Russia Contagion Spreads to Former Soviet States Amid Rout

Updated on
Vladimir Putin
Russia's President Vladimir Putin. Photographer: Ian Waldie/Bloomberg

Russia’s currency and bond rout is spreading to former Soviet states.

Currencies are tumbling after holding steady since President Vladimir Putin annexed Crimea in March. Russia’s deepening crisis and the ruble’s 34 percent slump over the past six months hurt economies that rely on remittances and imports from the country.

Georgia’s lari lost 10 percent against the dollar last week, surpassing the 6.5 percent decline in the ruble as the biggest loser among 169 currencies tracked by Bloomberg. The Armenian dram slumped 2.8 percent, the sixth weekly drop, the longest slump since March 2010. Kazakhstan’s dollar-denominated notes due in 2024 slid, sending yields up 57 basis points, or 0.57 percentage point, to 4.76 percent.

“Russian ruble weakness is now beginning to send tremors across the wider region,” Timothy Ash, an economist at Standard Bank in London, wrote in a note on Dec. 5. “These managed currency weakenings are only to be expected.”

The lari reached 2.04 per dollar yesterday, the weakest level since March 2004 on a closing basis, according to data compiled by Bloomberg. Armenia’s dram tumbled to an eight-year low of 446.18 per dollar. The ruble fell to record lows this week, prompting Putin to warn of “harsh” measures to defeat speculators betting against the currency.

Kazakhstan may be the next to capitulate and allow its currency to fall as oil prices slump and the ruble weakens, even as policy makers have pledged to avoid devaluation, according to Ash. The central bank, which closely controls the exchange rate, devalued the tenge by 19 percent in February as the slumping ruble undermined the Asian nation’s export edge.

Recession Brink

Russia’s economy is on the brink of recession after sinking oil prices battered the ruble and sanctions imposed by the U.S. and its allies over the conflict in Ukraine stoked capital outflows. Gross domestic product may shrink 0.8 percent in 2015, compared with an earlier estimate for 1.2 percent growth, according to the Economy Ministry.

Russia bought 12 percent of its imports from the Commonwealth of Independent States, which includes nine countries such as Armenia and Kazakhstan, data compiled by Bloomberg show. Neighboring countries include Ukraine, which accuses Russia of supporting armed rebels, and Georgia.

Georgian central bank Governor Giorgi Kadagidze told reporters yesterday that policy makers are ready to intervene in the currency market to prevent “large shocks.”

Limited Reserves

The countries’ ability to prop up their currencies is limited, according to Ash. Foreign reserves in Armenia fell to a five-year low of $1.5 billion in November while the stockpile in Georgia stood at $2.4 billion, only enough to cover about three months of imports, according to data compiled by Bloomberg.

Renaissance Capital, a Russian brokerage, cut its forecast this week for Georgia’s economic growth next year to 4.3 percent from 6.3 percent, citing risks of slower exports and investment.

In October, the International Monetary Fund forecast the CIS region, excluding Russia, will grow 4 percent next year, after expanding an estimated 2 percent in 2014.

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