Kazakstan is, after the Russia Federation, the second largest republic of the former Soviet Union. Located in Central Asia, it has a land area of 2,717,300 square kilometers, which is slightly less than 4 times the size of Texas, and a population of approximately 16.5 million . Central Asia, a desert, steppe, and mountainous area to the north and east of the Caspian Sea is shared by the former Soviet republics of Kazakstan, Turkmenistan, Uzbekistan, Tajikistan, and Kyrgyzstan.

Modern banking history in Kazakstan is only as old as the country, 4 1/2 years. Approximately 250 commercial banks are operating, although less than 30 have general licenses to conduct foreign exchange transactions.

Few banks have shareholder equity of USD50 million and a capitalization of USD10 million is more common. According the a report by Union Bank of Switzerland, the procedures for reporting non-performing loans were until recently virtually non-existent , making it extremely difficult to assess a bank's real health. Reliable financial data on local Kazak banks is extremely difficult to acquire.

The Central Asian Exchange (CASE)

CASE, the Central Asian Exchange, is a private joint venture company located in Almaty with a capitalization of 4 million tenge. Although it carries a grandiloquent name, CASE trades only Kazak listed securities, and no discussions are underway with either the Kyrgyzstan exchange or the soon to be launched Uzbekistan exchange. USAID (United States Agency for International Development) is funding the development and implementation of a central depository.

Both CASE and the securities market are regulated by the National Securities Commission of Kazakstan (NCS). Only registered members have the right to trade on the exchange. Membership is restricted to institutions, and foreign members are welcome. Membership requirements are 600,000 tenge for local broker/dealers and 5 million tenge for foreigners. Seventeen brokers are members, although none are actively trading at present.

Listing requirements on the main board are:

• At least 1 million shares must be outstanding

• Not less than 10% of outstanding shares must be offered to the public via the exchange

• All share registration must be performed by an independent share registrar

• All annual and semi-annual financial statements must be prepared according to international accounting standards

• An independent accountant must audit yearly statements

• Appropriate information disclosures must be available for investors to review.

Few companies in Kazakstan can meet these criteria. Therefore there is a pre-listing board of approximately 50 companies that are traded but do not meet the above requirements. A further 400 companies are scheduled to be privatized in 1996, but very few of these are expected to meet the listing requirements.

Trading takes place Monday through Friday from 10:00 AM to 12:00 PM. The minimum share lot is 100 shares , and stocks trade via the open outcry method. Trading is generally thin except when there is a new listing.

Equities

Clearing and settlement occur on the trade date plus five days (T+5). Purchasing brokers must deliver all funds to the clearing and settlement department of CASE on T+4. This overnight risk has been identified as an operational deficiency and several market players have suggested that the government stand behind the exchange in case of collapse.

Selling brokers must provide certificates or other ownership documentation to the clearing and settlement department at CASE on T+4. As most shares are dematerialized on the books of the registrar, other proof of ownership, such as a registrar receipt, is considered good delivery. For listed shares, the broker is responsible for advising the registrar to re-register the securities and to notify CASE that this has been done.

Pre-listed share trading is even more risky and involves complete reliance on the broker and the company records, rather than an independent registrar. CASE is not involved in the trading of pre-listed shares.

The Kazak market recognizes that the system is reminiscent of the Russian market and unacceptable by international standards. It is anticipated that a central registrar function will be carried out by an independent registrar(s) or by CASE. USAID has purchased the necessary systems for CASE to perform this function, but the determination of who will act as the registrar has not yet been made.

Debt

The debt market is expected to gain popularity with foreign investors more quickly than the equities market. Bonds currently yield around 45% , and have an excellent payment record, without the infrastructure and counterparty risks associated with equities trading. Clearing and settlement of Kazakstan Treasury bills is conducted via the National Bank of Kazakstan. All trades are settled on T+2, and the bills are dematerialized. Investors must have an account with one of the banks where the records of dematerialized bills are kept.

The sale, exchange , or transfer of shares is subject to a tax of 0.3 percent of the selling price of the shares. Although the securities tax detracts from the stated objective of the Kazak government to establish viable capital and securities market, the government has no plans to repeal it. Registration of shares requires submission of evidence that the applicable tax has been paid.

Few restrictions have been placed on foreign investment at this time, although current pending legislation is anticipated to increase the paperwork involved. As Almaty is only 150 miles from the Chinese border, government officials are concerned the Chinese will become heavy investors in Kazakstan.

Foreigners may purchase equities without restriction , and up to 20% of state debt per issue. No other formal limits have been placed on foreign investment levels at this time, and all profits may be freely repatriated.

The government recognizes the need for legislation to confirm shareholders' rights to vote at annual general meetings, transfer ownership , and obtain dividends. As in other emerging markets such as Vietnam, this can be an arduous process exacerbated by lack of experience with capital markets. The government anticipates that legislation will be passed in the 3rd quarter of 1996.

With its vast mineral resources, Kazakstan has welcomed foreign investment. Recent western investments include those by Chevron and Mobil in the Tengiz oil field on the Caspian Sea. An agreement has been reached with Russia to construct a pipeline from the Tengiz field through southern Russia to the Russian port of Novorossiisk on the Black Sea.

Capital markets legislation will be introduced in the third quarter of 1996. Regulations on bond markets, a central depository, independent registrars, investment firms, and share custodians are expected to be implemented over the next three years. The World Bank has granted Kazakstan a loan of USD180 million to develop privatization plans and to upgrade its banking system, including a system of interbank payments.

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