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