Kazakhstan’s hefty devaluation could see other ex-Soviet states follow suit to protect their trade against fallout from a slide in the rouble as Moscow moves to float its currency.
The rouble has lost 6 per cent against the U.S. dollar this year and many analysts see that as the key factor that prompted Kazakhstan, which buys nearly 40 per cent of its imports from Russia, to seize the initiative and devalue its tenge on Tuesday by 19 per cent against the dollar.
It may also push Belarus and Ukraine into devaluations of their own – potentially a beggar-thy-neighbour cycle that risks disrupting trade balances across the region.
“In all these countries, authorities are looking at the rouble in their rear-view mirror,” said Christopher Granville, managing director at consultancy Trusted Sources in London.
“The rouble is the anchor currency for the wider trading area so you are seeing other countries responding to Russia allowing a sharp rouble move.”
Kazakhstan attributed its move to global volatility caused by the U.S. Federal Reserve scaling back its policy of printing money through buying financial assets. But analysts saw the explanation rather in an effective depreciation of the rouble against the tenge by some 10 per cent over the past year.
“The devaluation versus the dollar clearly targets the rouble-tenge cross,” said ING Bank’s Dmitry Polevoy, who added in a note to clients that calculations on a balance of payments basis put fair value for the tenge roughly 10 per cent stronger than the 185 per dollar which is now the central bank target.
“So the National Bank of Kazakhstan wins a more beneficial position for the tenge,” Polevoy said. “The only question is whether Russia will follow suit.”
Tuesday’s Kazakh move comes exactly five years after an 18-per cent tenge devaluation.
Back then, plunging oil prices had undermined the rouble. This time, too, the process began in Moscow, which last month scrapped targeted rouble interventions, indicating a shift to a fully floating currency was on track for 2015.
Along with the broader flight from emerging markets, that sent the rouble to record lows against a dollar-euro basket.
For Moscow’s customs union partners, Belarus and Kazakhstan, the shift is particularly bad news because their local producers can no longer use tariff barriers against cheap imports from their giant neighbour.
Russian exports to Kazakhstan for instance have risen sharply in the past year, trade data show, with 38 per cent of Kazakhstan’s imports now coming from its northern neighbour.
Around 7 per cent of Kazakh exports go to Russia.
Kazakhstan’s trade surplus shrank by more than 10 per cent last year, while the current account surplus fell to a sixth of 2012 levels, a factor the central bank cited for its action.
Russia may not respond directly to the Kazakh devaluation; though it is unlikely to stand in the way of further weakening in the rouble, its exports to its neighbours are limited.
“For Russia, it’s not a big deal,” said Alfa Bank economist Natalia Orlova in Moscow, who estimated Ukraine and Kazakhstan each account for just 3-4 per cent of Russian trade.
“But for these other countries, the fact that the rouble is going down is really complicating things. They are feeling the global situation, but through Russia.”
EYES ON UKRAINE, BELARUS
Ukraine and Belarus may have little choice but to follow Kazakhstan down the devaluation route.
“The National Bank will not react in the next week or two,” said Dmitry Kruk, an economist at the Belarussian Economic Research and Outreach Centre in Minsk.
“But if the devaluation of the Russian currency is more prolonged, then it will have to take account of this fact and let the Belarussian rouble fall.”
The currency of Russia’s western neighbour is linked to the Russian rouble by a crawling peg.
In Ukraine, where the prospect of joining the Russian-led customs union has contributed to mass protests against the government in the past three months, there has already been pressure on the hryvnia and the fact that a third of Ukraine’s imports come from Russia may add to pressure for a devaluation.
Last week, the central bank imposed currency controls to slow a decline of 10 per cent against the dollar since November that was prompted in part by protests against the president’s rejection of a trade deal with the EU under Russian pressure.
But diminishing reserves, a huge trade deficit and a recession are clearly tempting Kiev to let the hryvnia weaken.
The currency fell over 2 per cent after the Kazakh announcement while the Belarussian rouble also weakened.
Much will depend on what Russia does next.
Many reckon it will simply let the rouble slip gradually.
But the Kazakh move could inspire others to try and seize the initiative in the currency war: “Their idea seems to be that the trend of currency weakness will persist,” Granville said of the Kazakhs. “And they would rather get ahead.”