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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News Briefs:

  • Russian financial markets have rallied in recent days, despite the downgrade of its sovereign debt by Moody’s and S&P since the turn of the year. Moody’s report cited tensions over Ukraine as the reason for its negative outlook, and that a decision that “undermines timely payments on external debt service” and has raised questions about Russia’s willingness to actually pay theirs and Ukraine’s debt obligations. Percent changes in several Russia-focused indices were up, but this rally coincided with a rally in oil prices that started at the end of January.
  • The latest round of the P5+1 powers’ negotiations with Iran have concluded in Geneva, with both sides reporting substantive progress. Iranian Foreign Minister Javad Zarif in particular said that both sides had found a better understanding. Western officials cited movement but also said that the discussions were a moving target, meaning that changes in any one area of the negotiations would have repercussions for other parts of the negotiation.
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