Tenge in crisis, Kazakhstan in economic disarray

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by Mathieu BOULEGUE on 3/15/2014

Recent monetary problems in Kazakhstan cast a shadow over the very viability of the “ruble zone” and the almost-quantum entanglement between post-Soviet economies is now under scrutiny. With a low Russian ruble, Ukraine de facto defaulting and a recent devaluation in Kazakhstan, the economic side of President Vladimir Putin’s Eurasian integration project just took a serious blow. Countries like Armenia and Kyrgyzstan, in talks to join the Customs Union, might also find it a hard pill to swallow. Meanwhile, Kazakhstan suffers from the consequences of a devaluation.

 

On 11 February 2014, Kazakhstan’s central bank devalued the national currency, the tenge, by 18.9 percent. This “rapid fire” devaluation of the currency by one fifth of its value was announced by the National Bank without notice to avoid speculation and panic buying. At that, the National Bank vowed to reduce repeated state interventions on the currency market and straightened a managed free float policy aimed at keeping the currency between 182-188 tenge to the dollar – instead of the official National Bank rate of 155.5 tenge to the USD the day before. This strongly echoes the last devaluation that took place in February 2009 when the tenge lost almost 20% of its exchange rate.

The National Bank deemed the devaluation necessary in order to maintain trade and exports competitiveness, and especially with Russia. According to the National Bank, the devaluation was caused by the high volatility of the international market as well as currency speculation provoked by “high devaluation expectations” of the tenge. The volatility refers to a worsening of the national balance of payments due to rising imports in consumer goods over the last quarters. Another endogenic factor was summoned to explain the devaluation: the decrease in bond buying by the United States Federal Reserve – in the wake of a stimulus program – led to a situation of capital outflow from Kazakhstan, which induced increased pressure on the national currency. Another relevant internal factor is the deterioration of Kazakhstan’s current account due to lessened commodity exports – this is what had already partly caused the 2009 devaluation.

The culprit, however, is probably to be found in Moscow. In this, the downfall of Kazakhstan’s currency closely followed the weakening of the Russian ruble, currently in disarray and at an all-time low. The “uncertainty” concerning the ruble’s exchange rate was also summoned as an official factor for the devaluation: as such, a weak ruble automatically leads to higher prices for Kazakh goods imported in Russia as well as larger profits for exported Russian commodities. In reaction, Kazakhstan is forced to lower the value of the tenge through managed float if Astana wants to keep exporting to Russia at a competitive price. In the end, it is quite fortunate for Kazakhstan that the tenge was backed to a basket of currencies (including 70% for the USD) in September 2013 and not only pegged to the Russian ruble; otherwise the devaluation could have been much worse.

 

If the National Bank tried to convince itself that the exchange rate adjustment would improve the competitiveness of exported domestic goods (which is true), consequences were indeed dire. For Kazakh citizen paid with tenge-based salaries, their purchase power and savings lost one fifth of their value in dollar terms. For businesses, prices skyrocketed to 20% higher over the course of the day: this pushed shop owners to limit sales on certain commodities and foodstuff. For Kazakhstan as a whole, the loss of external competitiveness of the tenge exchange rate will led to an increase in import prices for consumer goods (many of which are imported) and subsequent short-term inflation. The devaluation even caused minor uproar when a handful of protesters gathered in Almaty to denounce the situation, leading to several dozen people arrested.

Consecutive to the currency crisis, the National Bank promised to keep the inflation rate between 6 to 8% in 2014 and exports “competitive on the global market” – the two main challenges on the short term. On the longer run, the National Bank has enough reserves to take the tenge back to its previous level, probably by the end of the year. Crisis management will also be ensured by an inappropriate push to dedollarize the economy. In order to defuse the tension, President Nursultan Nazarbayev quickly required measures be taken to minimize the consequences of the devaluation, including the stabilization of consumer goods prices. Most importantly, the President announced a 10% increase in salaries for state employees (civil servants and national companies), as well as pensions (14%), students grants (10%), and social assistance (12%) starting 1 April 2014. The President also promised higher state subsidies for small businesses and the industrial sector.

 

Paradoxically enough, Kazakhstan might have to pour more ruble into its currency basket in order to increase its exchange rate capabilities or firmly adopt a free float policy to match Russia’s and become less sensitive to currency fluctuations. The fact that the Kashagan oilfield failed to produce energy revenues in 2013 – which would have boosted exports – did not help Kazakhstan’s currency.

The downfall of the tenge seriously puts into question the ability of the National Bank Chairman, Kairat Kelimbetov, to fulfill his professional obligations. It needs to be recalled that on 21 January, recently appointed Kelimbetov had (once again) announced that the situation in the currency market of Kazakhstan was “stable” and denied that Kazakhstan would have to use its reserves to keep the tenge afloat. A former Vice-Prime Minister, Kelimbetov is currently opposed to the President’s second son-in-law Timur Kulibaev, but remains quite close to Nazarbayev – this could explain why he is still in charge…


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– author of 4 posts on Registan.net.

A Sciences Po and King’s College London alumnus, Mathieu Boulègue is an analyst in the field of Russia/CIS security and geostrategic issues. He currently works as a project manager for a risk management consulting firm. He is also a member of the Institute Prospective et Sécurité en Europe (IPSE), a leading French geopolitical think-tank.

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