Why the Ruble and Oil Are Getting Cheaper While the Tenge Is Getting Stronger

Lately the dollar has settled at around 360 tenge, give or take 5. Meanwhile, the dollar now costs almost 80 rubles in Russia, and oil on world markets is trading at about $30 a barrel.

It seems the experiment with a market-based tenge is over, and Kazakhstan is returning to the familiar pattern of the tenge moving within a set range.

Let me recall that on August 20, 2015, we switched to a freely floating tenge rate. In a single day the national currency collapsed, and the decline continued. The leadership of the National Bank of Kazakhstan (NBK) then returned to the market, supporting the exchange rate and providing liquidity to banks. For better or worse, the policy was adequate. Within three months, the head of the National Bank was replaced, and his successor again set the tenge adrift, this time against a backdrop of liquidity "drying up." In the end, we came back to where we started: providing liquidity to second-tier banks and fixing the exchange rate.

This whole imitation of market-based exchange rate regulation is simply a fiction.

For some reason, Kazakhstan's monetary authorities decided to follow Russia's example in exchange rate formation, arguing that our borders are open and we need to support domestic producers. But the new market-based rate did not help much. Before moving to such a regime, Russia spent about ten years building its foreign exchange market and de-dollarizing its economy. In Kazakhstan, they thought they could settle everything in three months. Alas, there are no miracles, and the abrupt change in exchange rate policy created new problems that only aggravated the old ones.

First, our country's heavy dependence on imports makes it impossible to shield consumers from currency risk. So people will save dollars to buy cars, furniture, vacuum cleaners and televisions, because we import all of these. Unlike in Russia, where ordinary citizens drive a Lada Kalina and buy appliances made in Kaliningrad or Lipetsk, we are used to driving Toyotas and using Chinese-made appliances. To switch to Russian cars and appliances, consumer psychology would have to change, and that will take no less than 3–4 years.

Second, a new exchange rate regime should be introduced in a period of growth, not decline, so that the overall trend is toward strengthening rather than weakening. I understand there was little time, but under those conditions it would have been better to keep using the old, proven method of a fixed rate, or to introduce a corridor that the state would defend. The country's economic authorities chose otherwise, and as a result devaluation expectations weighed on the tenge and continue to do so. No one "switched over" to the tenge, as had been expected. On the contrary, as soon as they receive cash, people buy dollars. And we got another negative effect: under the fixed rate, no one exchanged everyday cash, but under the new market policy people have started to exchange even the money on their bank cards.

Third, introducing market-based methods of exchange rate formation requires a developed financial and foreign exchange market, with smoothing of fluctuations that are not driven by market fundamentals, for example, when trading volumes move the rate during tax payment periods or large repayments of external obligations. The National Bank can anticipate all of this and should smooth out sharp swings. When the entire foreign exchange market consists of a couple of dozen banks, nothing will develop it.

Fourth, there are problems with the openness of officials. Their words do not always match reality. One needs the courage to tell the truth and to give real arguments in support of particular actions. When market participants are unaware of these actions, they start to speculate, and good intentions lead to the opposite results.

It is logical that, under current conditions, the National Bank should set a corridor for the dollar rate, provide currency swaps, and fix the deposit rate at the level of the maximum yield on a currency swap. The deposit rate at second-tier banks should be liberalized, but the very concept of a deposit should be changed. At present any demand account is called a deposit, which makes forecasting difficult for a commercial bank.

One more thing. When many media outlets, at the National Bank's prompting, write that the share of overdue loans in the country is 10%, it is laughable and undermines trust in the quality of the National Bank's inspections. Only in Kazakhstan, amid an economic crisis, a dollarized system, rising interest rates and shrinking liquidity, is the share of overdue loans falling! That deserves a Nobel Prize.