Azerbaijan’s currency plunges after peg to the dollar abandoned

On Monday, Azerbaijan’s Central Bank abandoned its peg to the dollar, allowing its currency to tumble by almost a third of its total value, dragged down by the consistently lower price of oil benchmarks. Against the US dollar on Monday morning, the manat was trading 32.3% weaker. The CB released statements soon afterwards, specifically citing the decisions of Kazakhstan’s Central Bank to devalue, which to date has resulted in an enormous drop in value of almost 40% since July. Azerbaijan’s export balance is 95% oil and gas, and accounts for 75% of government revenue and 40% of GDP.

Azeri CB governor Elman Rustamov said that “the peg was no longer sustainable. Without action, foreign reserves would have been entirely depleted within six months at the current spending rate.” According to the article, the CB had spent $589m propping up the manat in November alone. Most Azeri citizens (some 70%, according to Fitch) hold their bank reserves in foreign currencies, meaning that purchasing power rose.

Major retailers halted their business for the week and ordinary consumers held off on purchases due to fears about the plummeting value of the currency. Most expect that the manat will devalue even further before an equilibrium is reached.

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News Briefs:

  • Negotiations between EU Trade Commmissioner Cecilia Malmstroem and Kiev about a landmark deal between Ukraine and the EU, which had been at an impasse due to Russian objections, have ended despite disagreements. The landmark trade deal is expected to be enacted in full force on January 1, 2016. The trade deal, part of the EU Association Agreement with Ukraine, was the source of the protests on the Maidan that led to the civil war between Russian-backed separatists in the East and Kiev in the West.
  • Kazakhstan has signed a landmark deal with the EU to promote closer relations. The EU-Kazakhstan Enhanced Partnership and Cooperation Agreement was signed yesterday in Astana by EU Foreign Policy Chief Federica Mogherini and Kazakh Foreign Minister Erlan Idrissov. The agreement is far looser than the arrangement between the EU and Ukraine, without any free trade zones offered to other eastern neighbors like Georgia, and Moldova. Just the previous day to this signing ceremony, President Putin hailed Russia’s relationship with Astana, citing it as a key member of the Eurasian Economic Union (EEU).
  • Russia has warned that any considerations that the EU is taking to abandon the Nord Stream gas pipeline project from Russia’s Baltic coast to Germany will only hurt Europe’s energy security, citing “considerable progress in terms of legal, technical, economic, and financial aspects of this agreement,” according to Russian Economy Minister Alexsei Ulyukayev. The source of the concern on the Russian side came after Italy raised it as an issue of debate over the extension of Russian economic sanctions.
  • Kyrgyzstan’s government said it halted talks with Canadian Centerra gold on restructuring the Kumtor gold project, saying only that the “current agreement runs counter to national interests.” The decision sent Centerra shares sinking 6% on the Toronto exchange. Centerra has been engaged in negotiations with the Kyrgyz government, attempting to get it to swap the republic’s 32.7% stake in Kumtor for full 50-50 joint venture status. Centerra has been estimating lower reserves of gold in the mine, saying this was a negotiation ploy, citing that Centerra initially estimated 8.5 million ounces of proven reserves, later amending that estimate earlier this year to 6.1 million ounces. The former Kyrgyz Prime Minister, Joomart Otorbayev resigned after failing to clinch a restructuring deal, and the negotiations remain a top priority for the cash-strapped government.
  • Afghan and Russian government forces seized some 600 tons of opium in a joint operation in the northern Afghan city of Doshi. The Russian Federal Drug Control Service spokesman, Viktor Ivanov said that the operation was headed by the Afghan anti-drug police based on information provided by his service. The Golden Crescent, one of the top drug producing regions in the world, is fully supplied by Afghan farmers.
  • The Russian government has begun to build new nuclear reactors in Iran next week, according to the deputy head of the Atomic Energy Agency of Iran, Behrouz Kamalvandi. The announcement came after Russian-Iranian deal was declared last year, to build an additional two reactors at Iran’s first civilian nuclear power plant near Bushehr. Russia’s Trade Minister Denis Manturov said today that to assist in the construction, Russia was considering lending out $5 billion to ensure the contract is completed on time.
  • The European Bank for Reconstruction and Development will lend Tajikistan $2 million in order to improve the resilience of microfinance institutions including Humo, a non-bank microfinance institution (MFI) in Tajikistan. The new line of credit comes from the EBRD’s Pilot Program for Climate Resilience, a new program whose formation was incentivized by climate change and whose primary purpose is to assist countries deal with its side effects. Tajikistan, for instance, is particularly vulnerable to a rise in temperature as it depends on water from glaciers found primarily in the Pamir mountain range. Humo’s operations are concentrated in rural parts of Tajikistan outside of Dushanbe and has assisted farmers and local agricultural workers adopt renewable energy and farming practices designed to decrease soil erosion and reduce pressure on water and energy resources.
  • Iran is reportedly in talks with Red Shipyards, a large Russian shipbuilding and construction conglomerate, to develop large-scale offshore oil rigs in the Caspian Sea. The head of Red Shipyards stated recently that he intends to sign an agreement for the “joint construction of rigs for exploration and production of hydrocarbons in the waters of the Persian Gulf.” Others have voiced their support for the collaboration and have called for it to be gradually expanded to include Caspian littoral states Kazakhstan and Azerbaijan as well.
  • TASS News reports that the export arm of Gazprom will hold an auction for natural gas supply to Baltic nations like Lithuania, Latvia and Estonia in the beginning of 2016. The contracts, insofar as they have been described by Gazprom, would supplant existing supply contracts which are destined to expire at the end of this year. It will be interesting to see how rumors of increased competition between the US and Russia, particularly in natural gas, plays out in the Baltics.
  • Regional and financial expert Chris Weafer (as well as Steppe Dispatches interviewee) has written a blog post on the FT’s beyondbrics page, speculating if the Russian state can remain stable with oil at $30. The post notes the superior performance of the ruble dominated MCX exchange and index of companies, up 17% year on year, while the regional multi-market index from the MSCI (MSCI EM) lost 17% since last year. Cheap valuations and high yielding Russian government securities accounted for the above-average return. Weafer speculates that lower oil will force the government to invest in diversification and creating more value-added products to take advantage of the lower rouble value.
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