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

Two dead American presidents weigh in on Putin's War

 

James Monroe:  "[The] respect which one power has for another is in exact proportion of the means of injuring which they respectively have of injuring each other."   

Or, as Teddy would say, "Speak softly and carry a big stick."  

--Leon Taylor tayloralmaty@gmail.com

Good reading

Tim McGrath, James Monroe: A life.  Dutton Books. 2020.

Twice-told tenge tales

 

 

Savvy speculators know that the exchange rate of tenge per dollar is slightly less sedate than the OK Corral.  So the steady-as-she-goes exchange rate of tenge per ruble always surprises. The figure above shows that exchange rate since January 1, 2021.  The long-run equilibrium is 6 tenge per ruble.  The lack of movement in the exchange rate over 2021 suggests that the National Bank of Kazakhstan may have intervened in the foreign exchange market more often than it has let on. Historically, the central bankers in Almaty (now in Nur-Sultan) have broken out into hives whenever the ruble value of a tenge rose or fell, because they viewed Russia as Kazakhstan’s leading partner in trade (which it isn’t. In 2019, the most recent "normal" year, Russia bought only a tenth of Kazakhstan’s exports.  Even before Putin’s War, Russia ranked only third among Kazakhstan’s export buyers, trailing Italy and China).  

And now for the real drama. In early March 2022, the West announced that sanctions against Russia would not preclude the central bank of Russia. The tenge strengthened accordingly, hitting 4 tenge per ruble on March 10.  Then the tenge weakened steadily to 9.1 tenge per ruble on June 30, about when Kazakhstani President Kassym-Jomart Tokayev publicly criticized the Ukrainian War in the glowering presence of Russian President Vladimir Putin.  In a few days, on allegedly environmental grounds, a Russian court ordered removal of Kazakhstani oil from the Caspian Pipeline Consortium, the main pipeline for delivering this oil. The pipeline runs from Tengiz and across Russia to Novorossiysk on the Black Sea, leading to European export markets.  Although another Russian court countermanded this removal in just a few days, it served its probable purpose as a warning shot at Tokayev. The CPC pipeline accounts for about a third of Kazakhstan’s government revenues, according to the journalist Almaz Kumenov.

Since June, the tenge has strengthened to 8 tenge per ruble. But this rate remains well above the equilibrium rate of 6 tenge. There are no compelling signs in the forex market that the tenge will strengthen to its equilibrium value anytime soon. So if you’re going to hold tenge, prepare to hold them until you die of old age.

The exchange rate data are from the National Bank of Kazakhstan. I retrieved them from nationalbank.kz  .   --Leon Taylor, tayloralmaty@gmail.com

 

References

Kumenov, A.  (23 August 2022). Kazakh oil exports across Russia interrupted for fourth time this year.  Retrieved from Kazakh oil exports across Russia interrupted for fourth time this year | Eurasianet

Lillis, Joanna.  (20 June 2022).  Kazakhstan-Russia frictions over Ukraine war go public.  Eurasianet.org.  Retrieved from Kazakhstan-Russia frictions over Ukraine war go public | Eurasianet.

Just the alternative facts, ma’am

In its story on the arrest of an opposition leader in Georgia, The Washington Post writes: “The unrest is the latest upheaval along Russia’s vast borders: Protests continue in Belarus over an August presidential election result that the opposition has denounced as fraudulent, and Kyrgyzstan recently had its third revolution in the past 15 years.”  Would some kind soul please buy for The Post a map? –Leon Taylor tayloralmaty@gmail.com

 

Reference

 Isabelle Khurshudyan.  Georgian opposition leader arrested, accelerating country’s political crisis.   The Washington Post.  February 24, 2021.  

When is a dollar not a dollar?

 

Economists are a conservative lot, but sometimes even they overestimate the cost of a long-run project.  Recently I saw an economist’s reckoning of the amount of aid that North Koreas would need to build a prosperous economy.  The economist thought that this would take $30 billion per year for 10 years.  So the total cost would be $300 billion.  Checkbooks, please.

The economist is using “current value”—the value of a sum in the moment that it is received. As I’ll explain, it is more common to use “present value”—the value today of a sum to be received in the future.

For example, suppose that the interest rate is 10%.  Then the present value of $1 to be received next year is 91 cents, since we can put 91 cents in a savings account today and receive $1 next year (the principal of 91 cents plus 9 cents in interest). The current value is $1, since we would receive next year a dollar if we withdrew our funds then. 

The advantage of present value over current value is that it enables us to compare the values of sums received at different times.  Yes, the current value of $30 billion per year for 10 years is $300 billion; but this tells us little, because we cannot compare this sum sensibly to, say, the sum of $25 billion per year for 15 years.  It is useless to compare the current values of these two sums, because each sum involves different periods.  The obvious thing to do is to express each of the two sums in terms of the same period—today. That’s what present value does.

Let’s return to our example of a $1 received next year when the interest rate is 10%. We’ve already seen that the present value of this dollar is 91 cents. To apply present value more generally, let’s express it as a formula.  In our example, the present value of a dollar to be received next year is PV = $1/(1+.1), since PV*(1+.1) = $1.  More generally, PV = S/(1+i), where S is the amount to be received next year ($1 in our example) and i is the interest rate (10%).   

We can extend the concept of present value to 10 years or to any other period of years.  A two-year example will show how this works. Suppose again that the interest rate is 10%.  We want the present value of $1 to be received after two years.  Suppose that we put the amount PV in the bank today. After one year, our savings account will hold the principal and interest, or PV*(1.1).  But this time, rather than withdraw this amount, we leave it in the bank for another year. After the second year. the savings account will have [PV(1.1)]*(1.1) = $1.  Solving, we find that PV = $1/(1.1)^2 = $.84.  In other words, if we put 84 cents in the bank today, we will have $1 after two years.  Thus the present value of $1 to be received after two years is 84 cents.

Generally, the present value of a sum S to be received after n years when the interest rate is i is PV = S/(1+i)^n.  

Your tax dollar at work

Now let’s return to the North Korean project.  Its present value reflects 10 annual payments of aid, each with a current value of $30 billion. To estimate this value, we will need the amount of money that, put in the bank today, would yield $30 billion after one year; plus the amount of money that, put in the bank today, would yield $30 billion after two years; and so forth. The present value of the project is PV = $30B/(1+i)^1 + $30B/(1+i)^2 + … + $30B/(1+i)^10.  The B denotes a billion.

We still need the interest rate.  For barroom calculation, a reasonable interest rate might be 3%, since this might roughly approximate the annual growth of real (that is, physical or human) capital over the very long run.  The idea is this: To borrow money for expanding their factories, producers are willing to pay an interest rate as high as 3%, since they can pay off the interest out of profits (expressed in terms of the new capital). Anyway, using this interest rate, the present value of the North Korea project turns out to be $256 billion. Not pocket change, but not $300 billion either.

In his proposal, the economist sums up the current values of $30 billion in each of 10 years to arrive at an estimate of $300 billion.  Most economists would argue that this overstates the true cost of the project, since its cost today is less than $300 billion. After all, if  we put $256 billion in the bank today when the interest rate is 3%, then we can pay out $30 billion (in current value) each year.  Or, to put it another way, if we put $300 billion in the bank today, then we can pay out each year, in addition to the $30 billion of "principal," the interest that has accumulated on it. The sum of those payments over 10 years will exceed $300 billion.

Note, incidentally, that present value falls when the interest rate rises—and rises when the interest rate falls.  If the interest rate falls to 0%, then present value will equal current value, since there is no interest. Always worth bearing in mind for a pop quiz. 

For simplicity, I assume no inflation.  Actually, I assume a lot of things; but for a Valentine’s Day post, the aphorism KISS seems apropos.  –Leon Taylor tayloralmaty@gmail.com

 

Good reading

Frederic S. Mishkin.  The economics of money, banking, and financial institutions.  Twelfth edition.  New York: Pearson.  2019.

 

 

 

Cantor’s game

 

 In Sunday’s Washington Post, Eric Cantor, a former House Majority Leader in the United States, explains that Republican politicians condone such lies as tales of rigged elections because of a “classic prisoner’s dilemma.  If the majority of Republican elected officials work together to confront the false narratives in our body politic…all Republicans will be better off. If instead most elected Republicans decide to protect themselves against a primary challenge through their silence or even their affirmation, then like the two prisoners acting only in their own interests, we will all be worse off.”

Cantor forgets that the prisoner’s dilemma is a dominant solution.  Regardless of what other GOP politicians do, your best strategy is to go along with the false narratives. Even if you and everyone else know that working together will benefit all, you will defect.

Sometimes a little math can actually help. The table below gives the payoffs for your game with another Republican politician.  In each cell, the first number is the payoff to you, and the second number is the payoff to the other GOP leader.  For example, if you denounce lies and the other Republican condones lies, then the payoff to you is zero points, and the payoff to the other Republican is 3. What will you decide to do?  Well, look at the second column, in which the other politician denounces lies.  If you also denounce lies, you will receive 2 points.  But if you condone them, you will receive 3 points. Since 3 is better than 2, you will tolerate false narratives when your fellow Republican denounces them.

Now suppose instead that the other GOP leader condones lies.  If you too denounce them, you will receive zero points.  If you condone whoppers, you will receive 1 point.  Again, your best strategy is to condone.

Since the other Republican faces the same dilemma as you do, he too will tolerate lies.  (Check it out for yourself by comparing payoffs to the other Republican in each row.) So the solution to the game is for you and your peer to condone baseless stories…even though you both would have gained by denouncing them (each player would get 2 points rather than 1).  This is the solution even if you and the other Republican know that the two of you would have gained had you both denounced lies.

   

You/Other GOP leader	Denounce lies	Condone lies
Denounce lies	2, 2	0,3
Condone lies	3,0	1,1

 

Cantor continues: “…Denouncing the false narratives and the conspiracy theories is the first step to winning back the college-educated, suburban and young voters Republicans have lost.” Without a doubt. But the problem is to convince every GOP politician that all others will act decently if she does. Lacking a solution to that problem, the Grand Old Party will blow itself up.

A similar game occurs in much of Central Asia as well as in the trans-Caucasian region and, for that matter, in Belarus and Russia.  Members of the party in power will assert that elections are free and fair, especially when they aren’t.  If all members will concede that elections are unfair, the party may gain supporters in the long run for its honesty. But if one member of the ruling power comes clean, he will lose the President’s support, regardless of whether his colleagues also tell the truth. So the safe thing for the member is to go along with the gag.   – Leon Taylor tayloralmaty@gmail.com

 

Good reading

Eric Cantor.  Many of my fellow politicians won’t tell voters the truth. The result was Jan. 6. Washington Post, January 31, 2021.

Avinash Dixit and Barry Nalebuff.  Thinking Strategically.  Norton, 1993.