Kazakhstan: No cut in oil production, no devaluation

Kazakh Oil Minister Vladimir Shkolnik has announced that it has no plans to cut oil production, despite the over 50% decline in the prices of common oil benchmark indices like Brent Crude and West Texas Intermediate. Shkolnik said that no production decreases were planned for 2015, despite the very clear warnings about lower profits and government revenues. Shkolnik said nothing about revenues, only focusing on production targets, and expressing optimism that the targets will be met for the year. However, this is only half the story.

The real clincher for this production target hinges upon whether the tenge will be devalued once again against the dollar to match the ruble’s decline. Most other former Soviet Union countries heavily tied to the price of oil have let their currencies adjust to the new exchange rate. But Kazakhstan appears to be counting on artificially inflated profits from oil production without lowering the exchange rate. While this wealth will accumulate in terms of the tenge, the overvaluation of the currency will increase costs for everything from equipment imports to cattle exports.

Real effective exchange rate for Kazakhstan is at some 11 percent above its long term average, causing a sharp decline in domestic consumption of goods and services as residents cross the border into Russia to buy cheaper goods taking advantage of the high rate.

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