Why Kazakhstani tenge won’t fall with Russian ruble

CEO and majority stakeholder in Freedom Holding Corp.
The op-ed of Timur Turlov, CEO of Freedom Holding Corp.
Тимур Турлов
Photo by Valery Ayapov

Russian Minister of Finance Anton Siluanov said that preparation for the upcoming three-year budget is going to be the most challenging in his career. Given that Siluanov has been serving as finance minister since 2011, this situation might be the toughest situation since the 1990s.

It has been a long discussion of factors that can intensify the budget crisis in Russia. On one hand, the country has to find new sources of funds as it can no longer rely on Western money because of sanctions.

«Once we bumped into sanctions, we realized that our country doesn’t produce many of the key technologies. That’s why we have to develop these competencies on our own by launching a kind of national program. It’s going to take time, but it is necessary. We simply won’t be able to reach technological sovereignty without such a program,» said the minister. In addition, the Russian government is beefing up its allocations to public mortgage programs and, of course, it has to spend money on its army in Ukraine and continue to support law enforcement agencies all over the country.

Although no accurate figures are publicly available, we can make some preliminary estimations of the planned expansion of the Russian budget based on reports from the Ministry of Finance and the budget commission. In August both entities said the federal budget will need $83.6 billion of additional funds annually for the next three years. This means the country’s budget might be expanded by 20% (4% of the GDP).

The trick is simply to find extra money in the situation when the county is gradually losing its sources of funds. After the invasion of Ukraine, Russia became an object of Western sanctions which have hit oil, gas and coal exports – traditional ones for Russia. Despite high prices on the global market, Russia is forced to watch its revenue shrink. In August, the finance ministry reported a 22% decrease in oil and gas revenue.

At the same time, non-oil revenues have also shrunk (by 29%) because of sanctions and the exodus of international companies from Russia. As a result, the federal budget of Russian lost about 26% of its regular revenue. It is not an easy task to find new sources of funds. The Russian National Wealth Fund (equivalent to the National Fund in Kazakhstan) is partially frozen. As of September 2022, the fund assets were estimated at $199 billion, though this figure is gradually going down. In terms of cash, the fund reported $133 billion of reserves. However, a big part of this money doesn’t work either simply because the Russian authorities have no technical ability to sell the EU’s euro, British pound or Japanese yen: the Bank of Russia gives rubles to the government and takes foreign currency from the National Wealth Fund. In other words, the regulator issues new money.

The government is likely going to use this tool quite often. With help of emissions, the government can cover all public costs for years. It is important because other options are unrealistic. Russia simply can’t increase its sovereign debt in a situation when the national economy is in free fall. The country can’t raise the tax burden for businesses and citizens either.

All these factors may cause the weakening of the ruble in the short term. Emission might be dangerous and the situation in Turkey where the inflation rate rocketed by 70% and the local currency has dropped twofold against the US dollar is a vivid example of that. However, in contrast with Russia, no sanctions have been imposed on Turkey; its industrial sector has no problems with components, money or business relations with Western countries.

The surplus of current accounts in Russia is shrinking as well. Despite quite a big number of $138 billion in January-August 2022 if compared to $61 billion in the same period last year, there is no doubt that this figure is trending downwards. According to the Russian central bank, this rate decreased to $16.5 billion in August from $21.7 billion in July.

Any direction the Russian ruble may go will be important for Kazakhstan where the ruble accounts for 23% of transactions with foreign partners and about 70% of trade within the Eurasian Economic Union (EEU). Moreover, Russian goods account for 30–40% of all imports to Kazakhstan. Several times in modern history the devaluation of the ruble (in 2014-2015, March of 2020 and February 2022) caused subsequent devaluation of the tenge. And the risk of repetition of such a situation is quite big.

However, this time there are not many reasons that the tenge may be taken down with the ruble. In the first half of the year, current accounts were about $6.7 billion in surplus in Kazakhstan. For comparison, the rate was about $2.8 billion in deficit last year. The trade balance, which is a key component of the payment balance in Kazakhstan, has risen 2.5-fold.

The capital account has also shown steady growth of 60%. Despite technical limitations linked to the Caspian Pipeline Consortium, Kazakhstan’s exports have increased. Moreover, Kazakhstan’s government can easily balance its revenues and costs thanks to the $53 billion in its sovereign fund, although the government has expanded its public costs.

The external conditions are also supportive for Kazakhstan. Metal prices are sky high. The oil price is at $90 and unlikely to change until the end of the year.

Even though both Russian and Kazakhstani economies share a host of similar attributes, their national currencies sit in different boats and each of them floats in its own way.

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