Dancing bear slips on oil slick

How will the Ukrainian crisis affect the tenge?

The answer depends on how the conflict will affect world demand for Kazakhstani oil.  This, in turn, depends on Russia.  The central bank of Kazakhstan attributes both of its tenge devaluations since 2009 largely to the weakening of the Russian ruble, notes a Kazakhstani business weekly, Panorama.  Since the National Bank believes that the ruble influences demand for tenge, currency speculators will act accordingly.        

On one hand, Russian belligerence – perhaps not entirely a new phenomenon – has convinced Europe to seek alternative sources of oil, including Kazakhstan.  This should strengthen the tenge.

On the other hand, European sanctions have induced the Kremlin to find other buyers for its oil.  This week, Russia signed a $400 billion pact to pipe natural gas to China for 30 years.  Kazakhstan is losing market share, which should weaken the tenge.  (The president of Kazakhstan, Nulsultan Nazarbaev, has just signed an agreement in Beijing for an oil and gas pipeline.  Isn’t that a coincidence?)

What is the overall impact on Kazakhstan?  Well, consider the net change in world demand for Russian oil.  As a matter of logic, it must be negative.  Had it been potentially positive, Russia would have reallocated the oil itself, from Europe to China; the goad of a Ukrainian crisis would not have been necessary.  On net, then, Kazakhstan is gaining oil buyers, so the tenge should strengthen.

Finally, consider Russian demand for Kazakhstani oil.  Western sanctions have reduced Russian income and subsequently Russian demand for oil imports.

The size of these three impacts will depend on how currency speculators perceive the future of Ukraine.  Much hinges on Sunday’s presidential election.  If it favors the pro-Russian element, or if it is marred by violence, then speculators will probably anticipate civil war, increased sanctions against Russia, and a strengthened tenge.  Otherwise, they will look for a weakened tenge. 

In any case, we won’t have to wait long for the forex denouement.  Every speculator will expect her colleagues to act immediately on the electoral outcome and will act accordingly – the textbook case of a self-fulfilling prophecy.

That’s the crystal ball (never mind the cracks) for 2014.  By next year, continued sanctions may so increase oil prices as to drive up production costs in Europe.  Output prices would rise, output demand would fall, and the continent may return to recession.  This would eviscerate demand for Kazakhstani oil.  But it is hard to believe that Europe would pursue sanctions beyond the point of shooting itself in both feet.   –Leon Taylor tayloralmaty@gmail.com   

References

Delovoy Kazaxstan [Business Kazakhstan].  Prorivnoy vyzyt v Podnebecnyu [A breakthrough visit to the Heavenly Kingdom].  May 23, 2014.  A good example of a time-honored tradition in Kazakhstani journalism – regurgitating press releases.   

       

Panorama.  Pervi kvartal etovo goda odnym yz camix profytsytnix dlya tekushevo scheta strani  [The first quarter of this year is one of the best for the country’s current account].     May 16, 2014.     

Perlez, Jane.  China and Russia reach 30-year gas deal.  New York Times.  May 21, 2014.