Naubet Bisenov in Almaty -

Falling oil prices and the currencies of its major trading partners are piling pressure on Kazakhstan's national currency, but against all the odds the tenge seems to be holding its hold. Despite reassurances by the Kazakh government about its ability to maintain financial stability and defend the currency within its trading corridor, this might not last long, as it has become customary for the government to devalue the tenge in February, by 19% in 2014 and 25% in 2009.

Oil, which together with other raw materials accounts for 17% of Kazakhstan’s annual GDP and four-fifths of its exports, has more than halved to around $50 per barrel since the summer of 2014. This drop in the oil price has devastated the currency of its neighbour Russia, which at one point in December had hit an all-time low of RUB80 to the dollar. Although the ruble is now trading at around RUB65 to the dollar, with few signs of a rebound in the oil price, some like Goldman Sachs predict little relief for the Russian currency anytime soon. The euro is also trading at nine-year lows against the greenback on fears of a "Grexit" and the European Central Bank's quantitative easing plans. The EU and Russia are Kazakhstan's major trading partners, accounting for 30% and 13% respectively of the country's total foreign trade in 2013. Russia is Kazakhstan's largest supplier, accounting for a third of Kazakh imports in money terms last year.

Despite central bank chief Kairat Kelimbetov's public denials last year, the Kazakh government is now frantically discussing various measures to come up with a response to the falling oil price and weakening ruble, a source close to government circles tells bne IntelliNews on condition of anonymity. "As soon as a compromise on these measures will be reached, I hope, at the end of January they will officially announce measures which will make it possible to defuse all tension," the source said.

When the National Bank of Kazakhstan (NBK) devalued the national currency from about KZT155 to KZT185 to the dollar in February 2014, it cited uncertainty about the exchange rate of the Russian ruble, which had begun weakening at the end of 2013, and the need to maintain balance of payments amid growing imports as reasons for the devaluation. In early September Kelimbetov said that the tenge, "will be fine at the ruble's rate of 40-42" to the dollar. His former adviser, Olzhas Khudaybergenov, suggested in October that "the next critical level is RUB52 to the dollar". 

Aware of the challenges the faltering Kazakh economy is facing because of the weak demand for the country's main exports, low oil prices and the uncertainty surrounding the ruble and the Russian economy, Astana claims it is prepared for all kinds of worst-case scenarios.

Chairing a special crisis meeting in Astana on January 15, Kazakh President Nursultan Nazarbayev noted that notwithstanding all the difficulties, the economy managed to achieve growth of 4.3% in 2014. However, he urged the government to monitor the situation in Russia and the EU to prevent "social tension in neighbouring countries" from spilling over onto Kazakhstan. "We should not allow this," Nazarbayev warned, ordering the government to have "clear plans for all possible cases" by the time of the next government meeting he will attend in late January or early February.

At the same January 15 government meeting, Kelimbetov boasted that the country had managed to build up a "significant" cushion for the economy in 2014, with its gold and foreign currency reserves at $102bn. Kelimbetov, who repeatedly denied rife speculation of a "second wave" of devaluation last year, then continued to recite his mantra that, "the National Bank intends to prevent sharp fluctuations of the exchange rate this year."

However, this invited ridicule from Kazakhstan watchers. "I am tempted to ask by which calendar they are talking, Chinese? Kurdish? I think Kurdish New Year is in March," Timothy Ash of Standard Bank commented at the time in a note to investors. "Anyway, maybe with this Astana Ukraine peace summit slated for the end of January, they will try and hold the line until then at least," he said in reference to Kazakhstan's proposal to host Ukraine peace talks in the frozen, unwelcoming Kazakh capital.

Indeed, the image-obsessed Astana, which styles Kazakhstan as an island of economic and political stability in the Commonwealth of Independent States, would not want to draw unnecessary media attention to domestic problems during any international get-together, should the public again use the devaluation as a pretext for protests over its economic policies that have resulted in the falling living standards.

Tools at hand

Analysts question the decision of the Kazakh central bank to devalue the tenge in February 2014 when the price of oil hovered around the $100 mark, but is resisting the call to do so now. "The NBK is afraid that letting the tenge float would create a vicious cycle between expectations of devaluation, panic and actual devaluation. That is one way to rationalise the actions of the NBK," Sabit Khakimzhanov, head of research at Almaty-based investment bank Halyk Finance, tells bne IntelliNews. "But one can only guess why the NBK devalued [the tenge] in February [2014] when the oil price was high and resists at such high costs to the economy now, when the oil price is so low."

With sufficient tools at hand to maintain the level or trajectory of the exchange rate, Khakimzhanov believes the central bank can keep the tenge strong for as long as it sees it fit. "But in order to achieve that, it would have to sacrifice reserves, the stability of interest rates, financial stability and competitiveness – usually in that order," he says.

Since the February 2014 devaluation, the NBK has operated in the area of a trade-off between forex reserves and interest rates. "Financial stability is not yet at stake. But at some point the central bank will have to choose between devaluation, letting banks fail or capital controls," Khakimzhanov suggests.

While ensuring the competitiveness of Kazakh goods on the domestic market is a valid concern, it has a lower priority relative to the stability of the national currency or the financial system, analysts argue. Despite the fact that the economic climate for Kazakh producers has deteriorated as a result of the ruble's devaluation in the short term, growth in the physical volumes of imports is offset by a decrease in their dollar value, believes Kasymkhan Kapparov of the Almaty-based National Bureau for Economic Research. "As a result, pressure on the balance of trade will be felt only if the ruble stabilises and physical volumes of Russian imports start growing," he tells bne IntelliNews.

Consumer benefits

While the authorities debate whether or not to devalue the tenge, Kazakh consumers are taking advantage of the strong tenge by shopping north of the border in neighbouring Russian regions.

The weak ruble has prompted Kazakhs to go on a shopping spree in Russia, snapping up everything from foodstuffs to furniture to cars. According to the Kazakh State Revenue Committee, Kazakh citizens imported over 22,000 cars from Russia in the last two months of 2014 alone. And that figure is only preliminary; according to Zhambyl Suraganov, a spokesman for the committee, the deadline for declaring goods imported in December expires on January 20 and so importers still have time to raise that number further. VAT paid on cars imported from Russia during the last two months of 2014 stood at over KZT4bn ($22mn), which at the 12% rate translates into KZT33bn ($183mn) or KZT1.5mn ($8,300) per car. The establishment of the Eurasian Economic Union on January 1 cancelled the need to pay VAT on cars imported from fellow member states Russia, Belarus and Armenia.

This buying frenzy has had other consequences. It has pushed up the buying of rubles in Kazakhstan: according to Tengrinews agency, in November Kazakhs bought the Russian currency to the tune of RUB16bn ($336mn) – or 45% more than in October. It has also invited the ire of local businessmen, who have urged the government to protect local businesses against the falling ruble. "The collapse of the ruble has put our local producers in unequal competitive conditions, especially in the border regions," Abylay Myrzakhmetov, chairman of the National Chamber of Entrepreneurs, complained on January 14. He cited the Association of Car Producers figures that showed domestic sales of cars falling by 60% on year in recent months. "The collapse [of the ruble] is reality and producers are now in an uncompetitive environment," he moaned.

The upshot is that should the oil price remain low and the ruble continue to weaken for a prolonged period, threatening public finances, exports and local jobs, the Kazakh government will have little choice but to devalue the tenge.