Ruble Aftershocks Unnerved Even Russia’s Least Exposed Neighbor

A brief crash in the ruble last week jolted the foreign-exchange market in Kazakhstan, underlining how risks can spread even to a neighbor deemed least vulnerable to flows of Russian capital.

(Bloomberg) — A brief crash in the ruble last week jolted the foreign-exchange market in Kazakhstan, underlining how risks can spread even to a neighbor deemed least vulnerable to flows of Russian capital.

The Russian currency reversed losses soon after the central bank called an emergency meeting and capital controls came back to the government’s agenda. It ended the week with the world’s biggest rally against the dollar.

By contrast, the Kazakh tenge’s plunge continued until Friday, a stretch during which it retreated more than any other currency globally apart from Argentina’s peso. When the Kazakh central bank tried to make sense of the depreciation, it found the declines were a “reaction to a weakening ruble,” Deputy Governor Aliya Moldabekova said in an interview.

The tenge was little changed on Monday against the dollar after appreciating by nearly 2% on Friday following five days of losses.

“It’s clear a connection remains between the exchange rates of the ruble and the tenge against the dollar,” she said in the capital, Astana. “But now we are no longer seeing a high or linear correlation as it was before.”

The National Bank of Kazakhstan didn’t intervene in the currency market during the selloff, according to Moldabekova. One of the reasons for the depreciation was the unwillingness by exporters to sell foreign exchange in anticipation that the tenge would weaken further in the wake of the ruble’s initial drop, she said.

“More and more, the tenge’s dynamics is dictated by the sentiment of global investors, who feel more comfortable entering emerging markets — including the tenge,” Moldabekova said.

Extensive economic and commercial links have long ensured the national currencies of Russia and Kazakhstan frequently moved in lockstep with one another. Russia is Kazakhstan’s biggest trading partner and their border is the world’s second-longest after the frontier between the US and Canada.

But while the tenge and the ruble both plunged in unison after the invasion of Ukraine in February 2022, the currencies then began to diverge, as a windfall from Russia’s energy sales abroad and declining imports drove up the value of the Russian currency. 

A deterioration in foreign trade put pressure on the ruble this year, however, setting the stage for one of the steepest depreciations in emerging markets. The tenge deviated even more as it strengthened against the dollar in all but two months this year through July.

The Kazakh currency has gained nearly 90% against the ruble since late June 2022.

Fading Link

“The correlation between the ruble and the tenge has weakened a lot lately, because the Russian ruble now has its own fundamental story” that has “nothing to do with the tenge,” Moldabekova said.

As sanctions put a financial choke on the Kremlin after the war began, billions of dollars in money leaked out and made its way to Russia’s neighbors to the south, heating up economic growth and inflating the value of their currencies.

But even as the capital flight started to fizzle out this year, Bank of America Corp. analysts said in July Kazakhstan appeared resilient, in contrast with smaller economies such as Georgia and Armenia that are “most exposed.” BofA this month said the tenge offered “attractive carry, which is difficult to ignore.”

While the latest bout of the tenge’s volatility showed contagion can travel fast, Moldabekova said that besides the lack of exporter-currency sales, the turbulence was made worse by the pent-up demand for dollars during a period when heavy tax payments are due this month.

It’s a time when the tenge usually appreciates and therefore prompts some to purchase dollars. An increase in hard-currency buying heaped more pressure on the tenge, she said.

Moldabekova said the central bank saw no evidence of any major institutional investor shorting the local currency, with most non-residents preferring to enter by way of short-term tenge securities sold by the Finance Ministry. 

Different Paths

In a sign of further decoupling from Russia, Kazakhstan’s central bank said on Monday authorities are suspending the mandatory requirement for state-run companies to sell a portion of foreign-exchange revenues in the domestic market. 

Russian officials, on the other hand, last week discussed tightening such capital controls but opted in favor of an informal agreement with exporters to surrender more of their foreign revenues.

–With assistance from Mark Sweetman.

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