It is customary to assume that Kazakhstan and Russia are two closely-knit financial-economic realms, however each one of them has its own specificities. We asked the chief analyst of GK TeleTrade Piotr Pushkarev to compare processes taking place in Kazakh and Russian financial sectors.
We asked Russian expert five questions, seeing if he will comment on the actions of regulators, interests of investors towards markets of two countries and perspectives of national currencies.
– Russian Central bank recently made a first stop towards lowering the base rate: by a quarter of percentage point down to 9.75%. And recently, chairman of the national bank Daniyar Akishev stated that in the second part of the year some conditions for softening of monetary policy in Kazakhstan too, might come in. Thus a question arises: To what extent do current credit rates in RF correspond to profitability of Russian producers, and aren’t they essentially prohibitive?
– Of course, Russian rates, which are still not just high but are 5% above inflation, greatly restrain financing of projects, especially of small and mid-size businesses. However, I cannot say that everything came to a halt: project that promise to be profitable obviously receive financing.
Also, businesses are not afraid to take out loans for them. A total loan amount of almost 100 bil. rubles was given to projects under the “program 6.5%” declared by central bank for specifically chosen projects. There are examples of projects under the “program 6.5%” also in mid-size business sphere, for example the loan given out to ISL which builds computing technology, for building of techno-park in Usady, Tatarstan. In small business, an example of such financing was recently for building of propathene pipes in Sverdlovsk oblast for the amount of 50 mln. rubles.
Even more of these projects are in the agricultural sphere, including in agricultural machine building. We would honestly like to see more projects of this kind in the sphere of high-tech, but here the issue is more in a lack of such projects rather than in the readiness of financing and supporting them.
Thus, rates could be and are lower for segments of business, but not for the whole business now. And we are accustomed to see negatives in that, they are obvious to everyone, but there are positives too. Because the financing is applied specifically for growth hotspots, a tough selection of maximally viable projects is conducted. Others do not pass this somewhat natural somewhat artificial selection.
Export projects, including in small business receive their favorable financing through Russian export center. Moreover, REC help find clients abroad for these business-projects, and are sometimes even ready to finance the foreign client itself, so that the loaned money could be used by the client when paying for the order. Thus great competitive advantages are created for most promising projects.
That kind of care is reserved for the best – or for what looks like the best and most promising option. As a result the economy us not getting uncontrollably pumped with money which allowed to achieve a respectable if not fantastic control over the inflation. If central bank was to let go of the rates for everyone and everything now, and considering our scope and our assiduous attitude towards money and saving, huge amounts of money would simply go into the “black hole”. Low inflation, on the other hand, creates a favorable environment of a different kind, and gives a certain level of predictability to business, and allows for planning. Thus, this could really be called an achievement.
However, I am of course in favor of filters becoming weaker, and financed projects increasing in numbers. And of course, it is time to lower the interest rate common for everyone in the economy. Not by 1.5 times or 2 times but at least by 2% in the next two or three years. This would give people an ability to create a family business, by taking a loan with a non-crazy interest rate and without risking getting into a financial serfdom. With lower interest rates both start-ups and enterprises of more experienced businessmen, including new business for which today’s rates are prohibiting, will become more common.
But to become too excited and get too far ahead of ourselves in the business of giving our cheap loans would also be foolish of us. High rates also result in an inflow of carry trade money – in bonds and other Russian equity. In order to gain on interest rate differences, on difference in profitability, international investors are willing to invest here, by lending to our ministry of finance and directly lending to the government, as well as buying our attractive corporate bonds. These investors also finance our large semi-governmental sector and banking sector and to a lesser extent our truly private sector. However, this way by which money flows into our country and such a process although on a smaller scale in Kazakhstan, is happening now as well.
– Today, level of inflation in Russia is twice as low as in Kazakhstan, even though the economies of two countries are similar. Why does that happen? Maybe Russian central bank works more effectively and is more qualified that our national bank, or are there other factors at play?
– If KR’s national bank decided to put tenge rate into free flow, there wouldn’t be sharp devaluations, there wouldn’t be slant in currency estimates and Kazakhstan would’ve become more appealing for international capital earlier. But it is better to do it right later than never or to be late. Floating rate was also late in Russia, but in the end they made it and nothing collapsed, on the contrary, a familiar system of market formation of rates coupled together with high interest rates proved effective. On the other hand, an inflow of money into the country comes for the most part through government structures anyway and then is distributed not so much through market principles, as through the plan economy approach: in reality a lion’s share of funds is distributed for selected projects by large banks that are under a partial or full government control.
Right now, however, it is probably the maximum available level of decentralization of investments. Regional banks will be more involved in distribution of these financial flows, which is being actively discussed now. For now however, it is large banks that have the best specialists, able to objectively gauge the benefit from projects: what is worth financing and what isn’t obvious. One should take into account sustainability of regional banks: funds shouldn’t get into nominal Tatfondbank in large amounts in order to disappear there.
We aren’t USA, where Federal reserve system, taking advantage of dollars monopolistic position, allowed itself to print 4.5 tril. dollars in 5 years and simply dump this money into financial system. But even they were forced to stop that process, because market bubbles became big, much exceeding in size real growth of income of firms, and the outflow of money from government bonds started: foreign investors that used to finance US economy en masse, stop doing it in such amounts. Thus, even for Fed, such policy has its limits, which explains the economically-motivated arrival of Trump’s team, which tries to start living based on real income and is looking for its own internal sources and reserves for development.
In this situation, when capital doesn’t know where to turn to, we can work on attracting this money in Kazakhstan and Russia. We are far from an investment boom, but the capital is still coming in, and thus system is working, and it is important to use it and not break it right now.
In Russia, just like in Kazakhstan, inflation is decreased through stability of currency rate, through trust of international and domestic investors, business and population, towards an idea of stable ruble and tenge. But there are objective things which are hard to fight. Qualification of employees of the national bank of Kazakhstan today is really high, but the level of foreign-exchange reserves of our countries is different. Even despite all the expenses of covering up budget deficit and a stable ruble, gold and foreign-exchange reserves of Russia are almost 400 bil. dollars. In Kazakhstan today, foreign-exchange reserves comprise $30 bil. including equity of national fund which are $93 bil. It is a lot but still a lot less than Russian reserves, so the level of trust is different too.
At the same time there are different ways to compare as well: current reserves of Kazakhstan are many times more than those Russia had in the nineties, and have we had those reserves back then, 1998 Russian default wouldn’t have happened. Also, reserves of the national bank are much higher than those Russia had in the early ‘00s, when Putin just came to power. By current parameter of Kazakh economy, National banks reserves are 70% of GDP and they have been growing at a good rate in the past year. So in that sense, we can talk of full reliability and sustainable nature, but both businesspeople and population needs time not only to get used to that idea but also to feel the sustainable nature of tenge in their own lives.
– Level of dollarization of deposits in Kazakhstan’s banking system over two times higher than in Russia’s banking system. Why do Russians trust ruble more then Kazakhstanis trust tenge?
– Let’s not forget that over here central bank was able to break the habit of banks investing into currencies from the beginning, having the ability to issue currency credit lines to banks directly from reserves, under very low rates: many large banks took advantage of it in order to specialize in currency. And then they started to look for new use for borrowed dollars – at some point having realized that now it is order to exchange currency for rubles… of all things.
Of course not right away, but with time this realization came: when oil prices stopped falling, when prices left the 30 mark and fixed at a higher positon, it turned out that there is no threat there, and the ruble is still cheap, plus interest rates on it are higher. Profit from operations of exiting form the “easy” loan currency into rubles, became apparent, in the same way that it was profitable to “milk” central bank before, receiving ruble liquidity and buying currency for that money. Thus, it is here, on the level of banks that it was possible to turn the process around, and then the population and business both started trusting the stable dollar.
Later what is important is a habit for predictability of exchange rate. Russians had more time to get used to the floating ruble and make sure that not only are stories of 100 for a dollar are fairy tales but that the rate wont stay fixed on 70 rubles anymore. Since the time of currency shocks of 2014-2015 we had two full years, and we had time to go through not just one quiet fall and winter, but the whole quiet year of 2016. So many issue are healed with time and in Kazakhstan people are starting to get used to stable tenge rate.
Time is needed for people to realize: it is unprofitable to keep money in currency deposits, interest is much lower and also the rate of dollar and euro constantly falls with regards to tenge. And thus an interest to national currency will inevitably return.
– Can we call current exchange policy of National bank of KR a market one? In a sense that regulator is really oriented at targeting inflation and doesn’t affect exchange rate of tenge on stock and non-stock exchange?
– I think that now that really is so, if only because in present conditions it is more profitable, and the currency is doing fine even without support. The example of a strong neighboring ruble helps as well, as well as increase of domestic goods turnover, Kazakhstan’s foreign trade is moving up and not only oil prices stay high – prices of raw materials and ore also went up. This is a global tendency that started before American elections, while Trump-mania bolstered this trend with America’s future needs to invest and buy many raw materials for infrastructure, bridges, roads and airports.
Also, dramatic rise of stock exchanges, when in expectations of future growth, infamous Trump-rally took place, all of this is beneficial to us now, and supports tenge in a natural way. In the same way the support comes purely financially through high interest rates. A rate of 11% for tenge, even of lowered by 2018, say down to the level of under 10%, like in Russia now, will still attract financiers from China and the west. For comparison: rate of national bank of China is slightly higher than 3%, and where will the Chinese bring their yuan; of course they will bring it to you and us.
Investors make no more that 2.5% in annual growth on US government bonds, as for German bonds the number is less than 0.4%, the more profitable Spanish and Greek ones still yield no more than 3%. Western stock exchanges are grossly outbid, and it is crazy to invest in them at such prices. Investors are not even interested as much in oil or iron ore prices, when they invest on our equity, since the prices of these stocks (especially of government bonds) isn’t directly related to prices of raw materials, but only indirectly. And if on the stock market of these extracting companies price risks exist, the guaranteed high payback of bonds is already there, and there are no risks to receive less or lose everything, except for purely country-related risks; and foreign investors already had the time to assure themselves in stress-resistance of our countries, as well as in working mechanisms of EAEU cooperation.
– How does the strengthening of Russian ruble affect Russian economy? Are there parallels with what is happening in Kazakhstan, where financing of economy by second-level banks de-facto stays at the same level or even slightly decreases?
– It is said that weak national currency would be good for financing and for exporters, since both Russia and Kazakhstan are export-oriented countries. But there is limit to advantages of this weakness. For example, cheap domestic and expensive foreign currency do not allow much for import of technology, interfere with import of components, in order to be more involved in international labor division, and not strew in one’s own sauce.
Adequately strong national currency suppresses inflation and stimulates investments, gives opportunity to estimate normal output from business, makes financial result of any activity more predictable and helps focus on development. Instant profit from very weak ruble or tenge would deprive us from prospects for future.
– Thank you for the interview!
