The government of Kazakhstan launched its ambitious new project, the Astana International Financial Centre (AIFC), on 5 July. Ideally, the AIFC will turn the Central Asian nation into a Eurasian commercial and trade hub, bringing in clients from Asia, Europe, and the Middle East. It is too early to predict the success or failure of this nascent organization, but we can view the AIFC through the prism of the Kazakh government’s grand diplomatic strategy.
Introducing the AIFC
The AIFC is part of the Kazakh regime’s “100 Concrete Steps Plan” to turn Kazakhstan into one of the 30 most developed economies by 2050. Its objective will be to transform Kazakhstan into a financial hub as it (ideally) becomes the pathway for investments and other opportunities for both the country and the wider Central Asian region.
To appeal to Western markets, the AIFC is comprised of various agencies, such as the AIFC Management Council; the AIFC Authority; the Astana Financial Services Authority; the AIFC Court; the AIFC International Arbitration Centre (IAC); and the AIFC Bureau for Continuing Professional Development.
The AIFC is based on the facilities of Expo 2017 Astana, and English will be its official language. It is reportedly based on “the best models of the financial centers in New York, Singapore, London, and Dubai.” In order to increase its credentials, NASDAQ and the AIFC signed an agreement in 2017 which includes implementing the Nasdaq Matching Engine, a trading platform. The Shanghai Stock Exchange is similarly involved with the AIFC.
What exactly is the AIFC trying to do? The answer is: a little bit of everything. An Astana Times article explains a few of the AIFC’s projects: e-Justice (AIFC digital financial system), digital crypto-exchange, a crypto-currency depository, financial supermarket, cyber-security center, Islamic financial technologies, and international start-up program aimed at creating an ecosystem of innovative financial technology. Similarly, a NASDAQ 2017 press release declares that the AIFC’s goal is to “attract investment into the economy through the establishment of an attractive environment for investment in financial services, to develop local capital markets, to ensure their integration with the international capital market, and to develop markets for insurance and banking services for Kazakhstan.”
In search of an effective arbitration system
The Court and the International Arbitration Centre deserve particular attention as they are structured after English law, in order to be more appealing to Western markets, while “party-friendly arbitration rules” have also been put in place. The IAC chairperson is Barbara Dohmann QC, who has worked at the Paris International Chamber of Commerce, along with other renowned agencies. The IAC has 28 arbitrators and mediators, including Aigoul Kenjebayeva, Managing Partner of Dentons, Europe, Almaty and Astana, and Alexander Korobeinikov, Counsel, Baker & McKenzie – CIS Limited. As for the Court, it is independent from Kazakhstan’s judicial system and will be the governing body for disputes between “AIFC participants, AIFC bodies and/or their foreign employees.”
The image of the Arbitration Centre will be critically important for the future of the AIFC. The Kazakh judicial system has been critiqued for its lack of fairness, hence it comes as no surprise that the AIFC will be a separate entity, complete with foreign arbitrators, which will hopefully give potential AIFC clients confidence in its impartiality. It is similarly positive that this agency is reportedly modeled on the renowned DIFC-LCIA Arbitration Centre.
An arbitration specialist interviewed by the author noted that it will be important to clarify how the IAFC’s arbitration court will function in relation to bilateral investment treaties (BITs). The specialist has studied the AIFC’s constitutional statutes, which state that any previously signed and ratified treaties, including bilateral investment treaties, take priority over AIFC agreements; “this will be good for the client, but the AIFC’s arbitration center could find it challenging to become a relevant agency if it is overruled by BITs,” the expert concluded. On the other hand, the provisions on arbitration appear to be efficient and up-to-date, and they even “take into account certain matters that have not been covered in previous arbitration rules. This shows that [the AIFC] is not improvising rules, but rather it has applied careful consideration, it has learned from arbitration precedents and is attempting to improve them.” In other words, the AIFC’s arbitration center, unlike the Kazakh judicial system, appears to be set up for professional and impartial rulings.
Discussion
During the ceremonial launch of the initiative, President Nursultan Nazarbayev highlighted that “AIFC participants will have access to the capital not only of Kazakhstan and the region, but the whole world. Unprecedented conditions have been created here that have no analogues in the post-Soviet space.” The AIFC also hopes to capitalize on China’s Belt and Road Initiative (BRI), as Kazakh Deputy Foreign Minister, Roman Vassilenko has declared that “the whole idea of the Astana International Financial Center is to serve not only as the hub for Central Asia, but also for the Silk Road project.”
In spite of the Kazakh government’s expectations and ambitions regarding the AFIC, there are some issues to consider that may influence its success (or lack thereof). First of all: location (still) matters. As developed and stable as Kazakhstan may be, particularly when compared to its neighbors, Central Asia is still fairly geographically distant from Western European and Asian markets. The AIFC is trying to solve this problem by reportedly not making it mandatory for clients to have offices in Kazakhstan, though tax free and visa-waivers have been imposed in order to attract people to visit the country (citizens of OECD states, the US, and several other nations do not require visas).
Moreover, there is the issue of how to attract customers and investors. Two of Kazakhstan’s neighbors, Kyrgyzstan and Tajikistan, have small markets. Meanwhile, Turkmenistan is well known for its secrecy and shunning of the outside world. The bright light is that Uzbekistan’s new government is keen to open up to the world, and the AIFC could be a valuable conduit. In other words, the other “stans” will not be major investors in the AIFC. China is a natural target, and the Belt and Road Initiative is China’s masterplan to expand its commercial relations and influence across Eurasia, but why would Beijing let the AIFC take the lead in this project?
The AIFC’s personnel and the headquarters are also factors to keep in mind. The Center’s language will be English, but Kazakhs mostly speak either Kazakh or Russian, a legacy of the Soviet Union. Will Astana promote teaching English in schools so young Kazakhs can work at the AIFC? One alternative is the Bolashak scholarship programme, which sends Kazakhs to study abroad and then, after graduating, they return to work in their homeland. Finally, Astana is not London or New York, hence the city itself will have to expand its list of amenities to attract foreigners (particularly the ones living in Almaty).
As a final point, there is always the concern that while well-intentioned, the AIFC could backfire. At the 2018 PONARS Conference in Washington DC, a panelist responded to a question from the author on the AIFC, stating that this is an intriguing idea, but one pressing concern is that it could be “subverted by its own stakeholders.”
Not everything is a concern
To be fair, there are valid reasons why investors should look at Kazakhstan with interest and why the AIFC could work. After all, the Central Asian state has enjoyed steady economic growth as high as 4% in recent years, mostly due to the country’s oil wealth, like in Kashagan, as well as natural gas and minerals like zinc, and copper. Additionally, the country possesses plenty of arable land and is a major producer of grain.
Moreover, Kazakhstan already attracts a significant amount of foreign direct investment, trade with the United States ($1.3 billion in 2017); and, with neighboring Uzbekistan opening up to the world, the AIFC could be used as a platform for investments there. In other words, the key is to create a symbiotic relationship between the AIFC and future investment and stock exchange initiatives in the region.
The AIFC and geopolitics
How does the AIFC fit into Kazakhstan’s foreign policy? Astana’s goal since achieving independence from the Soviet Union has been to not only become a regional power, but also attain global-level status. The country is generally regarded as the leader of Central Asia with its modern economy. Moreover, the country is currently a non-permanent member of the UN Security Council; it has been part of the mediation process in Iran and Syria, and an August meeting that may signal the end of the dispute over the Caspian Sea took place in Aktau, Kazakhstan.
Given its geopolitical situation, it is logical for the Kazakh government to look for innovative methods to improve its global standing.
Final thoughts
If the AIFC operates as expected, it would not only improve Kazakhstan’s global standing as a financial hub, but bring additional foreign investment into the country. This is one big “if” and Kazakhstan has a history of not always delivering on reform promises; but if it works, and clients utilize the AIFC to invest in the country and neighboring Central Asian nations, the AIFC could become an effective pillar of Kazakh development and foreign policy.
Wilder Alejandro Sanchez is an analyst who focuses on geopolitical, military, and cybersecurity issues. The views expressed in this article are those of the author alone and do not necessarily reflect those of any institutions with which the author is associated.
