In the past few months Russian ruble has strengthened its positions against US dollar and euro, the same happened to Kazakhstani tenge. Meanwhile Russian economic sources and many experts warn that the situation will change soon, and Russian ruble might lose its weight against US dollar. In Kazakhstan, however, ministries and National bank of KR don’t make any forecasts with regards to exchange rates, citing that the latter is determined by the markets.

In order to make some sense of what is going on, we asked Russian financial analysts to comment on the situation, by answering three questions.

Has the strengthening of Russian ruble affected Kazakhstani tenge? If yes, then due to what factors? Does that mean that if Russian ruble weakens by the end of the current year, the same fate will await tenge?

Sregey Polygalov, head of analytical group TeleTrade Central Asia:

Naturally, the correlation between rates of tenge and ruble exists. With a strong economic cooperation between two governments we cannot not note the mutual competitive “face-off” of these two currencies. Strengthening of Russian currency may put pressure Kazakh currency into a downward movement. If rate of ruble will rise, Russian will buy more of Kazakh products. Such a situation is unacceptable by the National bank, thus the prices for goods will increase, which will lead to a higher rate of inflation. Do not forget that the economy of Russia is much larger than that of Kazakhstan, so the gap in the exchange rate of 15-20% may negatively affect Kazakhstan’s financial standing.

On the other hand, since both currencies are essential “raw-material based” and both depend on world oil prices, there is another balancing effect hidden here, from the Russian side. With the rise of prices for energy sources (especially oil) Russian currency is prone to dramatic strengthening (for purpose of balancing budget funds), which also leads to strengthening of ruble against tenge. If there wasn’t a cross-exchange rate of tenge/ruble, then with the existing situation on the oil market (56-58 USD/barrel) we could see a strengthening of Kazakh currency up to 300-280 tenge per dollar, which doesn’t happen now; current rate is 311-312 tenge/dollar.

From the point of view of weakening of ruble against tenge one needs to take into account the mechanisms of weakening of the Russian currency. If such a decrease is the result of decrease in oil prices, this will lead to significant downswing of Kazakh tenge. If the weakening is cause by other factors (actions of Russian regulator, inner economic policy of Russia, decrease of investment demands for Russia currency, etc.) then there is no need to talk of direct influence of Russian currency on national currency of Kazakhstan; tenge rate will first of all depend on domestic economic factors.

Evgenit Chekai, head financial analyst of “Analitika online Kazakhstan”:

Even though Russia and Kazakhstan are closely interrelated, there is no need to draw direct correlation. Short-term strengthening of the ruble doesn’t affect our national currency that much. Also, the rise of ruble comes with a commotion on the bonds market. Price of the most liquid stocks of Russia reached its highest point in December 2013. But the most speculative component of support of Russian ruble is a very shaky factor. It creates a dangerous bubble of unjustifiably inflated rate of the ruble. This is dangerous in that with any change in moods on the market, ruble can crash unexpectedly; also budget profits suffer as well. Growth of the ruble doesn’t correspond to the state of Russian economy, which doesn’t show any signs of improvement. Most likely that within this year ruble will reach the 60-75/dollar mark; this is given that oil prices will stay below 45$ per barrel.

There are claims in Kazakhstani media that strengthening of tenge is a result of an inflow of speculative capital into the country, is that really so? How much does the arrival of players on the difference in rates of bank deposit and profitability of stocks affect the dynamics of ruble?

Sergey Polygalov, head of analytical group TeleTrade Central Asia:

As of today, an inflow of speculative capital into Kazakhstan (due to interest in carry-trade) cannot be significant, because the difference in bank rates of Central bank of RF and National bank of Kazakhstan is insignificant. In its most recent assignment in march of 2017 NB of KR left its rate at 11% mark while in Russia the rate was established at 9.75%. I don’t think that 1.25% profitability can attract a large number of carry-traders. From this point view, Russian investors would be more interested in profits from 10-year American government bonds that yield an over 2% profits, even in unstable economic situation.

In this case one needs to account mostly for inner economic potential of Kazakhstan, which as of today, having shown certain results, is still not in the best state. In order to support national currency and increase competitive nature of domestic business, main financial regulator will have to continue decrease of the bank rate, which isn’t good for carry-traders.

Evgeniy Chekai – head financial analyst of Analitika online Kazakhstan:

This type of investment creates a favorable ground for the growth of currency and stocks speculation, because there is an opportunity to reap good and easy profit, by borrowing money at a low rate and investing it into stocks that yield 9-10% profitability. This seems to be popular option for speculators.

We are only talking about foreign investments into government bonds, while the sum of speculative investments into other financial tools such as corporate bonds, tenge deposits etc. can be comparable to deposits volume of the central bank. In that case, the sum of speculative foreign capital in the domestic market can be over $8 bil.

Secondly, you need to understand that speculative carry trade strategy is not only a prerogative of outside investors. It can be actively used by domestic players as well, especially considering they have a basis for that: high base rate of the national bank and low recommended rate of Kazakhstan fund for guaranteeing of deposits on deposits in foreign currency – at a 2% rate. If you consider that by the end of February share of deposits in USD in Kazakh banks was 51.5% or over 8.5 tril. ($27 bil.) you cannot exclude some of these funds being used in speculative operations.

Russia’s central bank will increase the buying of currency in order to fill its reserves, using low rates. Seasonal spring growth of imports will move the payment balance towards the growth of demand for dollar. Also buying of currency through government bank via recommendations of central bank is possible. Also possible is further lowering of rates since central bank promised to do that 2-3 quarters which will also stimulate business. It is necessary to lower the excitement of “bulls” about the ruble; so the dollar/ruble will go back to its usual 58 rub/usd mark in the near future perspective.

Is strengthening of tenge beyond the 310/dollar mark possible? What should take place for that to happen, for example, to which extent should world oil prices rise?

Sergey Polygalov:

In the revised version of KR budget of February 2017, for 2017-2019 average price for oil is at the $50/barrel mark and the average rate of national currency is 330 tenge/dollar. Theoretically, if we talk about oil prices as a price-shaping factor of Kazakh tenge, then a strengthening below 310/dollar is possible with the stable growth of oil prices above 65-70 dollar per barrel of “black gold”.

But we are not speaking of this scenario taking place. Today, the source of strengthening and stability of Kazakh currency is not as much economy or oil prices, as the event that will take place in Astana from June 10-Septmber 10 of 2017 – I am talking about EXPO-2017. Before the ending of this event, we can be sure of consolidation of rate of Kazakh tenge at the 315-310/dollar rate. Fall on the other hand, will likely bring many surprises for national currency.

Evgeniy Chekai:

Despite a noticeable decrease in oil prices in march, weakening of tenge wasn’t as significant as one might have expected after the ending of tax season in February. Moreover, at the end of first month of spring national value has gained almost all of its positions on pair with dollar, lost in the first half of march. Of course, it is important for us that oil be traded above $60/barrel. But as we see from practice, not everything in our country depends on oil. More important is what policy national bank will take in order to strengthen our currency. Are there really no more levers for strengthening tenge in our country? There are, which is why we need to pay closer attention to the inner state of our economy. Right now, banking sector of Kazakhstan is in the stage of solving its current problems, in the mid-term perspective solving of current problems should yield positive results.

Ivan Kapustyanskiy, analyst of Forex Optimum:

Kazakh tenge correlates with Russian ruble due to strong relation of Kazakh and Russian economies. This is why significant trends in Russian currency market directly reflect on the Kazakh currency market. At the same time, not all local trends of tenge play out along with ruble, which is now being pressure by the geopolitical factor. In turn, Kazakh currency is free from that aspect and can continue to strengthen in relation to dollar.

Currency pair usd/kzt have a real chance to test the 310 mark, Moreover, that it will reach it within the horizon of 1-2 weeks. A rise in oil market can be a positive driver for it. Closing of the largest deposit in Libya pushes price upwards; as far as technology is concerned, Brent brand oil has about 2-3% growth potential. In case that in mid-term perspective ruble will change its vector downwards. This factor will of course, have a negative effect on tenge. However, in our opinion this isn’t a story that will happen soon. We can talk of the attempts of global change of the usd/rub trend when it will beat the 60 mark.