The tenge blues

 

About the growing conflict between Kazakhstan and Russia, my savvy old colleague from Tulane, the econometrician Mark Kennet, has an insight: “Around the world, there is constant friction between politics and economics, with governments following the path of least resistance. This is no exception. Kazakhstan is landlocked, and depends on Russia to make its economy go; thus, rightly or wrongly, whatever the government says publicly, it is inextricably tied to Russia.”

Yes, Kazakhstan is landlocked from oceans, although of course it does border the Caspian Sea in the west. The largest oil fields in Kazakhstan are Caspian.

In addition to geography, culture binds Russia and Kazakhstan.  The Russians have been in Kazakhstan since the 18th century, not always with Kazakhstani approval. In Soviet times, ethnic Russians dominated the government and the population, outnumbering the ethnic Kazakhs.  When Kazakhstan became independent in 1991, the ethnic Russians struggled with the ethnic Kazakhs for power.  The latter won, and hundreds of thousands of ethnic Russians emigrated to their homeland.  Today the Kazakhs are the largest ethnic group in Kazakhstan.

Mild ethnic tensions linger, largely over the languages. In Almaty, the lingua franca is Russian; in rural areas, it’s Kazakh.  The official language is Kazakh, which many ethnic Russians don’t speak. At KIMEP, an international university, virtually all students speak Russian; but only a much smaller number, I would say, are fluent in Kazakh.

The Russian and Kazakhstani economies are similar.  Both emphasize oil exports and nurture state-directed enterprises. In a panel study of the two countries over a recent 15-year period, explaining real income per capita and controlling for oil prices and industrialization, a dummy variable for Kazakhstan is statistically insignificant. In other words, the unique characteristics of Kazakhstan don’t enable it to out-produce Russia.

Finally, both countries belong to the Eurasian Economic Union, which the Kremlin dominates. 

But the importance of trade to Kazakhstan is decreasing, giving way to domestic services. Exports in 2019 amounted to 30% of GDP; in 2008, 57%. 

And Russia no longer dominates Kazakhstani trade. Russia buys a tenth of Kazakhstan’s exports; China and Italy buy more. Russia does dominate world sales to Kazakhstan; it accounts for 37%, more than twice China’s share.  Since two-thirds of Kazakhstan’s imports are capital goods, you could argue that by stabilizing the exchange rate of tenge for a ruble, the National Bank was making life more predictable for Kazakhstani manufacturers. Or you could argue that the Bank held steady that exchange rate simply because that was what it had always done.   

So decoupling would be difficult, but the question is whether Kazakhstan should try anyway. At the moment, the Kremlin can punish Kazakhstan for political incorrectness.  The main pipeline for Kazakhstan’s oil exports, the product of the Caspian Pipeline Consortium, runs through Russia, and the Russian courts this summer briefly banished Kazakhstani oil from the CPC pipeline for allegedly environmental reasons.  Coincidentally enough, these bans occurred right after Kazakhstani President Kassym-Jomart Tokayev criticized Putin’s War.

In self-defense, Kazakhstan is shifting oil to a pipeline running east from the Caspian Sea to China. Another pipeline runs to Baku, in Azerbaijan, west of the Caspian Sea, but it is probably too small for Kazakhstan to rely on. So it looks like Kazakhstan might decouple from Russia a bit by coupling with China.  

This has a political cost, because the Kazakhstani on the street is more suspicious of the Chinese than of the Russians.  Maybe he prefers the devil he knows to the one he doesn’t. For example, about six years ago, the Chinese began leasing farms in Kazakhstan. The domestic protest was so strong that Astana declared a moratorium on such leases in 2017.  Last year, Tokayev signed a bill banning sales or leases of farmland to foreigners. –Leon Taylor, Baltimore tayloralmaty@gmail.com

 

Note

Most of these trade figures are from the World Integrated Trade Solution at the World Bank. WITS is a useful resource. 

 

Good reading

Catherine Putz. Kazakhstan bans sale of agricultural land to foreigners.  The Diplomat. May 18, 2021.    

Thrice-told tenge tales

The contretemps between the presidents of Russia and Kazakhstan raise the distinct possibility that the two countries will go their separate ways; that Kazakhstan will decouple from its bearish neighbor. What are the economic implications of decoupling -- especially for exchange rates, which play a critical role in a small open economy like Kazakhstan (albeit one constrained by an economic union)?

Let’s run the numbers. Figure 1 tells the tale: For more than 16 years, the exchange rate of tenge for a ruble was as stable as a hydrogen isotope, around 5 to 6 tenge per ruble.  The few diversions occur at about the times that the National Bank sharply devalued the tenge with respect to the dollar. In February 2009, when the banking crisis had undermined the tenge, the tenge strengthened to 3.37 per ruble.  In 2015, when the Bank devalued the tenge twice, it rose in purchasing power to 2.62 in February -- and to 2.86 in August, when the Bank began to float the unruly currency (a float, at least, relative to the dollar). But in the wake of the Ukrainian invasion, the exchange rate of tenge per ruble gyrated far more than it had since 2005 at least. In late June, the tenge plunged to 8.83 per ruble, far weaker than it had been for at least 16 years.

 

Figure 1

 

Now consider the exchange rate of tenge per dollar since 2005, in Figure 2 below.  The Bank pegged the tenge to the dollar, with steep and permanent devaluations in 2009 and early 2015, until it launched the float. Then we were off to the races, and the tenge oscillated as never before, weakening to 500 tenge per dollar.  In January 2006, the exchange rate had been 134 tenge per dollar.  Those were the days….The gyrations do heighten after the Ukrainian invasion, but the volatility is not as unusual as for the rate of tenge per ruble. In short, over the long run, the Bank has tied the tenge more tightly to the ruble than to the dollar. Why?

 

Figure 2

       

 

Well, maybe the ruble is more stable than the dollar.  You never know. To test this argument, I looked at the exchange rates of the ruble and dollar per Special Drawing Right (SDR), a sort of currency created by the International Monetary Fund to allocate dough to the member countries. The data are from the IMF’s International Financial Statistics, at imf.org . Figures 3 and 4 are below. Clearly, the dollar is more stable than the ruble.   The statistics also bear this out.  The ratio of the standard deviation to the mean, which measures dispersion with an adjustment for the units used, is a wild .37 for the ruble and only .05 for the dollar.  True, the statistic is low for the dollar partly because the SDR is based on it (as well as on the euro, the yen, and other major currencies). Still, the contrast with the ruble is striking.

After 30 years of post-Soviet independence, why did the National Bank keep lashing the tenge to the ruble?  And now that Putin’s War has capsized exchange rates in the post-Soviet region, what is the Bank’s forex policy?  For the answers, don’t hold your breath.

Tenge exchange rates are from the National Bank, at nationalbank.kz  .  --Leon Taylor tayloralmaty@gmail.com

                                 Figure 3 

 

 

                                  Figure 4