INSTITUTIONAL DEVELOPMENT AND THE ASTANA INTERNATIONAL FINANCIAL CENTER IN KAZAKHSTAN.

• Published date: 01 January 2020
• Author: Yeung, Horace,Huang, Flora,Bekmurzayeva, Zhanyl,Janaidar, Dina
• Date: 01 January 2020

I. INTRODUCTION 55
                II. A NEW FINANCIAL CENTER IN KAZAHSTAN? SOME ECONOMIC
                FINANCIAL AND POLITICAL BACKGROUND 57
                 Table 1--Economic Indicators of Kazakhstan and Surround
                 Countries in 2018 57
                III. ASTANA INTERNATIONAL FINANCIAL CENTER 62
                IV. THE IMPORTANCE OF INSTITUTIONAL AND CAPACITY BUILDING 64
                 A. Is the AIFC Possessing Better Institutions? 66
                 B. Trajectory of Legal Development 67
                 C. Selected Mechanisms of Shareholder Protection Compared 71
                 D. Enforcement of Transported Law 75
                V. WILL THE AIFC BE A SUCCESS? 79
                VI. CONCLUSION 82
                

I. INTRODUCTION

Kazakhstan, formerly part of the Soviet Union, declared independence on 16 December 1991. It is the largest and, thanks to its natural resources, wealthiest country in Central Asia. The Governor of the Astana International Financial Center (AIFC), formerly chief of the National Bank of Kazakhstan, Kairat Kelimbetov referred to Kazakhstan now as "another Singapore in Central Asia, the most competitive economy among all post-Soviet nations". (1) Traditionally, the political and economic center of the country has been in Almaty. In 1997 Kazakhstan's President Nursultan Nazarbayev moved the capital from Almaty in the southeast of the country to the newly-named Astana (previously called Akmola; now Nur-Sultan), which was then "an empty patch of land by the Ishim River best known as a former gulag prison camp for the wives of Soviet traitors". (2) Despite unfortunately being given the label of "the world's weirdest capital city" (3), Nur-Sultan is definitely up-and-coming, especially with the development of the AIFC. The AIFC is envisaged to be a financial hub for Central Asia and beyond. It operates within a special legal regime different from the one pre-existing in Kazakhstan, regulating the legal relationships between AIFC participants and third parties and is aimed at the development of the financial market.

This article seeks to explore how different institutional arrangements, believed to be modelled on a Dubai experience, will serve to support the development of the AIFC. This key institutional innovation is the transplanting and operation of laws based on the English common law, independent of their national legal systems (civil law systems, heavily influenced by Islamic tradition, and, in the case of Kazakhstan, also Soviet socialist principles). This choice apparently sits well with the belief under the law and finance scholarship that legal institution is essential in financial development. However, this article argues that, with its pre-existing national shareholder protection regime highly praised by the World Bank's Doing Business Report (ranked the first out of 190 countries), the transplantation may not have necessarily led to better law. Also, this article notes that attention should be particularly put on enforcement, amidst the concern of "transplant effect". Two possible types of transplantation can perhaps be distinguished, a mild and gradual form which entails predominantly black letter laws and a more radical and acute form like Dubai and the AIFC, which entails the borrowing of effectively an entire legal system (we sometimes call it the Dubai model/experience in this article). (4) The latter is what the AIFC has adopted, and the concern of such an extensive scale of legal transplantation is inevitably prevalent.

The first part, after this introduction, will consider the economic, financial and political motivations of establishing the AIFC. Then, it will discuss the development thus far of the AIFC. The third part, the key part of this article, will seek to inquire whether the AIFC possesses a notable institutional advantage as opposed the rest of Kazakhstan, by considering the general trajectory of legal development in corporate and financial law, as well as certain specific mechanisms of shareholder protection. To do this, there are two dimensions of comparison. The first dimension will involve comparing the AIFC rules and regulations with their UK counterparts to reveal the degree of legal transplantation. The second dimension will involve comparing the AIFC rules and regulations with their domestic counterparts to explore a potential regulatory gap between the two systems. In particular, the article seeks to ascertain if there is a wholesale or partial legal transplantation. If it is the former, the AIFC should in principle provide comparable protection of investor rights as witnessed in the UK; if it is the latter, how the UK regime complements the domestic regime can be an issue. The fourth part, before a final conclusion is made, will ask if the AIFC is going to be a success by drawing on some prior experiences elsewhere in the world, notably Dubai. To the best knowledge of the authors, this work is the first ever English academic literature on the AIFC. Overall, this work seeks to contribute to the understanding of the system of Kazakhstan, a strategically located but well under-investigated country, and a potentially viable institutional model for other aspiring financial centers.

II. A NEW FINANCIAL CENTER IN KAZAHSTAN? SOME ECONOMIC, FINANCIAL AND POLITICAL BACKGROUND

Kazakhstan is the largest country in Central Asia and the ninth largest in the world. The country's mineral resources and arable lands have long been the major pillars of its economy. Kazakhstan also has a strategic location. Despite being a landlocked country, it links the large and fast-growing markets of China and South Asia and those of Russia and Western Europe by road, rail, and a port on the Caspian Sea. According to the World Bank, Kazakhstan moved from lower-middle-income to upper-middle-income status in 2006. (5) The country is currently Central Asia's largest economy. For a comparison with its neighboring countries, see Table 1. Its per-capita Gross Domestic Product (GDP) of US$9,331 in 2018 was only below that of Russia, comparable to China, but by far higher than the remaining Central Asian Countries.

The energy sector has been the main driver of economic growth. It is estimated that oil and gas contribute around 30% of GDP, 70% of exports and 20% of budget revenues. (6) As of 2016, Italy, China and Russia were the three largest trading partners of Kazakhstan (accounting for over 40% of the Kazakh exports). (7) The top exports were crude petroleum, refined copper, radioactive chemicals, petroleum gas, and ferroalloys. According to the National Bank of Kazakhstan, in 2016, "the gross inflow of the foreign direct investments (FDI) in Kazakhstan reached new heights, growing 40% compared to 2015 and surpassing the previous record from 2008." (8) The main recipients of FDI were the mining industry, geological exploration and processing. The top four investors include the Netherlands, the US, Switzerland, and France.

In order to realize the country's growth potential, ongoing structural and institutional reforms are underway, including the "100 Concrete Steps" program and the privatization agenda, which "aim[s] to reduce the role of the state in the economy and facilitate the development of a vibrant, modern and innovative tradable non-oil sector." (9) In March 2015, President Nazarbayev unveiled a comprehensive national plan to put forward five key institutional reforms, known as the "100 Concrete Steps". (10) Step 70 outlines the commitment to establishing the AIFC. The AIFC is intended to serve as a financial hub for the Central Asian region. It will enjoy a special status recognized by law, including notably an independent legal system based on English legal principles.

While the AIFC will be established in Nur-Sultan, Almaty is a preexisting national financial center in Kazakhstan. The city was the country's capital until 1997 when President Nazarbaycv decided to relocate to Astana. The Kazakhstan Stock Exchange (KASE), founded on 17 November 1993, is based in Almaty. At the beginning 2017, it had a market capitalization of US $42 billion and 98 listed companies. Although relatively small (11), the KASE is much larger than Central Asia's other exchanges. In comparison to the KASE's market capitalization, the Tashkent Stock Exchange, for example, had a total market cap of US$2.1 billion, and the Kyrgyz Stock Exchange, a cap of US$255m. (12) The KASE plays an important role in the (partial) privatization of the country's state sector through the "People's Initial Public Offerings" campaign. (13) Kazakhstan has launched a series of initial public offerings since 2012 in order to improve liquidity in its stock market and allow some of its people to own shares in its major companies. KazTransOil was the first state company to float its shares in November 2012. Subsequently, the campaign was planned to expand to a number of other state companies. (14)

According to Charman, despite the privatization program, the majority of large enterprises have remained in state hands. (15) The continuing dominance of the state took Kazakhstan to a "state-led liberalized market economy" model. (16) In this model, the market would provide the coordination mechanisms for the growing private sector, but the state sector would retain ownership and control in sectors of strategic interests. "Soon after independence, the governments of Central Asia recognized that the transition to a market economy would require the supportive development of their banking and financial system, involving considerable capacity building in a sector that needed to be reestablished virtually from scratch. (17) As mentioned, the KASE was established in 1993 to provide an additional source of finance for the economy. In 1994, Kazakhstan had 184 banks, six of which were state-owned. (18) In 2000, only 48 Kazakh banks remained. As of 2017, Kazakhstan has 34 commercial banks. (19) The five largest banks held assets worth approximately US$45.6 billion, or about 58.5% of the banking sector's total assets. (20) According to the Economist's Intelligence Unit, the Kazakh banking sector has struggled to overcome the...