The Georgian lari has tumbled against the dollar to its lowest level in a decade and the Armenian dram hit his lowest since 2006, as analysts warn of a spillover effect of the Russia’s ruble collapse across the former Soviet Union.

On December 5, the Georgian lari slumped 2.86% against the dollar, extending its rout to 11.2% since November 5 and the Armenian dram fell 1.4% versus the dollar, marking a decline against the greenback of almost 10% over the same period.

As Russia is an important trading partner for both countries, the “currencies weakening are only to be expected", wrote Standard Bank’s head of emerging markets research, Timothy Ash, in a note to investors on December 5.

Both Yerevan and Tbilisi have been benefiting from falling oil prices and growing remittances, one of the their main sources of external financing, but these are inevitably decreasing following the ruble’s devaluation. The heat is stronger on Georgia, as for the second year the government is failing to spend what it allocates in the budget plan, while links are growing between Russia and Abkhazia, one of its two breakaway regions.

The lari remained broadly stable throughout 2014 while other currencies significantly lost value against the dollar, according to a note released by Tbilisi-based Gart & Taggart Brokerage on December 8. G&T analysts think that the currency’s recent depreciation “was triggered by market overreaction, as was adjusting to weaker external environment and there was growing demand for imports owing to seasonality and increased government spending...Some relief could come in the medium term as winter season will attract tourists, and falling world prices on Georgia’s major commodity imports (oil, food) could help to save on imports in coming months.”

Monetary regulators in both countries sough to downplay their currencies’ depreciation. The president of the National Bank of Georgia (NBG), Georgi Kadagidze, said in a televised statement that the steep fall was because of “the frenzy of market players, which is generally characteristic of financial markets in such times", adding that financial and macroeconomic stability face “no threat whatsoever".

In Yerevan, the Central Bank of Armenia (CBA) attributed the dram’s fall to “recent developments in the regional and international financial markets", adding that the “exchange rate is in the “stabilisation zone” and that “reserves are absolutely sufficient for preventing all kinds of artificial exchange rate fluctuations and ensuring financial stability”.

Armenia and Georgia have similar macro stories, small economies – steady growth rates, low budget deficits/public debt ratios and free-floating currencies. However “their weaknesses are both on the external financing side, i.e. persistent current account deficits, and limited FX reserve cover,” said Ash in his note.

Both also have significant agro exports to Russia, and “had hoped to benefit from Russian sanctions on the West – but massive Russian devaluation is clearly threatening this trade".

Georgia has tried to refocus on Russian markets as relations warmed a bit following the departure of former president Mikheil Saakashvilli. Russian tourism has been a new "boon" for Georgia in recent years - a rediscovery for many Russians from the Soviet era.

The depreciation has reduced the real monetary value of the vital remittances from Russia, where the bulk of migrant workers from both countries are based. Individual money transfers from Russia to Armenia have been falling since June and plunged 17% year-on-year in October. Likewise, remittances to Georgia were down 6% y/y in October, but the decline from Russia was by 9.2% y/y.