Development of Emerging Financial Centres: The Example Of Almaty
The trend of recent years is that regional financial centres such as Dublin, Dubai, Hong Kong, Shanghai, and Singapore, were established on the emerging markets of some countries. Some of them take the lead on a number of criteria leaving behind such international centres like New York and London. Financial centres help attract new capital flows into the country and increase liquidity in the domestic market. In fact, they are the centres of attraction of long-term sustainable resources. CIS countries are not an exception. In Russia, the project to create a financial centre is developed and actively discussed, and in Kazakhstan it is already in the implementation stage.
Global and regional financial centres have gradually turned into powerful analytical, organizational, and managerial systems that attract a wide range of experts. Leading financial centres focus on the analysis of the state, prospects of the world economy, and on economies of the world. They set the “rules of the game” in financial markets.
As a result of competition, there have emerged several global and regional financial centres. However, recent studies have shown that global crisis has led to a gradual transformation of international financial markets. It has also led to the creation of new centres of attraction of capital. Experts point out that today the process of displacement of financial centres of Europe and Asia is going on. British research firm Z/Yen Group, which was hired by City of London Corporation to determine Global Financial Centres’ Index (GFCI), notes that despite strong leadership position of London and New York in the ranking, they are closely followed by Asian financial centres – Hong Kong and Singapore. Chinese Shenzhen and Shanghai, having made a record jump, pushed out some top-ten financial heavyweights such as Boston and Frankfurt (Delevingne, 2010).
If to consider experience of centres such as London, New York, and Singapore, it is possible to see that emergence of new and strengthening of existing positions of international and regional financial centres is a result of actions at the state level. So is the creation of specialized structures aimed at improving investment attractiveness and development of the financial and institutional infrastructure of the state.
In London, a City of London Corporation was established, which is an urban structure of business management and financial district of London. Corporation controls over a given area and has three main objectives:
– To promote the development of the business centre City as a leading international financial centre;
– To provide high quality services of the local government;
– To provide a range of additional services for the benefit of London (the Corporation implements, in particular, social projects).
Achievement of these objectives is realized through the provision of favourable tax, regulatory and infrastructure environment, and through increasing opportunities in London as a whole and particularly in the neighbouring communities. This is done through implementation of projects to address economic, social, and environmental issues as well as to improve competitiveness of City region by strengthening economic activity.
Regional Financial Centre of Almaty (RFCA) was created by an initiative of the state based on the experience of Singapore and Dubai. Creation of RFCA aims to increase capitalization and liquidity of Kazakh stock market, attract foreign investment to Kazakhstan, and increase financial literacy, training, and re-training of financial specialists of high qualification.
State regulation of RFCA are carried out by specially created agency, Agency for regulation of RFCA, which has the status of a central executive body that is not part of the government and is directly responsible and accountable to the president. In order to improve the infrastructure of the financial centre the following bodies were created: RFCA for the development of institutional infrastructure of the financial centre, JSC Rating Agency RFCA to assess creditworthiness of Kazakh companies, JSC RFCA Academy for training and retraining of professionals, and JSC Commodty Exchange Eurasian Trading system to trade commodities. Also a separate independent specialized financial court was established for efficient operation of the financial centre. Model of the Regional Financial Centre of Almaty includes the best of international practice of creating financial centres.
At the same time, Kazakhstan aims not only to develop the domestic market, but also to achieve integration of the markets of neighbouring countries. This year, one of the key projects of RFCA , which aims to bring Russian securities to Kazakhstan’s stock market, is currently engaged in RFCA study of the issue. Vested interest in attracting Russian companies is caused by factors such as geographical proximity, established economic and political ties, and the pace of development of Russian economy. In addition, as it is known, over the last 5-7 years Kazakhstan quite actively invested in securities of Russian companies. In this context, simplification of placement will be also welcomed by retail investors. This group increased significantly in Kazakhstan last year as a result of RFCA marketing measures (Economics – Regional Financial Centre of Almaty, 2012).
The idea to establish a regional financial centre in Almaty (originally under the region had a mean post-Soviet republics of Central Asia and Kazakhstan) was first announced in 1995 at a meeting of members and senior staff of the Association of Banks of Kazakhstan with the President of the Republic of Kazakhstan. However, at that time the decision was not supported due to a number of reasons, main of which was the fact that Kazakhstan itself has just started reforming the banking system (and have not even begun reforms in other sectors of the financial market) and its aspiration for regional leadership in this area looked premature. Events of 1995 – 1999 indicate that country’s political leadership shown by the political management of the country was justified: in October 1996 the Kramds bank ceased to function. This event was at that time one of the largest and most influential in the country. Elimination of the banks that did not meet legal requirements of the level of bank capitalization was delayed for several years (including the legal framework, according to which National Bank acted). Formation of the modern infrastructure of securities market started only in two years, and the reform of the insurance industry began only in 1999.
Nevertheless, a number of circumstances can again connect the above-stated idea with the extension of its geographical aspect: from Central Asian countries – participants of the CIS – to the group of countries located in the central part of the Asian continent.
First, in Almaty there is heavy concentration of different types of financial institutions, including those operating with foreign capital in terms of transactions of capital between neighbouring cities – Bishkek, Tashkent, Dushanbe, Ashgabat, and Baku.
Secondly, the population of the city of Almaty is bigger than population of other cities in Kazakhstan. In this cosmopolitan city, multunational character of Almaty determines its cultural diversity.
Third, in Almaty relatively high investment potential is formed, particularly through management companies, pension funds, and commercial banks, which begun to attract the interest of neighbours.
Fourth, Almaty stands out among big cities of neighboring states because its population is comprised of a big number of people with high level of personal income. Both foreign and Kazakh citizens who are of interest as solvent consumers of financial services.
Fifth, despite some financial difficulties, Almaty remains an attractive place to live in and to spend vacation due to the beauty of the surrounding nature and the availability of high-quality services, particularly in telecommunications, catering, and entertainment.
An important factor contributing to the development of Almaty as a regional financial centre is considered to be proximity of the city to the Silk Road countries.
Historically, emergence of financial centres happened due to the concentration of capital in large cities (and this assumption is in Almaty, as noted above, is some already available). Howevver, this concentration itself does not make the city a financial centre. Examples are cities of Switzerland. Formation of the financial centre of mass attraction begins with the accumulation of capital by entrepreneurs as a source of funding for commercial projects. In addition, these projects need to be securitized (presented in the form of financial instruments that can be easily implemented in the secondary market without complex procedures of legalization of change of ownership). They should also be profitable and have an acceptable level of risk for investors. Over time, attracted by the possibility of profitable and liquid investments, free capital from other regions begin to flock to the city. Increase of capital available for investment is a counter offer of new financial instruments. In these circumstances, the city becomes a financial centre. This is a simplified model of financial capitals of the world: London and New-York.
Younger financial centres, such as Hong Kong, Singapore, Bahrain, and others, also differ in a simplified way of deliberate promotion of inward investment and financial instruments for utilization of capital. The main incentives include liberal customs and tax regimes, lax government regulation, and repatriation of capital combined with high quality consumer and business services required by investors, entrepreneurs, and professional financial intermediaries (Matte, 2012).
Thus, the development of Almaty as a regional financial centre requires observance of the following socio-economic conditions (Zurabaev & Polkhov, 2007):
1. High concentration of local capital;
2. Liberal foreign exchange regime of import of foreign capital, repatriation of capital and profits from its use. Predictability of monetary credit policy of the central bank, including the exchange rate policy;
3. High qualification level of local professional financial intermediaries;
4. Liberal regime for the access to the market for foreign professional financial intermediaries with recognized international authority;
5. Developed and high-quality infrastructure (transport, telecommunications, and others);
6. Sufficient development of local financial market, regulation of which is carried out by highly qualified staff of government agencies in Almaty.
7. Varied and comfortable home and business service;
8. Developed industry of recreation while maintaining the natural appeal of natural objects;
9. High level of public safety;
10. Improving the international status of Almaty.
World political leaders and “business sharks” believe that Kazakhstan is valuable not only “in itself”, but also as a key to energy and other resources of the Caspian region and Central Asia.
Support and even specific recommendations on the formation of RFCA is publicly expressed by influential statesmen and leading financiers of the world. Thus, in December 2006, EBRD President Jean Lemierre after participating in a meeting of Foreign Investors Council under the President of Kazakhstan said: “This is a powerful concept to create exceptionally high quality financial services market. If you want to create a regional financial centre, there must be a leader in the best financial centre. You must have a banking supervision, which would be recognized not only in Kazakhstan, but also outside of the Republic, as well as very powerful laws to combat terrorism and money laundering” (Elger, 2011). Other well-known financier and former head of the World Bank James Wolfensohn, becoming president’s advisor, will provide advice in setting up the Centre.
In short-term perspective, RFCA does not threaten the emergence of other equivalent competitors in CIS countries. This fact, coupled with favourable treatment of the RC as a whole and financial innovation on the part of world’s centres in particular create more than favourable external environment for the first step.