Devaluations po-Kazakhski; Devaluations po-Russki
A look at relative central bank policy in the face of economic crises
17 August 2014
Since 2008 both Kazakhstan and Russia have seen their currencies depreciate by almost 50 percent. In dealing with these pressures the two countries have adopted two different strategies. While Russia has allowed the rouble to gradually fall, Kazakhstan has opted for large and unexpected devaluations. This policy has kept Kazakhstan’s foreign exchange reserves well stocked but at a high social cost.
Until the 2008 financial crisis growth in Russia and Kazakhstan had been fuelled by high oil prices and cheap credit. In August 2008 these inputs dried up putting the rouble under pressure. In November, having spent USD 112 billion, the national bank announced it would allow the rouble to devalue. The Kazakhstan central bank defended the tenge until 4 February 2009 when it was lowered 19 percent overnight.
By the end of 2013 as capital began returning to Europe and North America currencies in emerging markets worldwide faced renewed pressure. Russia and Kazakhstan each followed their 2008–09 policies - Russia allowing a slow devaluation and Kazakhstan opting for a 21 percent devaluation on 11 February 2014.
In both instances Kazakhstan has lowered its currency further and conserved more of its foreign currency reserves. Between August 2008 and September 2009 the rouble dropped some 39 percent at a net cost of 26.5 percent of its foreign exchange reserves. In the same period Kazakhstan saw a devaluation of some 20.5 percent at a net cost of just 1 percent of its reserves. Between September 2013 and July 2014 the rouble fell 6.5 percent at a cost of 8.5 percent of its reserves. In contrast, Kazakshtan devalued by 19 percent and saw a net increase of its reserves of 14 percent (see diagram).
The results seem somewhat counter-intuitive. It would seem that staunchly defending the tenge rate until a major devaluation would put more pressure on the currency. However, Kazakhstan’s more assertive policy seems to have precluded any speculation on the tenge. By contrast, the Russian policy of gradual depreciation has caused huge speculation, a practice which has virtually become an industry of its own in Russia over the past few years. The damage has meant Russia has been forced to more actively plunder its foreign currency pot. May 2014 also saw interests rates return to the high of 7.5 percent, last seen during the crisis of 2008.
With its much larger exposure to international markets Russia was always going to be the subject of greater speculation. But Russia’s problems have been compounded by its political climate, which has seen foreign military intervention and periodic threats of renationalisation. In 2014, instead of benefitting from a relatively buoyant oil price, the Russian economy has been hammered by the Ukraine crisis. Russia’s apparent determination to pursue its current political course has seriously undermined the central bank’s credibility when it pledges to defend the rouble. A high point in tensions between February and March 2014 saw the largest rouble sell off since 2008, costing the central bank some USD 12 billion net.
Meanwhile in Kazakhstan, the decision to conserve foreign exchange reserves has come at considerable cost to the wider population, which has seen their savings slashed by some 50 percent over five years. This is considered a necessary sacrifice as, for Kazakhstan, the preservation of foreign exchange reserves is a national security issue, ensuring economic independence from its larger neighbours.
As the rumour mill grinds on in Astana I will refrain from making predictions regarding the tenge. Instead I will suggest three factors that will influence the government’s thinking. First, the social implications of a second devaluation in one year; second, the likelihood of protracted hostilities in Ukraine and its effect on the rouble; and finally, the risk of discrediting the central bank, which has been good on its previous pledges. Given that Kazakhstan’s foreign exchange reserves are currently at an all-time high the government may just choose to ride out the storm a little more.
Update. 19 August 2014:
The Russian Central Bank has just announced it will widen the rouble corridor from 7 — 9 roubles. While citing the long-term target of achieving a free-floating rouble it is clear the Ukraine crisis and sanctions are taking their toll. Given the size of Kazakhstan’s February 2014 devaluation, the tenge may still have some leeway before it feels the need to follow suit. Watch this space.