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Kazakhstan Stuck Between Falling Exchange Rates And Oil Prices

Kazakhstan's president

How will Kazakhstan’s economy react to the double threat of the falling ruble exchange rates and falling oil prices?

Kazakhstan’s growth rate since 2010 has been above 6%, but current forecasts are far less optimistic. Kazakhstan is a close ally of sanctions-hit Russia and a member of the Eurasian Economic Union (EEU), a supranational organisation furthered by the Kremlin and founded in Astana last May by Russia, Belarus and Kazakhstan.

Kazakhstan’s political and economic proximity to Russia might become a liability in consideration of the latter’s economic slowdown and the constant fall of the Russian ruble’s exchange rate. In addition, Kazakhstan is a major oil producer and crude oil makes up 56% of its exports.

Will dropping oil prices affect its economic performance and political stability in the coming months? Will a second devaluation of the tenge become necessary, after the one in February 2014?

Kazakhstan's exports

Figure 1. Kazakhstan’s exports. Source: Wikimedia.

Since Summer 2014, the Russian ruble has fallen to record lows against both the euro and the dollar. In 2014, the dollar has appreciated against the ruble by 27.5%, and the exchange rate is now approaching 42 rubles per dollar.

Related: Kazakhstan To Use National Fund For Oil Price Damage Limitation

While the Russian economy is sharply slowing down and might enter recession, that of Kazakhstan looks more stable, but is still affected by the decline of its powerful neighbour’s currency. Russia’s economic weakness has already brought about a fall in its imports from Kazakhstan, which declined by 21% in the first half of 2014, when the Russian economy was not yet affected by sanctions and geopolitical tensions.

In addition, Kazakhstan’s tenge was traditionally pegged to the ruble. The February devaluation of 20% has de facto interrupted the tight connection with the Russian currency, and the National Bank of Kazakhstan has opted for a floating exchange rate with the dollar, with a band of 185 tenge per dollar +3/-15 tenge. Will Kazakhstan now return to follow Russia’s indications and currency, in the context of their enhanced cooperation within the EEU?

Together with the ruble’s fall, the drop in oil prices, which sped up in late September, is Kazakhstan’s other major concern. An oil price of 80-85 dollars per barrel could lead to budget deficits, boost devaluation and inflation, and jeopardise the perspectives of economic growth.

In the period of January-September 2014, growth has been approximately 4%, which already represents a slowdown in relation to the previous years. The new government GDP growth forecast of 14 October is 4.8% for 2015 and somewhere between 5.3-6.7% in the following years. If this was the case, the change would not be major. But what do Kazakh authorities think about it?

The National Bank’s Governor, Kairat Kelimbetov, clarified that Kazakhstan has enough ‘ammunition’ to handle any issues. In particular, Kazakhstan would have a ‘safety bag’ of 100 billion dollars in gold and currency reserves. On 21 October, Mr Kelimbetov further underlined Kazakhstan’s economic strength, availability of cash, and thus the lack of any necessity to devalue the currency again.

He also highlighted how the February strong devaluation already took into consideration big changes in geopolitical scenarios, the global economy, oil prices, and Russia’s difficulties. Hence, he concluded, Kazakhstan has a ‘safety margin’ before further devaluing the tenge.

Related: Oil Price Slump Threatens Kazakhstan’s Stability

Yet, official optimism partly hides a complex reality. Kazakhstan has to diversify its economy and reduce its dependency on Russia, which the establishment of the EEU has enhanced. The giant Kashagan oilfield, which so far has never really worked, might resume production only in 2017. Negotiations to join the EEU have delayed the country’s accession to the WTO, which would help Kazakhstan to be more competitive on Western and Asian markets.

Huge investment is required, particularly in infrastructure. Not by chance Kazakhstan has recently (24 October) co-founded the Asian Infrastructure Investment Bank (AIIB), a China-led initiative which aims at boosting development in Asia and already includes 21 countries. Astana’s ‘multi-vector foreign policy’ aims at strong relations with China as well as with Europe and the USA.

Trying to balance Russian, Western, and Chinese interests might become an increasingly difficult exercise, particularly in the case of a change of leadership in Astana. While Kazakhstan’s economic growth rate might remain reasonably high, world geopolitics could make the picture more and more complex. As Kelimbetov himself put it, “further developments in the global economy don’t depend on the Central Bank.”

By Ernesto Gallo

Source - www.globalriskinsights.com 

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