Capital flight: how to keep bankroll in Kazakhstan? | FinReview
15 May 2020

Capital flight: how to keep bankroll in Kazakhstan?

During the growing crisis due to the Covid-19 pandemic, the relevance of the return of capital illegally exported from Kazakhstan increased. Over the years of independence, its volume amounted to about 200 billion US dollars. In order to return these funds, legalization programs for property and income declaration were carried out. However, they did not give visible results, providing a return of only 10% of the withdrawn capital. Therefore, the question arises: What tools do Kazakhstan need to apply in order to preserve domestic capital?

In recent years, the issue of the need to return illegally exported capital to Kazakhstan has often been raised in the information field. According to international experts, its volume over the years of independence has reached about 200 billion US dollars. This is 3.5 times more than the current assets of the National Fund. However, only 90 million US dollars has been returned to the country.

There are various ways to withdraw capital, while in most cases it is completely legal. Contributes to these processes and business, using various manipulations with foreign economic contracts. Moreover, the trend of outflow of money from the country through export-import operations is quite stable.

Focusing on European experience, Kazakhstan has long decriminalized the corresponding article of the Criminal Code, thus freeing both exporters and importers exporting money from the country from serious consequences. Only administrative levers of influence, including penalties and fines, remained from the tools. Entities conducting foreign economic activity, independently submit declarations, which fill in the amount of debt under the contracts. However, this document does not allow to determine what exactly the debt is exposed to. For example, it can be formed as a result of not received export earnings, or due to prepayment for imported goods that have not been delivered.

Nevertheless, due to the coronavirus pandemic, which suspended business activity in the country, thereby reducing revenues to the budget and the National Fund, the need to return illegally exported funds increased significantly. Therefore, in the medium term, the state seeks to balance the budget, ensuring growing costs due to revenues from the non-oil sector of the economy. Already in the current forecast of socio-economic development of the Ministry of National Economy, it is planned to increase the budget revenues excluding transfers from 9.7 trillion tenge in 2019 to 13 trillion tenge by 2022. This means that from the non-oil economy in the next three years it is planned to receive an additional 2.5 trillion tenge of tax revenues. At the same time, one of the main tools for increasing the budget revenues is the fight against the shadow economy.

However, the legalization program that was carried out to return the exported capital did not give visible results – its volumes do not exceed 10%

In the public political field, the topic of offshore gained distribution in early 2010. One of the consequences of this was the creation of a working group on the deoffshorization of the economy in August 2013. And at the end of 2014, Kazakhstan took a new step in this direction by joining the 1988 Strasbourg Convention, which should improve the interaction of Kazakhstan’s tax authorities with international ones. 90 countries took part in the signing of the convention, including 19 offshore jurisdictions. This agreement allows the participating countries to exchange tax information on residents, which gives Kazakhstan the opportunity to track the availability of property and cash from Kazakhstan citizens abroad, and to compare them with the data on the declaration.

Since independence in Kazakhstan, three legalizations have been carried out. According to the results of the last of them, which ended in 2017, 151 thousand real estate objects were legalized and 4.1 trillion tenge was involved in the legal turnover. These assets allowed to increase tax revenues by 950 billion tenge per year.

However, legalization of property along with a universal declaration of income of Kazakhstanis provides a partial refund, and is not a comprehensive solution to the problem of capital outflows. Moreover, according to the General Prosecutor’s Office, economic crimes in the country only increased. And this means that Kazakhstanis still doubt the safety of their own capital and the possibility of increasing it domestically.

In 2019, Kazakhstani investors withdrew 2.7 billion US dollars abroad

Nevertheless, over the past five years, the outflow of direct investment abroad has decreased by 2.6 times. Most often, funds are sent to Cyprus, the Netherlands and the Cayman Islands – about 1.4 billion US dollars. And the main type of activity in the framework of which capital is withdrawn is an extensive sphere of financial services, with the exception of insurance and pension funds.

According to investors, the outflow of capital from the country is due to the fact that Kazakhstan has poorly developed instruments, alternative to bank deposits. For example, the private banking service, aimed at maintaining and increasing the capital of individuals, the amount of which exceeds 100 thousand US dollars, is provided only by 10 out of 27 Kazakhstan banks. Demand for this type of service remains low, as Kazakhstanis trust funds to international banks to a greater extent. Therefore, the financial sector of Kazakhstan misses the potential of the private banking market, the volume of which is about 1 trillion tenge.

How to reduce the outflow of Kazakhstani capital?

It is possible to stimulate Kazakhstani investors to reduce the withdrawal of funds abroad due to the development of the private banking system in the country. First of all, the service will solve the key problem of the financial sector – distrust of local STBs, which is also accompanied by high devaluation and inflationary expectations.

It is important to note that the private banking service is only a tool, and not the reason for the outflow or inflow of assets. Its development will allow localizing the capital of investors within the country only if there is confidence in the domestic market. Therefore, Kazakhstan needs the arrival of international organizations that provide this type of service, as well as the creation of partnerships between foreign and Kazakh banks and investment companies. Thanks to this, the market can grow to 2.5 billion US dollars by 2025.

But in addition to commercial banks, the basis for the development of private banking is also created by the state initiative – the Astana International Financial Centre. In particular, with the launch of the AIFC, modern assets and investment management tools appeared in Kazakhstan. For example, the option of transferring assets to trust management is available. This form of property relations allows wealthy Kazakhstanis to transfer their assets in trust for the purpose of making profit by the ultimate beneficiaries. The main purpose of the trust is to protect assets from possible risks.

Trusts are very popular in Western countries, as they are an instrument of the Anglo-Saxon legal system, which provides ease of use, an understandable concept, flexibility of structure and legal protection of transferred assets.

The AIFC has already registered the largest international companies operating in the private banking system. For example, Swiss companies Blackfort Capital and Clarus Capital. And this confirms the high confidence of foreign financial institutions in the Kazakhstan financial center. It is with their arrival on the Kazakhstani market for wealthy Kazakhstanis that the whole range of VIP-services will open, which for now they are forced to look abroad.