In a long-expected but still stunning move, Kazakhstan’s Central Bank has relinquished control of its exchange rate, allowing a free float. The currency immediately plunged against a basket of other world reserve currencies by some 23%, by far the largest drop in the history of the tenge currency, even surpassing last year’s unilateral 19% devaluation in February 2014. Likely the trigger was the devaluation of the yuan earlier last week. The reconsideration of the fixed exchange rates issue has become more pressing as the US Federal Reserve’s meeting in September (where it is believed they will raise rates) will change the equation.
In addition to the yuan and the Fed, Kazakhstan is facing renewed downward pressure and oversupply in oil markets, with the Brent global index falling below $50 once again, and sanctions pressure triggered by the conflict in Ukraine has created a largely untenable situation, resulting in rapid decline. Tajikistan and Kyrgyzstan are likely to suffer the most from the fall, according to BMI, and identified the next targets in the competitive devaluation sweeping through the emerging and frontier market world as the Kyrgyz som, the Turkmen manat, and the Tajik somoni. Central Bank Governor Kairat Kelimbetov announced the Central Bank is pursuing an inflation-targeting monetary policy in the wake of the devaluation.
There is, however, a bright side. Kazakh exports have become more valuable now that they are cheaper in end markets with more relatively expensive currencies. Kaz Minerals, a copper mining company, had its shares rise some 20% today after the announcement, simply due the FX (foreign exchange) differential.
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- Russia’s largest private oil firm Lukoil is selling its stake in several Kazakh oilfields to Chinese energy company Sinopec for roughly the equivalent of $1.09 billion, offloading its 50% share in Caspian Investments resources, which owns shares of the major fields in Kazakhstan in Tengiz, Karachaganak, and Kumkol. Offloading these investments is probably an effort by Lukoil to remain liquid in the coming months.
- Turkmenistan recorded from January to July 2015 some 7.8% growth in oil and gas production. This figure was announced at a meeting of the Turkmen Cabinet of Ministers, and volume of all financing resources represented a 7.9% growth from the same period of 2014, odd considering that global commodity prices are down and the only major export that Turkmenistan has is natural gas. Nonetheless, other sectors of Turkmenistan are experience a rapid rise in domestic investment, most notably the construction and agricultural sectors, which both recorded double digit growth.
- Renewed fighting and artillery shelling in Ukraine has dampened expectations that the Minsk II Accords will hold, as Russian-backed separatist military units led an assault by tank and artillery on the strategic town of Starognatovka, a key in-between point between the capital of separatist resistance, Donetsk, and the key port city of Mauripol. The new offensive has revived a key debate in Washington – whether the US and NATO establishment can politically afford to send lethal aid in the form of weaponry to Kiev.
- The Russian economy is still failing by two key metrics, making the situation still appear to be largely hopeless in the eyes of most analysts. Retail sales and Capital Investment both continued to decline in July, putting additional pressure on the CBR to cut rates again (which would mark the 6th intervention on the part of the CBR this year alone on the key funds rate). Tom Levinson of Sberbank, said that every meeting of the CBR has produced a rate cut, and as a result it is likely that they will pause to gauge if the 25 bps rate bump by the US Federal Reserve will come into play. Whatever the play by the CBR, retail sales have fallen some 9.2% YoY.
- Additional Gulnara Karimova associates have been arrested in Uzbekistan, all with current or former business ties to the former heiress. Some of them include two former senior managers of a local Coca-Cola bottling plant, and several financial advisors. Early last year, the Uzbek Prosecutor-General’s office announced the launching of the criminal case against the group with the usual charges of embezzlement, money laundering, and corruption.