A LEAGUE AHEAD

Kazakhstan 2016 | FINANCE | FOCUS: ASTANA INTERNATIONAL FINANCE CENTER

The government is planning to turn the EXPO 2017 grounds into a free trade zone when the event is over. The environment is becoming increasingly welcoming to investors, but will Astana be able to follow through with its plans this time around?

President Nursultan Nazarbayev recently announced the creation of the International Financial Center (AIFC) in Astana, a free trade zone that will be have precisely defined boundaries within the capital. The AIFC will occupy the facilities and infrastructure put in place for the 2017 World Exposition, totaling an area of roughly 225,000sqm. Astana's plan will create one of the largest financial institutions, keeping the cost as low as possible. In the first stage, the National Bank of Kazakhstan will bring support by the means of its own budget. The government has several objectives for the AIFC, and at the top of that list are hopes that the FTZ will spark both local and foreign involvement in Kazakh investments. The country plans to meet this goal by creating an attractive environment for potential investors in the financial services sector as well as the securities market development. The AIFC is scheduled to begin operations in 2018, immediately following the 2017 World Expo.

This is not Kazakhstan's first attempt at a free trade zone. Earlier, it had considered building the Regional Financial Center in Astana (ARFC) as a means of bringing in foreign direct investment and further developing the country's financial sector. This plan, however, failed to get far off the ground and was ultimately never realized. The International Financial Center Astana will not be built on an entirely new platform—the AIFC will in fact use the International Finance Center of Dubai as a prototype. In order to use the Dubai model successfully, the government in Astana will need to efficiently implement a number of major reforms that will result in necessary institutional changes. One of those necessary reforms takes up the issue of regulation—for the financial center, the government will create both an international arbitration center and a financial court. These two regulatory bodies will have the support of foreign judges and be based on English law.

The AIFC will include several benefits for participants with regard to taxes, such as a 50-year exemption from paying taxes for investors. Other benefits and preferential treatment for those involved in the AIFC include no authorization requirement for foreign laborers, and a special visa regime that allows for employees in the AIFC, staff members, and their families to stay for five years.

The government is indeed making the necessary moves to build the kind of investment climate necessary to attract the caliber of foreign investment it is seeking; however, the endeavor has not been without its share of problems. The main difficulty in building the AIFC is the dire need for more developed liquidity in Kazakhstan's financial market. Today, the country's financial market is using a continental model in which the banking sector acts as the instrument of financing the economy.

According to estimates by the government and the National Bank of Kazakhstan, the AIFC has the potential to contribute some $40 billion to national GDP by the year 2025. It is also expected that by the same year, the AIFC will have injected over $350 billion into Kazakhstan's economy through attracting investments. If, unlike Astana's first attempt, the AIFC plan succeeds, the country's economy will have much to gain. It is anticipated that the AIFC would be a positive force in diversifying the country's economy, which, given the global drop in oil prices and the country's historic reliance on oil as a pillar of its economy, will secure the growth of Kazakhstan's economy for years to come. With the region seeking to revive the Silk Road and Kazakhstan seeking to become a transport hub, a stronger Kazakh economy would bring benefits not just to the country, but also to all of Central Asia.