The crystal ball drenched in oil

The fall of the pro-Russian government in Ukraine has led to a threatened secession by the Crimea region and to tension in eastern Ukraine; both regions are dominated by Russian speakers.  How might this crisis affect the foreign exchange value of the ruble, the euro, the dollar, and the tenge?

Here’s my two-cents’ worth (which you should discount for inflation):

Ruble.  In the short run, uncertainty over the impact of economic sanctions on Russia will reduce the demand to hold the ruble.  There are safer currencies now to stuff into your pillowcase (or your bank account, if you trust your bank).  The ruble will weaken now, but what will happen to it over the long run is less clear.  If Russia can acquire Ukrainian territory without permanent damage to its own economy, then the ruble will eventually strengthen beyond its pre-crisis value.

Dollar.  For similar reasons, the dollar will strengthen now.  Economically, the United States has less at stake in the Ukrainian conflict than do Russia and Europe.  Demand to hold the dollar, rather than the ruble or the euro, will increase.

Tenge.  This will strengthen in the short run.  Sanctions may reduce world demand for Russian oil and thus increase demand for crude from alternative sources such as Kazakhstan.  Even if Europe does not buy more oil than before from us, its increased demand for non-Russian oil will raise the price of crude and consequently raise global demand for Kazakhstani oil when it has become cheaper than before relative to oil of other suppliers (bearing transport costs in mind).

Some economists argue that since the price of oil is expressed in dollars in the global market, changes in that market don’t affect the tenge.  The arguemnt overlooks the fact that when demand increases for Kazakhstani oil, it also increases for Kazakhstani oil inputs.  The owners of that labor and capital must be paid in tenge.

Appreciation of the tenge would endanger the few dregs of credibility remaining to the National Bank of Kazakhstan, which devalued the tenge by about 20% just a month ago.  To be fair, I must say that Bank officials could not have anticipated an incipient civil war in Ukraine at that time, particularly since they don’t seem to read the newspapers.

Euro.  Europe was on the verge of a weak recovery when push came to shove in Kiev.  If Europe pursues sanctions, then its energy costs will rise, since it must buy oil and gas from sources that are more expensive than Russia.  This could raise production costs, leading to a fall in output, a rise in unemployment, and an overall rise in prices – a triple-whammy known as stagflation.  To say the least, the euro will weaken. 

Alll prices are relative, and the exchange rate – which is the foreign price of our currency – is no exception.  The predictions here of appreciation or depreciation in a given currency are with respect to a currency unaffected by the Ukrainian conflict (the Thai baht?).  Still, let’s look at some exchange rates for just the four currencies discussed here.

For the short run, the safest bets are: 

(1)  The number of dollars per euro (or ruble) will fall.  That is, the dollar will strengthen.

(2)  The number of tenge per euro (or ruble) will fall.

It is not clear what will happen to the number of tenge per dollar (although it seems to be falling at present) or the number of rubles per euro.  It’s hard to wipe clean a crystal ball of all that oil.  --Leon Taylor tayloralmaty@gmail.com

 

Notes

1.  I thank, but do not implicate, Dmitriy Belyanin and Yerkin Omirzak for discussions.