Kazakhstan’s Tenge: Dramatic currency depreciation and how it affected life in Kazakhstan

(This is a revised version of the blogpost originally published on September 1, 2016.)

Hello, dear readers! My name is Smaiyl Makyshov, and I am a 15 year old Kazakh student at Concord Academy.

This post is based on my research about my home country Kazakhstan’s recent currency depreciation and economic recession. It will examine the causes of the crisis and the impact it had on our neighboring countries. Furthermore, this post will also describe the aftermath of the crisis and will recount my observations and experience as I lived in the country during the period of currency devaluation.

Intro

Kazakh national currency Tenge (KZT) has not been much volatile for the last 10 years until 2015 except the two devaluations during the 2008 financial crisis and in 2014. According to the website xe.com which tracks various currency rates, the Kazakh Tenge stayed around 120 KZT per 1 USD from at least the year of 2005 until February 2009, when it was devalued by 25 percent. The rate then maintained around 150 KZT per 1 USD until February 2014 when the Tenge was devaluated again by about 20 percent to the rate of 180 KZT = 1 USD. The rate fluctuated around 180–190 until the 21st of August of 2015, when it suddenly fell to 255 KZT per 1 USD, experiencing a steep 40 percent drop. This was when the government announced that it will make Tenge a “floating currency”, meaning that the currency will now become very volatile, relying on the foreign-exchange trade and the economy. But on the real scale, to citizens of Kazakhstan it actually meant that our national currency would continue to fall unpredictably until the rate reached 390 KZT per 1 USD on 21st January 2016. The currency now depended on the strength of the country’s economy, which is based mostly on oil, the price of which was suffering during the same time. However, the continued drop to 390 KZT per USD was followed by the Tenge’s slow recovery, reaching its strongest value of 326 KZT per 1 USD on 4th May 2016. This was followed by a fluctuation of the rate between 330 and 340 for a couple of months. After a terrorist attack in Almaty on 18th July, Tenge gradually fell until one week after on 26th July when the Tenge rate had dropped abruptly from 344 to 354 (by 3 percent) Tenge per USD. Nevertheless, the Tenge later was able to come back slowly to its usual 2016 rate of around 340 KZT per 1 USD.

A small, but a significant factor: did the terrorist attack in Almaty on 18th July affect the currency rate, and was the abrupt 3% devaluation the result of just that?

Initially, I was confident that the terrorist attack somehow had a relationship with the devaluation of Tenge in that one week from 339 to 354 KZT per USD. I thought it could be indirect — maybe after the terrorist attack, the demand for the products in Kazakhstan may have dropped, or even more reasonable — maybe the demand for the US Dollars in Kazakhstan has increased because more people seek the financial safety in the US Dollars, which translates to the feeling of personal safety after hearing about the terrorist attack.

I wanted to find the true answer, whether it clarifies my hypotheses or not. Thus, first I wanted to check whether the depreciation during that week may have happened not just to our currency. I decided to check out the USD/RUB rate (using that exact same xe.com website) in late-July 2016 in case if something may have happened to oil prices in that period of time. Our neighbor Russia’s economy is also dependent on oil, and as of August 2012, oil and gas represented 42 percent of the total exports of Russia. Consequently, during the major oil price drop of a few years ago, the Russian Ruble depreciated significantly in response. Furthermore, it is also worth checking the Ruble rate because Kazakhstan’s economy is influenced significantly by the Russian economy as it is our largest economic partner and we are both in the Eurasian Economic Union. Therefore, technically, the value of the Rubble and its rate against the US Dollar can affect the value of the Tenge against the US Dollar, but it’s not vice versa given the relative size differences of the two economies (so the terrorist attack in Almaty could not affect the Russian economy).

From my research, I found that between July 18th and 25th of 2016 the Russian Ruble’s value has dropped by about 5 percent from 62 to around 65 RUB per USD. I decided to check the crude oil price. I went to the website dailyfx.com/crude-oil and saw that both Crude Oil Brent and Light Crude Oil prices have dropped after 20th July. The dropping of oil price was quite significant — Light Crude Oil’s price had dropped roughly by 11 percent between 22nd July and 2nd August, while Crude Oil Brent’s negative price change was about 9–10 percent. Therefore, I concluded that the Tenge devaluation in late-July happened mainly because of oil-prices. That reason is reliable due to the following three main points :

  • Previously, the Kazakh tenge dropped mainly because of low oil prices — at the end of 2015, and in 2016 as well. Russian Ruble had a similar case.
  • In late-July 2016, KZT was not the only currency to depreciate. Russian Ruble has also depreciated and with a similar percentage drop against the US Dollar.
  • It is evident that the Kazakh Tenge is tied to the crude oil price — the currency continued dropping until late-January 2016 and began to strengthen after — the crude oil price had a similar path over time.

Being affected more than our close neighbors

Initially, I did not pay attention to the fact that our neighbor country Kyrgyzstan, which has a far weaker economy than ours, actually had a smaller “size of crisis”, especially if comparing their national currency Som (KGS) value change against the US dollar as of 28th August 2016. Kyrgyzstan’s Som dropped by only about 23 percent during the 2 years starting from 28th August 2014, while the Tenge lost about 88 percent of its value against the US dollar during the same period. From August 2014 until April 2015, KGS had dropped from 3.4 KZT to 2.9 KZT per 1 KGS. This rate stayed until August 2015, when the Tenge depreciated by 40 percent due to the currency free-float. As mentioned above, the Tenge, being tied to oil prices, kept falling dramatically until January 2016, where it reached its lowest point ever against Som at 5.15 KZT per 1 KGS. Similarly, the Som strengthened against the Russian Ruble as well.

Before the crisis, the exchange rate for RUB/KZT stayed stable around 5 KZT per 1 RUB. During the crisis in mid-March 2016, I noticed that the Tenge weakened by 3 percent against the Ruble and the rate became more than 5 KZT per 1 RUB. Since then, 95 percent of the time until today, the KZT to RUB rate stayed over 5. Given the stable rate of the ten years pre-crisis, I personally considered 5 KZT per 1 RUB as the “normal exchange rate”. Since the recent relative rate has gotten to be more than 5 KZT per RUB since Spring 2016, then Kazakhstan’s economy likely has gotten more worse than Russia’s, compared to the previous past 10 years.

The reason behind the relative worsening

The relative worsening of the Tenge against the Ruble bothered me for some time and inspired me to examine the cause in a greater depth. I always assumed that Russia’s economy is less dependent on oil commodity than Kazakhstan’s, and decided to back it up by data. I found the Kazakhstan export data chart for 2014 from the statistical source: http://atlas.cid.harvard.edu. The chart states that 62 percent Kazakhstan’s the total export was petroleum oils and gases related (57%+5% from the chart below).

Kazakhstan’s export composition in 2014

Next, I obtained a similar chart data for Russia, which shows that petroleum oils and crude exports represented 42 percent of the total Russian export in 2014 (34%+8% from the chart below). Therefore, Russia’s total export is less dependent on oil and gas commodities than that of Kazakhstan’s.

Russia’s export composition in 2014

I decided to research Kyrgyzstan’s export composition as well. I never heard about Kyrgyzstan exporting oil or being a country which produces oil and gas commodities. Below is the chart on Kyrgyzstan’s export for 2014, from the same data resource.

As suspected, Kyrgyzstan does not export any meaningful amount of energy commodities. As a result, Kyrgyzstan’s economy and its currency are not meaningfully dependent on oil price changes. The depreciation of the Kyrgyz Som may have been caused either by the demand and price drop for their other export commodities, or more likely by the demand drop for Kyrgyzstan’s products due to currency depreciations in Kazakhstan and Russia, since the two countries are the main trade partners for the Kyrgyz Republic.

Kazakhstan in 2016: Life post the currency free-float

A lot has changed in Kazakhstan the past few years due to the crisis. Mostly, it is the way people live and spend their money is what has changed. People who traveled a lot in 2015 now travel far less and seek for cheaper options for hotels and flights than before. People started to stock up with food earlier, because when the Tenge was falling, no one knew how far the rate will keep dropping, since the prices for the commodities was also unpredictable. Since the Tenge was falling continuously, people expected it to continue to fall — and when the currencies fall, the price for food and necessities in stores usually go up, because many products, such as food, get imported to Kazakhstan from other countries.

Literally, a lot has happened since 2015. But people still have to make a living. Life still goes on. The change affected different people in different ways too. Let me explain it in different categories.

The crime rate has increased and driving on the streets became worse

I do not know whether the fact that driving on the streets became more dangerous is relevant to the current crisis, but I am pretty sure it is very relevant to the fact that it does not depict the city in a safe and pleasant way.

According to the website numbeo.com, the crime rate factor rate in Almaty is 50.61 in 2016. About a year ago, this number was around 43. Even if this source is not the most reliable since not many Kazakh citizens know enough English to take the survey for an accurate result, I believe there must be a reason behind in these numbers to be rising.

As a citizen born and living in Almaty, I can say that it has become a little bit more unsafe this year compared to last and 2015. The number of homeless people begging for money has increased in Mosques and streets, and they have started doing that in some apartment districts. The last time this was previously seen was 5 years ago — literally, this means our country and the state of living went through degradation back 5 years. While I surf in the internet through the news, I hear more instances of serious crimes as well as other unpleasant news such as car crashes and illnesses.

The prices for products do not rise a lot, but their quality drops

I can tell that last year, the food quality in markets, groceries, bazaars, restaurants, and cafes in Kazakhstan was better than this year. As I was reading news in the internet, I started seeing more often about how some people got food poisoned from various restaurants and eating places. By the way, McDonald’s has opened in Kazakhstan only in 2016. First McDonald’s opened in March 2016 in Astana, while the first McDonald’s in Almaty opened in mid-June 2016. According to the website of McDonald’s in Kazakhstan, the cost of Big Mac is 800 Tenge (a little bit over $2 according to today’s exchange rate of 325 KZT per USD), and the cost of Small Fries is less than a dollar. That gives some doubt about the quality of their food. McDonald’s in the USA and in many other countries is considered a low-quality cheap fast-food restaurant branch by many people, and people have assumptions that they are trying to cook food out of the same type of products in Kazakhstan as they do in other McDonald’s restaurants around the world. If they hope to do that, then the prices for food in Kazakhstan’s McDonald’s are supposed to be the same as in the USA. But that is not the case. What products do they use to make food in Kazakhstan’s McDonald’s then? No one knows.

People started traveling abroad less frequently

The demand for international flights has dropped, since for the Tenge-holders it became almost twice as expensive as before to travel overseas. The passenger traffic for international flights at Astana Airport in January-June 2016 has dropped by 6 percent compared to the same period in 2015. But that obviously doesn’t mean that the citizens of Astana started travelling less internationally by 6 percent.

On February 2016, I had to fly from Almaty to London via Frankfurt using Lufthansa. In fact, Lufthansa has not decreased flights to Kazakhstan during the crisis period at all. I was wondering why, and I found out an answer when I was returning home from Frankfurt to Almaty that same month. The plane was about 85–90 percent full, which is very good and profitable considering the fact that tickets for Lufthansa are a bit more expensive than the tickets normally should be. I realized that most of the passengers were not the citizens of Kazakhstan — many were Germans who were originally from Kazakhstan but moved to live in Germany when the Soviet Union collapsed in 1990s, but there were also tourists. Also, travel visa is not required for German citizens for an up to 15 days stay in Kazakhstan.

Another possible reason for the international passenger traffic not dropping too much is the re-structuring of Air Astana. Air Astana started offering cheap, attractive and convenient deals for transit passengers. Transit traffic has obviously grew a lot in 2016, since it also became much cheaper to fly via Kazakhstan. The ratio of international citizens to the Kazakhstan citizens onboard flights to and from Kazakhstan has changed.

— — — —

Now, I want to describe some different types of people who have benefited from this crisis, and some types of people who suffered.

People who benefited in this crisis:

People who earn in and/or stock their money in US Dollars or any currency, not really depending much on oil, but live in Kazakhstan.

People who earn in US Dollars but live in Kazakhstan did not get affected by the crisis. Conversely, they benefited from the devaluation of the Tenge, because the prices in Kazakhstan for cars, products, and other items. in US Dollars have dropped. A product that was priced at 180,000 Tenge in 2015 was equivalent to $1000, and a product that was priced at180,000 Tenge in 2016 is worth a little bit more than $500, and the prices in Tenge themselves did not rise much and will not because they were regulated and monitored by the government.

Foreigners either visiting Kazakhstan or travelling via Kazakhstan’s airports.

This depends from what country the foreigners are from, but in general, travelling to or via Kazakhstan has became cheaper in US Dollars, Euros, British Pounds, and many other currencies. For instance, a return ticket from London Heathrow to Bangkok via Astana and Almaty if booking in advance costs only $745pp the lowest. Citizens of the USA, UK, France, Japan, Germany, Spain, Korea, and many other countries do not need a travel visa to visit Kazakhstan for a stay up to 15 days, so that deal would be even more attractive to foreigners. Air Astana has made some special sales and programs to attract tourists to Kazakhstan and to increase the transit traffic via the airports of Astana and Almaty. However, the prices in US Dollars are low mainly because if Air Astana would increase them (they don’t really need to since the oil has also became cheaper), it would become too expensive for Kazakhstan’s citizens (as mentioned, now it is already expensive enough) to travel so the demand for their flights will drop because although the proportion of Kazakhstan passengers has decreased to the proportion of International Passengers. There are still more Kazakhstan passengers that use Air Astana’s services, and generally travelling through the airports of Almaty and Astana.

Hotel prices in Kazakhstan have also dropped (in USD, of course), whether it is The Ritz-Carlton Almaty in the country’s tallest building Esentai Tower, or whether it’s a traditional-style guest-house. Prices for food, cars, and other commodities in US Dollars have also dropped.

People who earn in US Dollars but have a bank loan in Kazakh Tenge.

These people succeeded in the crisis financially, or in other words, saved their money in their pockets. You could have had a bank loan to get yourself a new apartment or a car in Tenge a couple of years ago, for instance, and if you earn in US dollars, now you have to pay less amount.

— — — -

So those were the main categories of people who benefited in this crisis, and there are other minor categories that benefited too that were unmentioned. Now, let us expand on categories of people for whom the crisis turned up as a big financial nightmare.

People who suffered in this crisis:

A little bit.

People who earn in Tenge and pay in Tenge, not having any relationship to the US Dollar. That is the case for the majority of Kazakhstan’s population. People who are applicable to this category have lost from a little bit up to a decent amount, since the prices for many things went up, but not all salaries and pensions were raised.

A lot.

People who travel overseas but earn in Tenge. People who have bank loans or debts in a currency other than Tenge (it depends, though). People who study in international schools which pay in US Dollars or people who study abroad but earn in Tenge. They all lost a huge amount of money, since now they pay almost twice as much as they did before in Tenge.

— — -

It will take me forever to list all the categories of people who won and lost, so I believe I should end my blog on this note. Thank you everyone for spending the time to read my blog, and please do comment below, share your ideas and thoughts on the article!

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