The Global Silk Road: Building the Financial Pillars

 

The revitalisation of the Silk Road has been envisioned as a scheme, which would stimulate the free movement of people, goods and services from East Asia to Western Europe via Central Asia. The Central Asian leaders believe that it could stimulate economic growth in the region, the rise of small-and-medium enterprises (SME) and the creation of new jobs. The New Silk Way also could give opportunities to millions of travellers to visit natural beauties still untouched by  civilisation and unique cultural centres of the millennia-old Silk Road.  According to the World Bank (World Bank, 2018 est.) estimates of economic prospects from the modernisation of infrastructure and easing of movement of goods and services in the region could double intra-regional trade by 2025-2018. Updating infrastructure can also add at least 1.2-1.5 percent of GDP growth within next decade, which would add at least 2-3 billion dollars to the combined GDPs of the five Central Asian States (CAS) and help to create at least 500,000 jobs in tourism sector alone within next 10 years (the World Travel & Tourism Council (WTTC), 2017 est.).

 

BOX 1: The business community in the Central Asian States came up with the idea of the International Financial Centre (IFC), which would serve the entire region in attracting investments and offering financial services, using the examples of IFCs in Dubai IFC, London and some others

 

The Silk Road Cooperation: Big Promises and Failures

After the fall of the “Iron Wall” about 30 years ago, the governments of Central Asia repeatedly declared the benefits of the development of what Newspaper AIF-Kazakhstan calls the “Global Silk Road” and announced a “Silk Road collaboration.” However, until now many ideas have remained only on paper. One of the key problems has been the underdevelopment of infrastructure and service sector in the region, and the need to finance thousands of small and large projects – from developing tourist clusters to rehabilitation of hundreds of small and medium airports, which were closed in the 1990s.  Unfortunately, the government-led investment funds in the region could not attract enough capital to the CAS and foreign investment funds did not rush into the region. Indeed, the business community badly need an International Financial Centre (IFC). It would serve the entire region in attracting investments and offering financial services, using the examples of IFCs in Dubai IFC, Singapore, and Shanghai as national financial centres were too small to achieve the required economy of scale. Since the 1990s, the governments in the region have attempted several times to establish financial centres and stock exchanges, which were supposed to serve the entire region, but failed miserably. The last failed attempt was the establishment of the International Financial Centre in Almaty City, which after US$300 million of investment was quietly closed.

The China-led Silk Road Economic Belt (SREB) program could become a solution for the Central Asian region, providing financing for several large-scale infrastructure projects connecting China with Europe via Kazakhstan. For example, Beijing has offered several loans to the government of Kazakhstan during the difficult years of oil revenue decline and actively participated in the privatisation program between 2012 and 2018, investing about US$28 billion during the past five years. The “One Belt, One Road” (OBOR) program and the Asian International Infrastructure Bank (AIIB) have helped to create a foundation for financing some projects in the region. However, the OBOR program did not meet the expectations of Central Asian leaders as the program’s initiatives have more often focused on a series of infrastructure mega-projects and macro-economic indicators and has paid significantly less attention on working with local private sector institutions, such as the myriad of so-called “bazar capitalists” – small and medium enterprises (SMEs).

The Astana International Financial Centre (AIFC) was officially inaugurated in summer 2018 out of the necessity to revitalise regional and global economic cooperation and technological exchanges, expanding them from the Central Asian markets to the wider markets of the so-called Silk Road Belt region. Indeed, for almost two decades policy-makers in Kazakhstan and Central Asia have been talking about the need to stimulate intra-regional economic integration – especially in the area of regional and international infrastructures. Yet, the political will and joint declarations did not lead to concrete large-scale joint regional projects or joint ventures, despite the long history of effective collaboration in the 20th century and the obvious need to develop an “economy of scale” by enlarging national projects into joint regional schemes to become competitive in the international arena. The main obstacle often has been – among other things – a lack of adequate capital and financial resources for funding such projects. It is projected that the AIFC will provide financial services in the words of Kazakhstan’s government officials – “not only for Kazakhstan, but also for the whole world” creating a competitive financial hub and financial pillars for the development of the “Global Silk Road.”

 

  BOX 2: The “One Belt, One Road” (OBOR) program and the Asian International Infrastructure Bank (AIIB) have helped to create a foundation for financing some projects in the region.

 

IMPLICATIONS:

The OBOR program and significant rise in Chinese investments into Kazakhstan’s economy, infrastructure and financial projects have boosted economic growth in the country and led to the completion of several long-delayed large infrastructure projects. At the same time, Astana has started thinking of avoiding dependency on a single investor and decided to take a number of steps toward diversifying its portfolio of international investors. While the government of Kazakhstan welcomes investments, infrastructure and business development with its Chinese counterparts, it has clearly highlighted its quest for diversifying investments, building its very own, internationally competitive financial system and raising capital directly in the international financial markets.

For almost three years, a team of Kazakh government officials and local and international experts have been working closely with several international and transnational financial institutions, such as the NASDAQ, Shanghai Stock Exchange, London Stock Exchange and many others to develop a unique project – the Astana International Financial Centre. They have developed an exclusive regulatory system introducing among other things changes in the national constitution, investing almost US$400 million in funding and in large business space transfers to the AIFC.  The preparation work of the team has included three major aspects of additional legal regulatory changes. First is that the entire functioning and all activities of the Centre would be outside of the legal regulation of Kazakhstan, and would be conducted under British law. Second is the introduction of a special system of preferences and regulations in taxation, currency exchange and currency movements as well as a special visa immigration status for the AIFC. Third is the commitment of Astana to continue its national privatisation program using the AIFC platform. To this end, the government has committed itself to holding Initial Public Offerings (IPOs) of more than US$34 billion within the next few years, including privatisation of such national business jewels as Samruk-Energy and Kaz-Post, as well as privatisation of major enterprises currently under the control of the Ministry of Transportation and the Ministry of Energy.  The managing team of the AIFC has created a series of extremely favourable concessions (some experts say – one of the most liberal in the region) to attract the attention of financial top-players from the USA, such as the NASDAQ and Goldman Sachs Group.

The government of Kazakhstan hopes that through collaboration with leading international partners the AIFC will gain access to the latest technologies and know-how in working with various financial instruments at the national, regional and global levels. This is especially important as Kazakhstan has launched a new round of ambitious multi-billion dollar reforms dubbed Industrialisation 4.0 betting on the benefits in moving towards a service-driven economy.

 

BOX 3. The government of Kazakhstan hopes that through collaboration with leading international partners the AIFC will gain access to the latest technologies and know-how in working with various financial instruments at the national, regional and global levels.

 

CONCLUSION:

The government bets that its new financial and other initiative can contribute to diversification of investments into Kazakhstan’s ambitious projects, making Kazakhstan’s and Central Asia’s section of the Silk Road more attractive for business and financial deals. For example, as recently as September 2018, during his visit to Kyrgyzstan to attend the Sixth Meeting of the Cooperation Council of Turkic-speaking States (CCTS), the president of Kazakhstan declared that he would like to improve collaboration with neighbouring countries in Central Asia in industrial, agricultural and financial sectors, inciting them to work with the AIFC. Indeed, the Centre needs to attract enough financial resources from regional players, especially from Uzbekistan, Turkey and Turkmenistan, to become a real financial hub for Kazakhstan and Central Asia.

In this regard, Astana plans to take several important steps towards creating sustainable and stable economic and financial systems. Firstly, this includes overcoming “economic nationalism” and embracing intra-regional “Silk Way” economic collaboration with neighbouring Kyrgyzstan, Turkmenistan and Uzbekistan as well as with Tajikistan and Afghanistan. Secondly, the government of Kazakhstan intends to reconceptualize the current model of economic development taking into consideration the new realities and trends emerging upon the need in moving away from the commodity-exports driven economic development.  In collaboration with leading U.S. universities Kazakhstan proposes training a new class of financial talents and professionals capable of handling financial instruments, wealth and assets management not only for individual states, but also for regional projects. Last but not least, the government envisions developing closer working relationships with U.S. partners at all levels, not only with large companies but also with small and medium enterprises (SMEs) able to attract technologies and investments, create jobs, and move goods and services.

By Rafis Abazov

photos are courtesy of the author

AUTHOR’S BIOS: Rafis Abazov, PhD, is a visiting professor at Al Farabi Kazakh National University and a director of Ban Ki-moon Institute for Sustainable Development. He is author of The Formation of Post-Soviet International Politics in Kazakhstan, Kyrgyzstan and Uzbekistan (1999), The Culture and Customs of the Central Asian Republics (2007), The Stories of the Great Steppe (2013) and some others. He has been awarded an IREX 2010–2011 EPS fellowship (Title VIII program) for research on public policy reforms in Kazakhstan.

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