Central Asia’s ratcheted ruble zone remorse

March 30, 2015 3:02 PM (UTC+8)

 

By Gary N. Kleiman
Despite the ruble’s recent bounce with global oil prices, the Asian Development Bank joined other official lenders recently in downgrading the economic growth forecast for Russia’s closely tied CIS neighbors.

After 5% expansion in 2014, this year’s pace was cut to 3.5% on reduced trade, investment, and remittances. Global financial markets with small positions had largely ignored the fallout and focused on major credit and securities exposure to Moscow under recession and sanctions, but they have increasingly soured on Central Asian and Caucuses countries run by aging autocrats with poor competitive and reform records. From oil exporters Kazakhstan and Azerbaijan to Eurasian Economic Union members Armenia, Belarus and Kyrgyzstan, these assets have been marked down to “distressed” awaiting Russian orbit shifts delayed for decades.

The European Bank for Reconstruction and Development earlier warned that the the sub-region faces 1-3% medium term growth cuts from the Russia-Ukraine crisis and commodity price slump. The IMF pointed out that worker remittances, which account for 30-50% of GDP in Georgia, Tajikistan and Uzbekistan, began to fall in the first quarter of 2014. The ruble’s 40% fall against the dollar slashed incomes and compelled comparable devaluations across the zone, as central banks also hiked interest rates and foreign exchange controls. Inflation has often spiked to double digits and returning migrants will aggravate already steep poverty and unemployment.

Belarus was first to enter President Putin’s Eurasian Union but his close ally Lukashenko has bemoaned reliance on Russian trade, banking and remittances for half of output. He demanded cross-border payment in dollars rather than national currencies, and doubled interest rates and taxed foreign exchange trading at the end of last year. As the local ruble sank to a 15-year low, he sacked the central bank head and prime minister and invited the IMF to restart program talks after a post-2008 effort was derailed. The Fund recently completed a visit and Moscow tried to quell dissatisfaction with the promise of a $2 billion loan.

Kazakhstan’s $225 billion economy dominates the area as the main hydrocarbon exporter alongside Azerbaijan and Turkmenistan. President Nazarbaev postponed a second devaluation after one in early 2014 until imminent snap elections which will extend his post-independence tenure. Analysts expect 20% depreciation despite a recent order to banks to repatriate dollars. The ADB forecasts just 2% GDP growth this year with oil exports and mining falling over 10%. The giant Kashagan field remains in ownership and royalty dispute with foreign partners. The President’s 2014 housing and infrastructure initiatives have lost momentum, and residual bad loans from the 2008 crisis banking remain one-third of the total.

Through the first quarter the stock market declined 20% on the MSCI Frontier Index, and investors have dumped sovereign bonds despite recent global market re-entry. They fear the BBB investment grade rating will again disappear, and took large losses from consecutive restructurings of state-owned BTA bank. The Kazakhstan stock exchange is also held down by its stake in Kyrgyzstan’s one next door as the country prepares for admission to the Eurasian Union in May. Former communists still hold power there in a multi-party coalition, and the IMF estimates that a one percent Russian growth drop fosters a 0.5% Kyrgyz one. The Kumtor joint venture gold mine as the main company represents a “vulnerability” with management clashes and price fluctuations, according to the ADB. When the currency peg first came under pressure officials banned private exchange bureaus further alienating foreign investors. Turkmenistan’s and Azerbaijan’s sudden devaluations likewise reflected secretive command style policies by authoritarian rulers alongside competitive realities.

Armenian, Georgian and Mongolian bonds are in JP Morgan’s frontier index and have sold off even though they are illiquid, as most of the ex-Soviet Union, with the Baltics a  notable exception, is shunned as an asset class. To regain confidence the area must now mirror other smaller emerging markets and embrace new Eastern and Western commercial and monetary ties to aid domestic cleanup. Betting on such diversification would be an anti-Putin “put” for a portfolio bottom bounce.

Gary N. Kleiman is an emerging markets specialist and senior partner with Kleiman International, a research and advisory service on economies worldwide based in Washington, D.C. 

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