By RWI senior economist Akram Esanov and RWI program officer Morgan Mandeville
On February 4, 2009, the tenge, Kazakhstan's national currency, lost more than 20 percent of its value against the US dollar, sending shockwaves throughout the economy. Since the summer of 2007, the country's central bank has been doggedly defending the national currency at a rate of 120 tenge per US dollar, with 2 percent fluctuations. Other countries have followed suit, the Jamestown Foundation has reported, with the som, the currency of the Kyrgyz Republic, losing approximately 10 percent of its value in early February, and the Tajik somoni also falling by around 10 percent in the past month. The financial woes of Kazakhstan and its Central Asian neighbors have created what some fear are ripe opportunities for Russian resurgence in the region.
Many observers believe that the central bank's position has been weakened by the sharp decline in oil prices and the ailing banking sector, which have led the bank to abandon its previous currency peg, or fixed exchange rate regime. Furthermore, Kazkhstan's largest trading partner, Russia, has devalued the rouble more than 40 percent since the summer of 2008, distressing Kazakh exporters who in turn pressed the central bank to devalue the tenge.
The central bank of Kazakhstan has depleted $6 billion of its reserves since October 2008, in a futile attempt to keep the exchange rate at the previous level of 120 tenge per US dollar. Initially, the central bank resisted pressure to devalue the tenge, reasoning that it had sufficient foreign exchange reserves to defend its managed exchange rate regime. But eventually the bank had to admit that sharp oil price declines and the weakening currencies of Kazakhstan's major trading partners called for the devaluation of the tenge.
Kazakhstan's central bank announced in early February that it had set the new exchange rate target at 150 tenge per dollar, with 3 percent fluctuations around the target—an exchange rate that would keep foreign exchange reserves at current levels and boost the competitiveness of the Kazakh economy. Though the central bank has actually helped national banks repay their external debt by initially keeping the exchange rate unchanged—since the banking sector holds about $40 billion in foreign debt—it is widely expected that the current devaluation of the tenge will hurt the banking sector more than any other sector, even with Kazakh authorities' recent injections of liquidity into the banks. Still, the magnitude of the recent devaluation might turn out to be insufficient to provide a competitive edge to Kazakh exporters if Russia, Kazakhstan's main trading partner, continues to depreciate its own currency.
Russia, also a resource-dependent country, has been engaged in its own fight against falling commodity prices and the deteriorating global liquidity crisis. The Russian central bank has lost about $200 billion of its international reserves in defending its pegged exchange rate regime.
Since last October, the Russian central bank has been steadily devaluing the rouble against the euro-dollar currency basket. In such an economic environment, banks have found it more profitable to bet against the central bank than lend to customers. In the fourth quarter of 2008, the Russian government gave the banking sector approximately $50 billion to encourage bank lending. The banks, however, used the money to stockpile foreign currencies. This practice has become so widespread that recently the Russian government warned banks against using state funds for currency speculation.
Russian and Kazakh authorities have opted for different strategies in depreciating their currencies and the effect of the devaluation on the banking sector has thus been different in these two economies. While the gradual devaluation of Russian currency enabled the banking sector to accumulate sufficient foreign exchange reserves to service its external debt, the rapid devaluation in Kazakhstan has fostered widespread unease among the country's banks.
Kazakhstan's largely privatized banking sector is now vulnerable not only to governmental attempts at nationalization but also to takeover by Moscow. Kazakhstan's oil coffers are modest in size in comparison to those in Russia, which is one of the few countries at present with actual cash on hand. According to reports by Stratfor the Kremlin is already eyeing opportunities to buy into its neighbor's fledgling banking sector, and these latest rumors suggest that Russia's Sberbank may be poised to take over BTA, the largest bank in Kazakhstan.
Russia's resurgent presence can be felt throughout the region. Kyrgyzstan, the second poorest country after its Tajik neighbor, is severely impoverished and debt-ridden. With little in the way of tradable goods or commodities, the Kyrgyz government has begun a quest for cash infusions by employing rent hikes and threats of closure against foreign military bases. These threats have led to a bidding war between Russia, which is primarily interested in maintaining its sphere of influence, and the U.S., which seeks to maintain convenient military access for its war efforts in Afghanistan. Similar accounts in recent years in Tajikistan indicates that Russia continues to overshadow U.S. influence in the region.
The Russo-Georgian conflict is another instance where Russia is clearly reasserting control over its periphery. And while the Ukrainian gas crisis may have tarnished Russia's reputation as a reliable supplier, it did succeed in swinging the political loyalties of many of the former Commonwealth of Independent States back to the Kremlin.
In the wake of the global financial crisis, all of these forces and the region's subsequent vulnerabilities play to Russia's advantage as it extends its geopolitical interests regardless of its own financial troubles.
The recent wave of currency devaluations in both Kazakhstan and Russia demonstrates that the economies of these two resource rich countries have been hit hard by the global financial crisis and weakened commodity prices. During the boom years, both countries made some efforts to diversify their production base, but ultimately they still remained reliant on the extractive sector for budget revenues and foreign exchange reserves. Without improvements in either the global credit markets or world oil prices, the economies of Kazakhstan and Russia will deteriorate further, putting more pressure on both currencies. However, Russia still possesses substantial foreign exchange reserves and is ready to use these resources to strengthen its geopolitical interests. For the weakening economies of the CIS countries, the only viable option to revive their weakening economies is to seek financial aid from Russia—developments that will likely push these countries back under greater Russian influence.
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