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Mutual admission of securities to the exchanges of the EAEU countries: dominance not integration

Big dog and small dog

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The recent approval of the draft Agreement on cross-border admission of securities to stock exchanges in EAEU countries leaves an unfavourable impression. The Kyrgyz securities market stands to gain little from it, while Russia could flood our market with its securities, including those issued by sanctioned issuers.

The benefits of the Kyrgyz Republic’s membership in the Customs Union (CU) and the Eurasian Economic Union (EAEU) remain a topic of ongoing debate. On one hand, our country was granted easier access for migrants to the Russian labour market as an incentive. However, this might be where the tangible (not declared) benefits end. Kyrgyz products continue to face numerous obstacles in Russia and Kazakhstan, while Russian goods have inundated our stores – particularly in light of the rising ruble inflation and a relatively stable som exchange rate. Local pharmacies are stocked with Russian medicines, and generics produced in our country struggle to pass approval procedures in other Union countries.

Instead of receiving 100% of the customs payments collected from us, the country now obtains only a small percentage of the total customs fees from CU countries. This situation has eliminated the incentive to collect any fees locally and has led to a significant increase in smuggling. The «black» import schemes for goods from China, which were widely discussed in the media, rapidly expanded following the country’s accession to the Customs Union. As for the migrant benefits, they are debatable; millions of Uzbek and Tajik workers successfully work in Russia without any EAEU involvement.

From the earliest days of the EAEU’s existence, member states were promised the integration of financial markets. Some of the initiatives announced at the time are now starting to gain legal clarity. Unfortunately, these initiatives seem to follow the pattern of commodity deliveries: Russia obtains guaranteed access to our market, while our benefits from the new regime remain highly questionable.

On February 20, 2023, during a meeting of the Committee on International Affairs, Defense, Security, Migration, and the Committee on Budget, Economic and Fiscal Policy of the Jogorku Kenesh, the draft «Agreement on cross-border admission to the placement and circulation of securities on organized trading in the Member States of the Eurasian Economic Union» was presented. The Government must now sign it, and then the Jogorku Kenesh can proceed with ratification.

Let’s examine the primary provisions of this Agreement.

Simplified admission of securities issued in one EAEU country to the stock exchange of another EAEU country is only provided for securities of the highest listing category. This means that not a single security from our side can potentially be listed on the stock exchanges of Russia and Kazakhstan (as the two most appealing markets for Kyrgyz issuers)! As of today, no securities have been listed in category A on the KASE due to the complex rules for such listing prescribed by a government decree. 

In contrast, there may be over 500 applicants from the Russian side for automatic listing on our exchanges. This figure represents the number of securities currently listed in the «First Level» category on the Moscow Exchange (more precisely, 52 issues of shares, 350 — bonds, about 200 issues government securities, and 106 issues of investment shares). Zero against 500: did the deputies who approved the draft Agreement have access to these statistics?

Once listed on our exchanges, these Russian securities will effectively compete with local issuers» securities for our private investors» funds. This competition will inevitably draw the already scarce liquidity of our stock market into Russian securities. Consequently, we will have to abandon the strategic development of our stock market to attract investors» funds, primarily for local businesses and national projects.

Another concealed risk of automatically admitting Russian securities to our stock market is the entry of securities from Russian issuers under blocking sanctions from Western countries. Without delving into the political aspect of the issue, allowing settlements on sanctioned securities within our exchange’s clearing infrastructure could jeopardize both the exchange and the Central Depository. If not directly subjected to secondary US and EU sanctions (which is a possibility), it could certainly block their settlements in major world currencies.

Regrettably, our diplomacy failed to recognize these risks while coordinating the parameters of the draft Agreement. Perhaps unilateral reservations could be made during the ratification vote.

Another key provision of the Cross-border Admission Agreement states, «This agreement does not apply to cases where cross-border admission is initiated by a person other than the issuer.» In professional terms, non-sponsored listings are not covered by the Agreement. This limitation is generally unfavourable, as it deprives our professional participants of the opportunity to organize a market for selected securities on local exchanges without undergoing the cumbersome procedure of admitting foreign securities to circulation at the State Financial Supervision Authority.

If ratified by all EAEU countries, the Agreement will come into effect on the day of ratification by its last member. This is likely to happen toward the end of 2023. However, there may be surprises. For instance, it is unclear why Kazakhstan should ratify it, as «jurisdictions (territories) of member states with a special legal regime in the financial market» are excluded from the Agreement. This exclusion means that issuers and exchanges of the International Financial Center will not be able to benefit from it, including Astana, which is a central element of the Kazakh financial system.

Alexei Gorin



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