Kazakh Devaluation Shows Currency War Stirring as Ruble DipsNariman Gizitdinov, Lyubov Pronina and Vladimir Kuznetsov
Two years after Russia, Kazakhstan and Belarus formed a trade pact, a currency war is breaking out between the former Soviet republics.
Kazakhstan devalued the tenge by 19 percent yesterday, saying the Russian ruble’s plunge to a record low this month put additional pressure on its currency. The tenge will trade at 185 per dollar, with a range of 3 tenge on either side after a previous target of about 150, the National Bank of Kazakhstan said yesterday. The ruble fell to a record 41.0472 against the Russian central bank’s dollar-euro basket this month, dropping
6.3 percent this year and 15 percent from the start of 2013.
After Russia eased trading limits and allowed the ruble to weaken as its economy slumped over the past year, Kazakhstan, central Asia’s biggest energy producer, was seeking to keep its exports competitive, according to VTB Capital. Russia accounts for 17.7 percent of Kazakhstan’s total trade, second after the European Union at 40.9 percent, data from the Kazakh statistics agency website show.
A more market-based exchange-rate “makes Russia simply more competitive,” Dmitri Fedotkin, an economist at VTB Capital, said yesterday by phone from Moscow. “For the last few months, Russian producers were competitive on the global market. After this devaluation Kazakhstan has matched them.”
The devaluation was “purely a financial measure” aimed at helping Kazakh enterprises, President Nursultan Nazarbayev said at meeting today with central bank Chairman Kairat Kelimbetov and Prime Minister Serik Akhmetov.
“Our economy will get extra profit, and it will positively impact its further growth,” Nazarbayev said, according to a transcript on his official website.
The tenge plunge follows a devaluation last month in Argentina and the implementation of currency controls in Ukraine and Ghana as developing nations struggle to curb capital flight triggered in part by the Federal Reserve’s stimulus reduction.
“We’ll witness many countries making similar decisions” and devaluing their currencies this year, Kazakh central bank Chairman Kairat Kelimbetov was cited as saying by Interfax today. There won’t be a repeat devaluation, he told the news service.
The ruble gained 0.1 percent to 40.3964 against Bank Rossii’s target basket of dollars and euros by 6:14 p.m. in Moscow. The Belarus ruble, closely managed by the central bank in Minsk, was 0.2 percent lower at 9,710 per dollar, leaving it down 10 percent during the past year. The tenge plummeted to
184.52 per dollar yesterday, compared with the previous close of
155.63, and traded little changed at 184.54 today.
Brazilian Finance Minister Guido Mantega coined the term “currency wars” in 2010 to criticize the competitive devaluations of advanced nations as they slashed interest rates to records to boost growth after the global financial crisis.
“The new levels provide enough of a safety net against extra global headwinds and guarantee impressive competitive advantage versus the ruble,” Dmitry Polevoy, chief economist for Russia and the CIS at ING Groep NV in Moscow, said in a note today. “We, though, don’t think the Russian central bank will follow. The only reaction may be a further gradual move to higher ruble flexibility.”
The tenge devaluation “seems to be aimed at helping the relatively small manufacturing sector to restore competitiveness versus other emerging-market countries, notably Russia,” Tatiana Orlova, senior economist for Russia, the CIS and Israel at Royal Bank of Scotland Group Plc, said yesterday in a note. Non-commodity exports to Russia and Belarus are “vulnerable to the competition from local manufacturers,” she said.
The three former Soviet republics, with a combined population of about 170 million people and more than $2 trillion in combined output, created a single economic space in January
2012. The bloc, which plans further policy integration to become the Eurasian Economic Union by 2015, seeks to coordinate economic policy and adopt unified visa and migration rules.
Russian President Vladimir Putin has said the alliance of former Soviet countries will help reduce global imbalances and fuel integration across “Greater Europe.”
Mineral products, including oil and fuel, account for 41 percent of Kazakhstan’s trade within the customs union, while metals represent 24 percent, according to data compiled by the customs union’s Eurasian Economic Commission for January-November 2013.
“The change in the ruble’s exchange rate is more important for them than a change in the tenge’s exchange rate is for us,” Interfax cited Russian Deputy Economy Minister Andrey Klepach as saying yesterday.
The Kazakh central bank said yesterday that “uncertainty regarding the ruble exchange rate remains” as Russia moves toward fully floating the currency in 2015.
Bank Rossii now targets the ruble’s movements against a basket of dollars and euros and steps into the market to smooth excessive gains or losses. It has spent the equivalent of $29 billion on such interventions since May, central bank data show.
The ruble weakened the most since May 2012 last month as the flight from emerging-market assets prompted central banks in Turkey, South Africa and India to raise interest rates. A Bloomberg index of 20 emerging-market exchange rates has weakened 10 percent in the last year and dropped this month to its lowest level since 2009.
The National Bank’s 19 percent tenge devaluation looks excessive, given the scope of the ruble’s decline and slower inflation in Kazakhstan than in Russia, Oraz Jandosov, director of Rakurs center for economic analysis and a former central bank governor, said by phone from Almaty yesterday.
“It’s hard to explain in macroeconomic terms why they’re giving themselves so much room,” Jandosov said.
Kelimbetov, who was named central bank chairman in October, is planning to shift to inflation targeting to lower annual price increases to no more than 3 percent to 4 percent in the medium term, according to the central bank’s statement yesterday. Inflation decelerated to 4.5 percent from a year earlier in January, the slowest since May 1999, according to the state statistics service.
Kazakhstan’s $204 billion economy, almost the size of Ireland’s, expanded 6 percent in 2013, Akhmetov told Nazarbayev according to the presidential website on Jan. 13. The Kazakhstan Stock Exchange’s KASE index dropped 1.6 percent today after a 12 percent advance yesterday.
The tenge, introduced in 1993 after the breakup of the Soviet Union two years earlier, weakened the most since July against the dollar last month. Kazakhstan devalued its currency by 21 percent in February 2009 and spent billions of dollars to support the economy and bail out its largest lenders following the collapse of Lehman Brothers Holdings Inc.
Kazakhstan’s current-account surplus shrank 82 percent in 2013 to an estimated $118 million, according to the central bank. The country posted a deficit in the broadest measure of trade in goods and services in four of the past six quarters, according to the central bank and data compiled by Bloomberg.
“The problem of loss of competitiveness comes very clearly if you look that Kazakhstan is in the Customs Union with Belarus and Russia, and has to compete with local manufacturers,” Sergey Dergachev, who helps oversee about $9 billion as senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt, said yesterday by e-mail. The tenge’s devaluation is “helpful” to keep the country’s “rapidly evaporating” current-account surplus from becoming a deficit, he said.