Kazakhstan’s Hushed Currency Corridor

Kazakh stocks were buoyed at home and in London on the central bank’s abrupt 19 percent devaluation to the 185 zone versus the dollar, in part due to the Russian ruble slide at the same time within their Eurasia Economic Union as dual oil exporters, as the current account surplus almost disappeared in 2013 despite 5.5 percent GDP growth. The move came after the departure of long-serving governor Marchenko, and coincided with the recent state stake disposal of BTA Bank as its former executives accused of misappropriation are pursued through the local and foreign courts. Italy helped enforce an extradition order against estranged Nazarbaev family members accused of sinking the institution five years ago and forcing a government rescue and severe serial bond write-downs for overseas creditors. The sudden depreciation evoked parallels to 2007-08, when banks could no longer service heavy foreign currency borrowing in a precursor to broader global crisis, but they and the sovereign have since refrained from major issuance. The adjustment could aid the small manufacturing sector and broader commodity diversification, but could also aggravate 5 percent inflation and upset formal targeting plans. The shakeup may also have political overtones as the President considers standing for a fifth term as he separately hints at removing the “stan’ from the country’s name on the belief it is pejorative in investor perception. FDI remains steady at 5 percent of output despite consortium bickering over the mammoth Kashagan oil field as it enters operation, and corporate governance breaches in London that have prompted independent director resignations and share selloffs. The peg loosening was in stark relief with Ukraine’s imposition of capital controls to defend the currency and stanch reserve bleeding, as Moscow paused its $15 billion assistance package as President Yakunovych tried to hang onto office. Brussels and the US have been in consultation over possible economic aid that would reflect longstanding IMF reform conditions, while the Russian response was on hold during the Sochi Olympics and fluid government composition with the prime minister replaced early in the confrontation.

Limits on foreign exchange access and payments abroad spooked depositors and instigated withdrawals at second-tier banks. One in trouble is owned by a construction oligarch whose projects have been stalled on non-payment and lack of equipment. The morass there represents a shift from last year’s Emerging Europe focus on Slovenia, where the MSCI frontier index recovered on a successful $3 billion international bond placement at reasonable yields despite the IMF’s warning that bank recapitalization was just a portion of the immediate heavy fiscal load. It questioned the basic welcome for foreign direct and portfolio investment as privatization post-independence continues to be softly pedaled.