The Eurasia Union’s Loutish Launch
Russia reversed runaway ruble depreciation with improvised emergency measures at year-end as the Eurasian Economic Union went into effect with core ally Belarus insisting on trade in dollars as it doubled interest rates to 50 percent and imposed a 30 percent tax on foreign currency buying. Its rouble reached a 15-year low as President Lukashenko sacked the central bank head and prime minister in response and then banned informal dealing and ordered exporters to surrender half of sales. The latter’s replacement was presidential chief of staff and former Ambassador to Russia and has hosted talks in the capital Minsk to end the Ukraine conflict. West European banks have arranged loans and bond issues despite Lukashenko’s condemnation for anti-democratic practices as he faces re-election next year. The IMF for its part has resumed relations short of a formal program and urged thorough banking, monetary policy and structural reforms to avoid another post-2008 like collapse. The biggest union country Kazakhstan has thus far spurned capital controls and devaluation as the tenge hit a 2.5 to the ruble high in mid-December while keeping within the 185 to the dollar corridor in place since early 2014. However the crash in the price of oil which accounts for 60 percent of exports has prompted large central bank interventions as banks were instructed to repatriate assets bringing reserves close to $30 billion apart from the sovereign wealth fund’s $75 billion. GDP growth is due to slip to 3 percent in 2015 with the petroleum contribution previously in trouble from delays with the Kashagan field, as President Nazarbaev unveiled a multi-billion dollar pipeline of infrastructure and stimulus spending with support from multilateral lenders which narrowed the MSCI stock market index’s double-digit loss. The IMF in its December Article IV visit recommended more exchange rate flexibility and bank cleanup to achieve the medium-term 10 percent NPL ratio goal. It cited business climate priorities ahead of desired WTO accession as it diversifies commercial partners into East Asia and the Persian Gulf. Neighboring Kyrgyzstan also bowed to pressure on its currency peg with the ruble’s meltdown and shut private exchange bureaus as mining export values likewise plunged. The move raised fears of reversion to authoritarian rule after open elections were held with former Communists still holding power and struggling to honor an IMF anti-poverty arrangement.
Moscow went into the month-long winter holiday with a raft of initiatives designed to aid the currency and banking system, which experienced its first rescue with a $2.5 billion operation for mid-size Trust Bank. The government will inject fresh capital into state banks as regulatory leniency was granted on mark-to-market and loan impairment standards. Additional foreign exchange and debt refinancing facilities were offered, and commodity exporters were instructed to relinquish proceeds. The 17 percent benchmark rate has lured back deposits but households particularly with hard currency mortgage debt remain united that recession and double-digit inflation next year will test preferences.
