A $13 Billion Outflow and the Reform of the Stock Market

Over the past two years, around USD 13 billion has left Kazakhstan in the form of portfolio investment in foreign jurisdictions. This is an enormous sum that should have been working for our country's economy, but is in fact working for other countries' economies. I have described the reasons many times. The main one is the cap on foreign-currency deposit rates. Depositors know that there is an arbitrage between the market rate and the 1% ceiling set by the regulator, and they send their money to countries where they can put it into financial instruments that offer a fair return. But there is another reason: our market lacks alternative financial instruments, which is directly linked to the underdevelopment of our stock market. It is therefore very important not only to eliminate the arbitrage, which brings banks hundreds of billions of tenge in additional profit, but also to develop a stock market capable of offering alternative financial instruments.

It must be said that Kazakhstan has built a fairly developed exchange infrastructure, consisting of KASE and AIX, but infrastructure in itself guarantees nothing about the maturity of a market. The figures show this well: almost 97% of exchange activity is the money market and government securities, while the primary equity market in all of 2025 amounted to about USD 73 million. In other words, we have an exchange, but practically no capital market. A market's development rests not on infrastructure but on an institutional environment that provides transparent rules and players. And here we have certain problems and difficulties.

First, we lack institutional investors, who should provide the bulk of market liquidity. This applies above all to pension funds and insurance companies. After the pension reform, our pension funds were consolidated into the UAPF, which is severely restricted in its investment decisions and is geared more toward financing the budget deficit through government securities. Private companies manage less than 1% of pension assets today. The insurance market is over-regulated as far as investment is concerned, and is also not as developed as in advanced economies. Private pension asset managers have failed to develop because of legislative restrictions and have de facto not become an alternative to the UAPF, but that is a separate topic for discussion.

Second, Kazakhstan has few companies that could be quality issuers of securities. We have either large companies, which find it easier to raise capital abroad, or small ones, which lack the financial stability and transparency to issue securities. This is because we have no institutional incentive to develop and grow, so companies prefer not systemic growth but reorganization into opaque holdings, both as protection against competitors, the state and partners, and as a means of tax optimization. There is a very large body of work here for the state.

Third, the current infrastructure landscape of two exchanges is a considerable constraint for everyone and clearly requires reform. Market participants have to bear double the time and money costs, and maintaining two exchanges and two regulatory environments is always an additional expense for the state as well.

Fourth, and in my opinion the most significant factor, is weak institutions, which prevent the stock market from developing on market principles. This concerns, first of all, the protection of minority shareholders, bankruptcy rights, the independence of board members, information disclosure, the enforcement of laws, court rulings in corporate disputes, the absence of pressure from law enforcement agencies, and so on.

It is therefore very important to reform the stock market, but the reform must be comprehensive, affecting not only the stock market itself but also adjacent sectors, without which its development will be limited.

As for institutional players, we need to continue the reform of transferring pension money into the hands of independent asset managers, give them more freedom, and encourage asset holders to move funds to market-based management companies. The National Bank is, in principle, already actively doing this and confirmed it at its latest press conference. We also need reform of the insurance market. The issue here is not only the quality of regulation of how insurers manage their funds, but also the creation of an insurance market proper, which at present rests more on compulsory than on voluntary insurance. This is systemic work that requires very great effort from both the state and the insurance market itself.

As for motivating companies to enter the stock market, we need to encourage our companies to become more open and transparent. While large companies are already, one way or another, present on the stock market through debt capital, mid-sized companies have enormous potential. Here I would propose subsidizing the costs of the initial placement of securities, whether shares or bonds, instead of subsidizing interest rates: compensating the costs of the initial audit, obtaining a rating, and engaging brokers and market makers. Many companies reason simply: if a placement is not guaranteed, why spend money preparing for a listing? Meanwhile, a rate subsidy disappears into the interest margin and ends with the program, whereas a paid-for audit and an obtained rating stay with the company and make it transparent for good.

As for large companies, I think we need to motivate our banks to become more public. Right now only four banks are publicly traded in one way or another, and if another 3–4 banks were represented on the capital market, it would significantly increase market depth. Banks are also currently funded mainly through deposits that in effect have the characteristics of current accounts, and this is not only a matter of banks' practice but also of how our liquidity requirements themselves are designed.

Here we have a direct divergence from Basel, and it is not in our favor. Under the Kazakhstani LCR methodology, all retail deposits within the guaranteed amount are treated as stable with a 5% outflow rate, regardless of whether the depositor can withdraw the money tomorrow without loss. Under Basel, the existence of a guarantee is not sufficient in itself: a deposit is classed as stable only if there are conditions discouraging early withdrawal, such as loss of interest or prior notice, or if there is a stable transactional relationship with the bank, making withdrawal highly unlikely. As a result, about half of retail deposits are classed as stable in Kazakhstan, whereas only about 12% meet the Basel definition, namely term and savings deposits. The EU and a number of other countries go even further and recognize a higher outflow risk for deposits managed remotely via the internet; we have no such criterion at all. At the same time, for wholesale funding we are, conversely, stricter than Basel: for large corporate deposits our outflow rate is 60% against the recommended 40%. So the problem lies specifically in retail.

What does this mean in practice? The requirement understates the real short-term nature of our deposit base and, more importantly, distorts the pricing of funding: a bank does not feel the price difference between demand money and genuine term funding, and has no incentive to pay for term. Hence the distorted spread between savings, term and non-term deposits. That is exactly why I say that we need to introduce into the requirement an explicit definition of term, similar to the one already used in the KDIF's mechanism of maximum rates, and to reinstate interest accrual on current accounts so that funding becomes market-based for banks. Banks will then have an economic reason to move to truly stable funding: bonds and long-term deposits. That is the direct link between the banking sector and the stock market.

The infrastructure landscape today consists essentially of KASE and AIX duplicating each other, which for a small market is more of a constraint than a driver of development. We now have to maintain not only two infrastructures but in effect two regulatory environments as well, while market participants bear double the time and money costs. The task of merging the two exchanges was set as far back as in the President's Address, but in practice it has not happened.

My view here is simple: the direction should be toward a single exchange and a single regulatory environment, built on international standards and clear to the foreign investor. As for exactly how to get there, whether by merging the venues, dividing functions between them or unifying the regulation of the two jurisdictions, that is a matter for separate, in-depth work by the state together with the market. What matters more here is to settle on the direction.

The most significant reforms, of course, must concern the institutional environment, since it is the institutional environment that most affects the development of the stock market and the arrival of both domestic and foreign investors. First of all, major changes are needed in the protection of minority investors and their representation on boards of directors; the role of boards and of independent directors needs to be strengthened. We must also increase the accountability of auditors, independent appraisers and everyone on whose opinions the transparency of companies depends.

An important part of any investment environment is the bankruptcy and rehabilitation process, which in my opinion also needs revision and alignment with international standards, since it is through this mechanism that investors recover their money from bad companies. An environment is defined not by successful projects but, on the contrary, by bad ones, and by how the rights of creditors and minority shareholders are protected in them. This, incidentally, also applies to corporate lending by banks.

Particular attention should be paid to the execution and enforcement of existing laws. A law can be written, and even well written, but the question is how well it is enforced. The Supreme Court and the Prosecutor General's Office bear a huge responsibility here. We need more transparency in corporate cases in this country, and perhaps such cases should be made more public.

The privatization of state-owned companies also has a big role to play. On the one hand, the state wants to keep control of strategic companies, but on the other, this restricts the development of those companies and prevents them from becoming truly independent of state influence. In this respect, the Samruk-Kazyna sovereign wealth fund should probably undergo further transformation into an independent institution managing stakes in national companies. At present Samruk-Kazyna still remains an instrument in the Government's hands for carrying out various policies, whether building schools or building infrastructure.

Overall, reform of the stock market is not a matter of a single day but a large systemic undertaking involving many government bodies, associations, the National Chamber of Entrepreneurs (Atameken), the AIFC and interested private parties. But this work must begin now: as long as there are no alternative instruments inside the country, our money will keep flowing to where such instruments exist.