so there’s a lot of organizational resistance.”

This is perhaps unsurprising in a country ruled by one man since independence – and, indeed, for a few years before it. Nazarbayev is generally seen as a business-friendly ruler, but large parts of the economy have been built around relationships with him, his family and his closest advisers. When Halyk Bank listed the mix of shares and GDRs in October, a company owned by Nazarbayev’s daughter and son-in-law was the selling shareholder.

“Secondly, the legal structure and regulatory environment here is byzantine, to say the least,” says Bennett. “It’s very much Soviet still, whereas in Moscow you have a lot of global investment banks. Putin, ironically after the global financial crisis, liberalized the financial sector. You had foreign lawyers and foreign banks, and that evolved the financial services market. None of that happened here.”

Tim Bennett, AIX

The ARFC’s failure was not an implosion but a whimper, a slow, begrudging acknowledgement that grand change was not going to happen, leading to its replacement by another grand vision. The same fate may befall the AIFC – and hence the AIX, as a key plank of the initiative – but the government appears to have learned a few lessons that give it a better chance of success this time.

A key one is the importance of reducing the government’s influence.

Kazakhstan has created a small bubble of English common law in Astana, putting in place a system that is officially independent from Kazakhstan’s judiciary, although some bankers argue the emphasis should be on ‘officially’.

The AIFC Court showed its ambition with the hiring of Harry Woolf, former Lord Justice of England and Wales, to act as its chief justice.

The welcome for foreign partners is also clear at the AIX. Goldman Sachs, the Shanghai Stock Exchange, the Silk Road Fund and Nasdaq are shareholders in the exchange, alongside the AIFC. Nasdaq provides the trading technology.

The AIX has joined the European Central Securities Depositories Association. (Kase, by contrast, has owners closer to home, including Kazakhstan’s central bank, the Moscow Exchange and a swathe of local banks that make up its membership.)

Perhaps most crucial to the project’s success is the government’s willingness to reduce its own influence over the domestic economy.

The OECD says it is hard to put a precise figure on Kazakhstan’s control over the economy, partly because of public-private partnerships, and partly because valuing some government projects is difficult.

“That said, virtually all estimates point to a much larger role for the state-owned and quasi-state-owned entities than is typical of OECD countries,” the organization wrote in a 2017 report.

Kazakhstan is now trying to reduce the state’s role, offering a potential wall of supply to its newly created exchange.

Samruk-Kazyna, the country’s sovereign wealth fund, owns companies in almost every sector of the economy, including oil and gas, mineral mining, electricity generation, transport and telecommunications. It is officially coming to the tail-end of a series of privatizations that the government intended to take place between 2016 and 2020. But only now are the biggest deals starting to hit the market.

Kazatomprom’s $451.3 million dual listing was the first such deal, but there is bigger game to hunt on the Kazakh steppes. KazMunayGas, the state-owned energy firm, promises a jumbo IPO: it will be listed at some point in 2020, according to bankers and executives. Samruk-Kazyna is likely to sell less than a quarter of the company, but that will still raise it anywhere from $5 billion to $7 billion.

“Outside of the tech space, this will be one of the largest listings in the world next year,” says Bennett. “Inevitably, they’ll list in London; they’ll talk about an Asian exchange as well and they’ll list here. We want to build some local demand for this deal.”

Kazakhtelecom and Air Astana, two national champions, are both widely touted candidates for a listing on the AIX. The government was initially planning to sell both in 2019; they now appear more likely to try in 2020.

The government is also considering selling stakes in several companies including: Kazpost, the national postal service; Kazakhstan Temir Zholy, the country’s railway operator; and Tau-Ken Samruk, which holds government stakes in metals and mining companies.

Bennett put together a plan last year that projected 30 companies listing over the following five years. He says he would still consider that a success. But these deals will not all come from the oft-delayed sale of prized national assets. Instead, they will most likely to come from the country’s smaller domestic players.

“Most Kazakh businesses are worth less than $1 billion,” he says. “This is a nation of relatively low GDP per capita and only 18 million people. By and large, these are domestic businesses. We’re going to be a market of mid-cap and small businesses. But they are what will drive economic growth, and that is ultimately why we’re here.”

He says it is hard to predict the market capitalization of the AIX in five years’ time, given the likelihood of Kazakh companies listing on the AIX and an international exchange simultaneously. But he says the market cap is likely to be quoted in “the tens of billions” of dollars.

That goes a long way to answering the supply question. But where will the investors come from? Is the exchange looking west or east to bring more foreign investors into the country?

Bennett admits that is “a bit of dilemma”. He says that although the long-term plan is to attract investors from funds in Hong Kong and Singapore, the low-hanging fruit is in the UK, where portfolio managers often include Kazakhstan in their emerging Europe funds, rather than considering it part of Asia or the Middle East.

He acknowledges the need to attract Chinese capital to the AIX, but says this is likely to take somewhere between three and five years.

Of course, not all of the AIX’s demand will come from overseas. Kazakhstan’s grand plan to develop a capital and financial market hub for Central Asia will mean little without domestic money.

Although Bennett is spending much of his time telling Kazakh companies about the benefits of a listing, he recognises the need to unleash the local investor base.

Kazakh citizens held about KT18.6 trillion ($48 billion) of deposits at the end of 2018, according to the National Bank of Kazakhstan, the country’s central bank. Around half, KT9 trillion, of those were in dollars, a potential pool of demand, considering the low rates on offer in the country.

“The nay-sayers in Almaty would say there’s not enough money here, but I think that’s untrue,” he says. “There’s also Kazakh money offshore – I’m not sure how much, but there’s certainly tens of billions of dollars sitting in Geneva or London that could come back. We’re only talking about small chunks of that.”

There are several obstacles for the AIX, most obviously Kase. If the AIX represents the government’s flashier new approach to building its financial system, Kase undoubtedly plays the role of the old guard.

Founded in 1993, just two years after the country declared its independence from the Soviet Union, Kase is also more focused on foreign exchange and money markets, products that fit well with Kazakhstan’s state of development: they allow easy hedging and treasury management for Kazakh companies but do little to unlock untapped sources of capital.

Bennett says that Kase is a “distraction”, taking up his time during meetings with potential issuers and investors that would otherwise be dedicated to the virtues of the AIX itself.

For now, the two exchanges co-exist and compete for a tiny pool of deals.

Alina Aldambergen, chairwoman of Kase’s management board, tells Asiamoney that the exchange’s equity market capitalization is $40.8 billion and the nominal value of corporate bonds is $31.5 billion. That puts it well ahead of AIX, which has so far only played host to two new share offerings, and allows her to take a magnanimous view on the domestic competition.

“I think a competitive environment positively impacts domestic capital markets as it increases awareness about the markets, pushes towards lowering the costs and widens the number of capital market participants,” she says.

Bennett also says he sees little long-term threat from Kase, in particular because he thinks the AIX can steal the march on its rival when it comes to debt and equity offerings, leaving Kase to dominate the two markets it already focuses on.

The obvious solution to two exchanges competing for attention and business in an emerging economy is a merger. Bennett says this is possible, but shows little interest in the idea. Aldambergen says Kase has considered the idea but also rebuffs any notion that such a deal is likely to happen anytime soon.

“I think the merger is technically possible,” she says. “Kase is already the operator of four markets, so it is possible to run another trading platform under different regulations. In my view, the existence of two exchanges within one country is economically inefficient and is fragmenting market liquidity. However, currently the merger is not under discussion.”

If Bennett is right that Kase and AIX will focus on their own strengths, the bigger competition to AIX will come from outside the country, in particular from the London Stock Exchange.

That is certainly the case for the bigger listings, including a mooted IPO from Kaspi, the country’s eye-catching, money-spinning bank-cum-technology company.

Kaspi delisted from Kase earlier this year in preparation for an LSE IPO, although the deal has now been delayed.

Bennett acknowledges the need to include London, at least for now.

“The challenge for us in trying to build the marketplace is that there’s no real domestic demand here,” he says. “At the same time, while we have attracted some international investment through AIX, it will take time to develop. In the interim, large listings will go through London.”

Since 2005, 10 Kazakh companies have listed on the LSE, according to Dealogic data. This includes Eurasian Natural Resources Corp, a London-based company with many Kazakh assets. The company’s £1.5 billion deal in December 2007 – worth over $3 billion at the time – remains the largest listing from a Kazakh company ever, but it was delisted six years later after the management decided life would be easier as a private company.

Before Kazatomprom, the most recent large IPO was the $525.1 million GDR listing by telecommunications company Kcell in 2012.

Bennett thinks a patient approach will help the AIX move ahead of London in the eyes of Kazakh companies, in part because they often get neglected in the hubbub of an international exchange.

“The problem with London historically is that floats get too small to get research coverage,” he says. “There’s no price discovery and thus no ability to raise additional capital.”

Regulators across emerging Asia often talk about their need to create financial hubs, but mostly it is just that: talk. Local bourses, typically hamstrung by weak regulations, a tiny pool of issuers and a dearth of investors, seldom fulfil the grand promises their architects make at launch. The AIX is working to address all three of these shortfalls.