LONDON Feb 11 Kazakhstan's hefty devaluation
could see other ex-Soviet states follow suit to protect their
trade against fallout from a slide in the rouble as Moscow moves
to float its currency.
The rouble has lost 6 percent against the dollar this year
and many analysts see that as the key factor that prompted
Kazakhstan, which buys nearly 40 percent of its imports from
Russia, to seize the initiative and devalue its tenge on Tuesday
by 19 percent against the dollar.
It may also push Belarus and Ukraine into devaluations of
their own - potentially a beggar-thy-neighbour cycle that risks
disrupting trade balances across the region.
"In all these countries, authorities are looking at the
rouble in their rear-view mirror," said Christopher Granville,
managing director at consultancy Trusted Sources in London.
"The rouble is the anchor currency for the wider trading
area so you are seeing other countries responding to Russia
allowing a sharp rouble move."
Kazakhstan attributed its move to global volatility caused
by the U.S. Federal Reserve scaling back its policy of printing
money through buying financial assets. But analysts saw the
explanation rather in an effective depreciation of the rouble
against the tenge by some 10 percent over the past year.
"The devaluation versus the dollar clearly targets the
rouble-tenge cross," said ING Bank's Dmitry Polevoy, who added
in a note to clients that calculations on a balance of payments
basis put fair value for the tenge roughly 10 percent stronger
than the 185 per dollar which is now the central bank target.
"So the National Bank of Kazakhstan wins a more beneficial
position for the tenge," Polevoy said. "The only question is
whether Russia will follow suit."
Tuesday's Kazakh move comes exactly five years after an
18-percent tenge devaluation.
Back then, plunging oil prices had undermined the rouble.
This time, too, the process began in Moscow, which last month
scrapped targeted rouble interventions, indicating a shift to a
fully floating currency was on track for 2015.
Along with the broader flight from emerging markets, that
sent the rouble to record lows against a dollar-euro basket.
For Moscow's customs union partners, Belarus and Kazakhstan,
the shift is particularly bad news because their local producers
can no longer use tariff barriers against cheap imports from
their giant neighbour.
Russian exports to Kazakhstan for instance have risen
sharply in the past year, trade data show, with 38 percent of
Kazakhstan's imports now coming from its northern neighbour.
Around 7 percent of Kazakh exports go to Russia.
Kazakhstan's trade surplus shrank by more than 10 percent
last year, while the current account surplus fell to a sixth of
2012 levels, a factor the central bank cited for its action.
Russia may not respond directly to the Kazakh devaluation;
though it is unlikely to stand in the way of further weakening
in the rouble, its exports to its neighbours are limited.
"For Russia, it's not a big deal," said Alfa Bank economist
Natalia Orlova in Moscow, who estimated Ukraine and Kazakhstan
each account for just 3-4 percent of Russian trade.
"But for these other countries, the fact that the rouble is
going down is really complicating things. They are feeling the
global situation, but through Russia."
EYES ON UKRAINE, BELARUS
Ukraine and Belarus may have little choice but to follow
Kazakhstan down the devaluation route.
"The National Bank will not react in the next week or two,"
said Dmitry Kruk, an economist at the Belarussian Economic
Research and Outreach Centre in Minsk.
"But if the devaluation of the Russian currency is more
prolonged, then it will have to take account of this fact and
let the Belarussian rouble fall."
The currency of Russia's western neighbour is linked to the
Russian rouble by a crawling peg.
In Ukraine, where the prospect of joining the Russian-led
customs union has contributed to mass protests against the
government in the past three months, there has already been
pressure on the hryvnia and the fact that a third of Ukraine's
imports come from Russia may add to pressure for a devaluation.
Last week, the central bank imposed currency controls to
slow a decline of 10 percent against the dollar since November
that was prompted in part by protests against the president's
rejection of a trade deal with the EU under Russian pressure.
But diminishing reserves, a huge trade deficit and a
recession are clearly tempting Kiev to let the hryvnia weaken.
The currency fell over 2 percent after the Kazakh
announcement while the Belarussian rouble also weakened.
Much will depend on what Russia does next.
Many reckon it will simply let the rouble slip gradually.
But the Kazakh move could inspire others to try and seize
the initiative in the currency war: "Their idea seems to be that
the trend of currency weakness will persist," Granville said of
the Kazakhs. "And they would rather get ahead."