Strategies for Establishing a Commodity Exchange for Kazakhstan

Focusing on electricity and emissions contracts, Kazakhstan can generate a viable business model for its proposed Eurasian Commodity Exchange. Photo credit: ADB.

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A study found that the proposed exchange should focus on electricity and emissions before adding agricultural products to the mix.


Kazakhstan’s economy relies heavily on oil and gas exports, estimated at 35% of gross domestic product (GDP) and 75% of exports in 2021. Declines in commodity prices expose the economy to external shocks. Although the share of agriculture in its GDP has declined to 5.2% in 2022 from 21% in 1991, it remains an important sector in Kazakhstan, providing employment to 13% of the total labor force. Significant opportunities exist to expand agricultural production and processing.

Kazakhstan is a net importer of agricultural commodities despite being one of the world’s largest wheat exporters. More than 60% of its agriculture imports are in processed commodities while over 60% of its agriculture exports are in primary commodities for processing. The grain sector (e.g., wheat, barley, and linseed) continues to be challenged by production inefficiencies, low yields, limited access to financial resources, and outdated infrastructure. A noncompetitive market structure, such as asymmetries in grain prices, results in further distortions.

A study by the Asian Development Bank (ADB) explored the viability of establishing a Eurasian Commodity Exchange, which can provide an opportunity to develop efficient marketing and trading systems by providing end-to-end service for commodity warehousing, quality control, trading, clearing, and market data dissemination. The study focused on the proposed exchange’s business product opportunities, infrastructure requirements, and regulatory aspects.

Initial Hypotheses

At the onset, the study hypothesized the following:

  • international demand and volume for key Kazakhstan agricultural commodities, such as wheat, barley, and linseed, are sufficient to generate cash flows and attract international players;
  • a new commodity and derivatives exchange that meets international standards could be formed by attracting a mixture of leading local second-tier banks and international firms as founding members;
  • trading volume at the exchange should initially include contracts involving the physical delivery of agricultural commodities. Over time, it could extend its purview to other commodity classes; and
  • European Union founding members would offer a means of both increasing Kazakhstan’s agricultural commodity exports to the EU and reaching a critical mass of trading, the lifeblood of an exchange.

However, international firms with global reach that specialize in the trading of agricultural commodities showed little interest in becoming founding members of the proposed commodity exchange. They noted that the risk exceeds their thresholds despite Kazakhstan’s leading position in delivering wheat and linseed to European countries.

Change in Approach and Strategy Pivot

Following the feedback, the study changed its approach and took on a new premise that Kazakhstan should first try to attract leading Middle Eastern banks in addition to local banks. Once the commodity exchange is operational and has demonstrated success, it can again attempt to recruit European member firms.

This approach is seen to have a higher success rate because Gulf Cooperation Council countries, such as Israel and Turkey, are not self-sufficient in wheat and have national policies of facilitating wheat exports. In addition, delivery distance from Kazakhstan to major ports in Egypt and Turkey are shorter and would be less expensive than to most European cities.

The study also stated that if Kazakhstan establishes a reliable supply chain, it should be able to displace some of the wheat shipped over long distances from the Americas and Australia to the Middle East, adding that the Baku–Tbilisi–Kars rail line has experienced strong increases in rail traffic since its inauguration in 2017. The railway connects Azerbaijan, Georgia, and Turkey and provides an additional rail route between the People’s Republic of China and Europe via Central Asia.

Major Findings
  • In general, the degree of difficulty in delivering agricultural commodities to customers in Middle Eastern countries at a competitive price versus their existing alternatives, such as exports from India, appears to be lower than in the case of most European countries. Several prominent Middle Eastern banks are active in commodity-related finance and commodity trading. However, their clients do not purchase Kazakh agricultural commodities at this time.
  • Given that agriculture commodities would not reach the critical mass of trading, the possible listing of contracts on emission allowances and electricity were explored. Nearly all exchanges that list contracts on electrical power also list contracts on emissions.
  • Despite gaps in Kazakhstan’s domestic emissions trading system operation, there is a solid foundation that regulators and participants can build on. The emission trading system suffers from excessive free allowances, and this imbalance is reflected in the low price of carbon allowances and the system’s insignificant trading volumes. The emissions market lists 128 companies under Kazakhstan’s trading system regulations.
  • The electricity market may be able to support an exchange-traded contract with its list of power generation companies representing 190 power plants and 346 companies representing industrial power consumers.
  • The two commodity categories (emissions and electricity) can benefit from domestic demand rather than international demand.
  • The proposed commodity exchange can list contracts on emission allowances and electricity. Local entities would have stronger direct impact on the emissions and electricity markets rather than on the agriculture commodities market.
  • The improvement of regulatory environment could increase the efficiency of Kazakhstan’s commodity exchange operations. Regulation of exchange operations falls under the supervision of multiple agencies: Agency for Regulation and Development of the Financial Market, Ministry of Agriculture, Ministry of Ecology and Natural Resources, the Agency for Protection and Development of Competition of the Republic of Kazakhstan, the Ministry of Trade and Integration.
Lessons Learned

The critical factor in successfully introducing derivatives to Kazakhstan and avoiding financial calamities is to have clearinghouses that meet international standards and practices. They must have well-financed default funds and have developed and ready to implement “clearinghouse default waterfalls.” The waterfall provides protection for the central counterparty and other participants in the event of a member default.

The business models of commodity/derivatives exchanges are a fusion of variable revenues and partially fixed costs. It is difficult for a nascent exchange to break even if it only lists contracts on a single commodity category.

By first focusing on electricity and emissions contracts, the proposed Eurasian Commodity Exchange can generate a viable business model before making additional investments for a new commodity category, such as agricultural products.


The optimal business model is a privately owned exchange that serves a public purpose. The founding members should be a mixture of domestic and international banks.

With international companies looking for a level playing field, where any applicable subsidies or incentives are applied uniformly, Kazakhstan’s policymakers should consider the following measures:

  • Establish the Eurasian Commodity Exchange that meets international standards and initially focusing on commodities with domestic demand.
  • Continue outreach to banks and trading firms in the Middle East and corporate buyers of agricultural commodities.
  • Strengthen over-the-counter trading through bilateral agreements to deliver agricultural commodities to customers in Egypt, Israel, Turkey, and other Gulf Cooperation Council countries.
  • Convene a task force to attract relevant investments from leading agricultural trading firms to establish operations in-country or facilitate exports.
  • Assign regulatory oversight of derivatives to one regulator. Derivative contracts are inherently riskier than securities. Consequently, the assigned regulator must be credible and adhere to international standards and practices.
  • Amend legislation to allow Kazakh banks to trade commodities. It is imperative that second-tier banks become members of the commodity market exchange to ensure participation of international firms.
  • Allow commodity exchanges to list contracts in currencies other than tenge. The requirement to list contracts in tenge as noted in Kazakhstan’s rules on commodity trading discourages international firms, both commodity users and liquidity providers, from pursuing trading opportunities related to the country.

The planned Eurasian Commodity Exchange should ensure proper compliance with the modern warehouse receipt system. This will assist in attracting international member firms and participants to trade agricultural commodities.

A lead institution is needed if a decision is made on the establishment of a commodity and derivatives exchange. Decisive efforts are required to coordinate and align a set of actions from regulators, local banks, and the proposed Eurasian Commodity Exchange’s prospective participants to bring this task to fruition.

Hans Woldring
Senior Evaluation Specialist, Independent Evaluation Department, Asian Development Bank

Hans Woldring is a natural resources and agriculture specialist with over 40 years of experience. He worked in the Central and West Asia and South Asia departments where he led assignments in Afghanistan, Kazakhstan, Tajikistan, and Nepal. He has also worked for the International Finance Corporation and consulted in Australia, Uzbekistan, People’s Republic of China, and Cameroon. He holds a Bachelor of Rural Science from the University of New England, a Master of Integrated Water Management from the University of Queensland, and a graduate of the ADB/Harvard Breakthrough Leadership program.

Matthias Leitner
Natural Resources and Agriculture Economist, Agriculture, Food, Nature, and Rural Development Sector Office, Sectors Group, Asian Development Bank

Matthias Leitner focuses on project design and preparation for agri-business, value-chain, and water resource projects. His particular interest lies in climate-smart agriculture, precision farming and ways to engage the youth more meaningfully in the sector. Prior to joining ADB, he was with the UN Food and Agriculture Organization and the World Food Programme where he collaborated and worked with the private sector, NGOs, and other UN agencies on issues related to nutrition, smallholder agriculture, and climate-resilient farming.

Arystan Galiyev
Project Officer, Kazakhstan Resident Mission, Asian Development Bank

Arystan Galiyev oversees works with the Kazakhstan government and developing partners in education, agriculture, tourism, and environmental, social, and governance. He has more than 15 years of project management experience in various industries and national companies, including in foreign direct investment attraction.

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