Central Asian and Caucasus currencies in the eye of the storm

Central Asian and Caucasus currencies in the eye of the storm
By Naubet Bisenov January 15, 2016

Central Asia and Caucasus countries face another difficult year in 2016, with pressure on their currencies continuing to cause economic dislocation and social problems that are already sparking political turbulence.

The national currencies of Central Asian and Caucasus countries experienced unprecedented depreciations in 2015 as falling oil and other commodity prices and plunging remittances wrecked the countries’ finances, while the weak currency of the region’s main trading partner, the Russian ruble, damaged the competitiveness of locally-produced products.

Initially most countries tried to maintain the exchange rates of their currencies, burning enormous amounts of foreign exchange reserves, but eventually they had to give up interventions and allow the currencies to drop in value against the dollar or impose restrictions on foreign exchange operations, or both.

This year, with predictions for the oil price to plunge further below $20 per barrel, the Russian ruble and the currencies of the region’s oil-exporting countries – mainly Kazakhstan and Azerbaijan – will continue to come under depreciation pressure. Authorities in Uzbekistan, Turkmenistan and Tajikistan may be able to maintain the official exchange rates but the population will increasingly turn to the black market to meet their demand for cash dollars. 

The depreciation of regional currencies is also causing sharp increases in prices, especially those of imported goods, which has led to social and political unrest in the closed authoritarian systems in the region. Despite the Azerbaijani authorities’ attempts to curb price increases Baku might well have lost a moment when it could contain the protest momentum and will have to resort to heavy-handed methods to crack down on protests. On January 15 authorities detained 55 protesters throughout the country, including local leaders of the opposition Popular Front and Musavat parties.

bne IntelliNews looks at the efforts of Central Asian and Caucasus countries to prevent the depreciation of their currencies and what the consequences have been:

The Kazakhstan tenge was one of the world’s poorest-performing currencies in 2015, but it had initially begun the year strongly, fluctuating within a target exchange rate corridor in the first half of the year. The government was unwilling to devalue the currency so soon after a 19% devaluation in February 2014, as the country headed into an early presidential election, national holidays and President Nursultan Nazarbayev’s 75th anniversary (his birthday is celebrated as Astana Day on July 6).

However, the move cost the National Bank dearly, with interventions costing about $12.5bn in January-August before the exchange rate reached the upper limit of the corridor and the bank finally allowed the tenge to float freely on August 20. As a result, the exchange rate of the tenge fell by 29.5% in one day and then continued its slide until mid-September when it started to depreciate more sharply. In response, the central bank abandoned the free-floating exchange regime and resumed interventions to decrease “volatility” on the foreign currency market, spending more than $5bn.

Despite the interventions the tenge continued its slide, resulting in the replacement of Kairat Kelimbetov with Daniyar Akishev as governor of the central bank in early November. The reshuffle led to the readoption of a free-floating exchange rate, allowing a further depreciation of the tenge.

At the same time, the National Bank’s foreign currency reserves went down by 2.2% m/m to $20.497bn in December, which suggests that despite its pledge to minimise interventions in the foreign exchange market, the bank supported the currency, which depreciated by 10.7% to settle at KZT340.5 to the dollar on December 31. As a result, the Kazakh currency finished the year with a cumulative depreciation of 87% of its original rate, despite nearly $18bn the National Bank burnt on maintaining the exchange rate and decreasing volatility on the exchange market. Analysts from the Russian thinktank Economic Forecasting Agency predict that the tenge will fall from the current levels of KZT360 to the dollar to KZT400 in May and KZT450 in August. 

However, unlike in Azerbaijan, prices have not changed sharply in Kazakhstan following the August devaluation as the government quickly moved to impose controls over prices of essentials. Should President Nursultan Nazarbayev decide to go ahead with early parliamentary elections, authorities may try again to maintain a relatively stable exchange rate to ensure the smooth conduct of an election campaign and the appointment of a new government. 

Another oil-based economy, Azerbaijan, adopted a different approach by resorting to two one-step devaluations of the manat in one year: the country’s central bank first devalued the national currency by 34% in February and then a second time by 48% in December. Like in Kazakhstan, the central bank spent an estimated $8bn on propping up the manat in 2015, but unlike in Kazakhstan, the second devaluation resulted in a sharp increase in prices of food and essentials, leading to unprecedented protests and frenzied purchases of foreign currency.

In response, the central bank instructed commercial banks to limit exchange operations and shut down bureaux de change outside the formal banking system “in order to efficiently and quickly regulate their operations and tighten control over operations”. It explained that commercial banks had a total of 914 branches throughout the country, 458 of which are in the regions – a “sufficiently wide network” to service the population and businesses. The restrictions have resulted in the emergence of black market where the dollar changes hands between AZN1.8 and AZN2.5 against the official rate of AZN1.57. Despite a halving of the dollar value of the manat in 2015 – it devalued by 99% – local observers expect the currency, the region’s worst performer, to fall further by around 40% in the short-term.

Natural gas-rich Turkmenistan, one of the world’s most economically isolated countries, increased the official exchange rate of the manat from TMM2.85 to the dollar to TMM3.5 in January 2015. In response to the continuing pressure from the falling prices of hydrocarbons, Turkmen authorities first limited the sales of cash dollars to the population ($1,000 per person per purchase and $8,000 per person per year) but later adopted the Uzbek approach by banning sales of cash dollars altogether. Turkmen people are, however, allowed to buy non-cash dollars for manats on their credit cards to spend them abroad. The restrictions created a black market in the country last autumn where dealers are now reported to sell greenbacks at TMM4.2-4.5.

Uzbekistan, another economically isolated country and one experienced at living with several exchange rates, is reported to be thinking of further increasing controls over its already tightly-controlled foreign exchange operations. It may totally ban the circulation of foreign currency or impose forced conversion of foreign currency held or received by the population from abroad at the rate set by the central bank. Ordinary people were banned in early 2013 from buying hard-to-access cash dollars from commercial banks; instead those who could prove their foreign travels were allowed to buy $2,000 per quarter on their credit card to spend abroad.

Because of tight restrictions on foreign currency, there are several exchange rates in the country: the central bank sets the official rate (with no obligation to sell foreign currency at that rate), commercial banks set their rates for their foreign exchange operations (which slightly differ from the official rate), currency dealers set rates that mostly follow the Russian ruble or the Kazakh tenge on the thriving black market, and there is another “stock exchange rate” (several times higher than the official rate) at which importers can convert their sum earnings into foreign currency.

The central bank manages the gradual depreciation of the sum, which devalued by 15.4% to UZS2,785 against the dollar in 2015. The black market rate fell from UZS3,200 to over UZS6,000 last year. The “stock exchange rate” now stands at UZS7,850, according to Uzmetronom.com, a website believed to be linked to the country’s security services.

Although Uzbekistan is a major exporter of cotton and hydrocarbons, official statistics don’t publish figures for export earnings. At the same time, the black currency market mostly depends on traders involved in exports and imports, as well as remittances, which fell to $1.9bn from Russia alone in the first nine months of 2015, against $4.6bn in the same period of 2014.

Unlike the natural resources-exporting countries, the region’s oil-importing countries – Armenia, Georgia, Kyrgyzstan and Tajikistan – allow their currencies to move up or down according to market forces.

The Armenian dram depreciated by only 1.9% to AMD483.7 to the dollar in 2015 – the best performance, as the currency mostly made its adjustments to the falling Russian ruble in 2014, depreciating by 17.3%.

The Georgian lari lost 28% the greenback in 2015, with the National Bank spending $290mn in the first nine months of the year in interventions. The currency is still under pressure to depreciate, so the bank continued its interventions in 2016, spending $20mn on January 12.

The exchange rate of the Kyrgyz som behaved in tune with the Kazakh tenge because of close trade links between the adjacent countries. It started to depreciate sharply following the free float of the tenge in August. Overall, the som depreciated by 29% against the dollar in 2015. It might have lost value more sharply, had the National Bank not intervened to smooth the slide, spending $330.5mn on propping up the som in 2015 after $536.7mn in 2014. As a result, the bank’s reserves fell by 11.72% y/y to $1,739.6mn between January and November 2015.

Authorities in the region’s poorest country, Tajikistan, applied a cocktail of market and Uzbek-style administrative measures to manage the somoni’s exchange rate in 2015, creating favourable conditions for the emergence of a black currency market. Following a 31% depreciation between January and November, the National Bank shut down all private exchange offices across the country and limited foreign exchange operations to exchange departments at banks and credit institutions. The move led the currency’s value in the black market of TJS7.6 per dollar to diverge from the official rate of TJS6.72 on November 30. Overall, the Tajik somoni depreciated by 36.3% to TJS7 in 2015.