the insider

Should forex companies go to Kazakhstan?

Given increased regulation of financial markets around the world, forex companies are forced to seek out new regions for expansion.

One of the most attractive countries for Russian-based forex brokers has long been Kazakhstan: territorial proximity, Russian as an official language, joint participation in the Customs Union, and close economic ties imply that the forex market here should develop similarly to the Russian market. But in reality it turns out that financial companies have not explored the region very much yet. Valentina Drofa, CEO of Drofa Group, talks about whether forex brokers should move on Kazakhstan

Facing Minimal Competition

In March 2018, when a new company, FXPrimus, entered the Kazakhstan market and opened a branch office there, Drofa Group provided PR support for that event. We were able to be right there and see and evaluate the interest in the forex market and opportunities for brokers to work in this country. According to Chris Trikomitis, the head of operations at FXPrimus, “there is a strong community of traders in Kazakhstan who could potentially become major traders. We believe that the trader community here needs a high-level broker who could offer them the support they need.”

Indeed, the broker situation in Kazakhstan is still far from ideal. The site on investments lists 17 companies in the category for forex brokers in Kazkhstan. If you check them, it turns out some of them have already closed, while some don’t have an office in Kazakhstan at the address given.

At one of the resources on forex in Kazakhstan, users accurately describe the situation: “You can find brokers online whose websites claim that they operate Kazakhstan and even publish the addresses of their offices. You check and neither the phone nor the address exists in real life.”

In the end, it turns out that there are no more than 10 companies in the republic who have their own or partner offices and are working to attract and educate clients. Most of these companies are Russian-based.

Teach and Develop

There may be several reasons for the relative “calm” of the local market. First, obviously a branch office in the country is not a prerequisite for providing services to traders. Clients can be attracted and served from the nearest Russian or other office. However, such remote work does not offer the most important aspect: personal contact and the ability to organize proper client education, which, given the country’s not-very-high rate of financial literacy, becomes an important factor in successful growth in the region.

According to 2015 research by Standard & Poor’s, 40% of Kazakhstan’s adult population is financially literate. And that’s even a little higher than in Russia (38%). But a different study conducted one year earlier by the International Economic Literacy Center using standards established by the World Bank showed that 36% of respondents in Kazakhstan rated their level of financial literacy as unsatisfactory, 38% of respondents do not track family income and expenses, 44% of those who have savings keep the money at home, and 63% of Kazakhstanis regularly run out of money before their next paycheck. All of these figures clearly speak to the fact that the real financial literacy level is very low. This is also confirmed by the financial literacy index compiled by the First Credit Bureau. According to its data, Kazakhstanis are in dept, having 1.5 loans per person (or even 2, according to some data), and are in no rush to pay them off.

Under these conditions, having a full-fledged educational center becomes a factor in the sucess of forex companies thinking of operating actively in Kazakhstan.

The second reason for low forex activity in Kazakhstan is that the infrastructure itself is not ready for active promotion: there is minimal activity on trading forums, and there are also not many local resources about the market. And this is a field that needs active development, because the population and local media are interested in the market. When we held a press conference in connection with the opening of FXPrimus’s branch office, there were 16 journalists present from various Kazakhstan media outlets (Forbes, Kursiv, Business Kazakhstan, etc.), who made 21 publications about the event. This is a good outcome for a corporate event.

The third factor is economics. Kazakhstan is the world’s 9th-largest country by area, but 64th by population (17 million people). This, of course, makes it difficult to compete with Southeast Asia, which is, in this regard, attractive for forex companies.

Regulation As a Driving Force

The experience of companies offering services in the stock market has shown that the country’s residents have an interest in earning an income from financial markets. This is in many ways tied to the market’s regulation. While the securities market is controlled and regulated by the republic’s government, the currency market is not regulated by tax authorities or financial oversight agencies. The lack of guarantees leads to a lack of trust.

There has already been movement in the right direct, but it’s still unclear what form forex market regulation will take. The government and National Bank of the Republic of Kazakhstan have adopted a Plan of Joint Action to Develop the Nation’s Stock Market for the next 4 years (2018-2021). The regulator’s plans include banning unlicensed forex companies (those without a license to operate as brokers) from operating within the country. Right now, forex companies and dealing desks operate within the country without any local licenses, using companies registered in other jurisdictions. In July of last year, Oleg Smolyakov, the deputy governor of the Kazakhstan National Bank, said that his agency was developing a revision of the law “On Currency Regulation and Currency Oversight” that would expand access to exchange currency trading for brokerages and dealers. However, the fate of that document is still unknown.

Market players see the measures planned by the regulator as understandable and aimed at counteracting malicious actors in the industry, which are also present in Kazakhstan. At the same time, it is properly-conducted regulation of the forex market in the country that will increase its transparency, give residents the opportunity to try this new instrument for increasing income, and let the companies themselves operate within a clear legal framework. That is what will increase Kazakhstan’s attractiveness to new players and provide an impetus for developing the infrastructure.