ALMATY, Kazakhstan -- The election of a new president in Kazakhstan following the resignation of Soviet-era strongman Nursultan Nazarbayev has failed to dispel fears of political instability stemming from the former president's sudden demise.
Instead, uncertainty has risen amid questions about the new government's longevity. Experts say this political instability now outweighs economic factors in determining the value of the Kazakh currency, the tenge. In July, the tenge hit 385 to the dollar, its lowest point in three and a half years.
Ahead of the election of Kassym-Jomart Tokayev, a staunch Nazarbayev loyalist, as president on June 9, there had been rumors that authorities would devalue the tenge after the vote. Some even said Kazakhstan would abandon the currency altogether in favor of some common unit of exchange devised under the Russian-led Eurasian Economic Union.
"We, of course, take into account informed opinion from experts, but there are always a lot of rumors at different times. If there exist macroeconomic external or internal conditions [for devaluation], then understandably there will be no questions. I just don't want to repeat the mistakes of the past years," said Yerbolat Dossayev, governor of the National Bank of Kazakhstan, the central bank, before the election.
The central bank's foreign reserves fell from $18.05 billion in July 2018 to $11.13 billion in June 2019, dropping by $1.46 billion in June alone.
The central bank's track record on maintaining the currency's value is not good. Dossayev's predecessor, Kairat Kelimbetov, now governor of the Astana International Financial Centre, repeatedly denied that there would be another devaluation after the tenge lost nearly 13% of its value in February 2014.
But 17 months later, in August 2015, the tenge fell another 35.5% after the ruble was battered by Western sanctions imposed on Russia over its seizure of the Crimea and its military intervention in eastern Ukraine. Economists estimated at the time that Kazakhstan lost tens of billions of dollars to Russia as Kazakh consumers snapped up Russian goods in border areas, taking advantage of the strong tenge.
"With U.S. sanctions on Russia in place, and the Russian ruble likely to depreciate this year, it is likely that the tenge, which is closely linked to ruble movements, will also weaken. However, I do not expect a sharp devaluation on the same scale as in 2014-15, because the situation now is quite different in a number of ways," said Samten Bhutia, a Central Asia analyst at the Economist Intelligence Unit.
Petr Svoik, an Almaty-based economist, believes that following the events of 2014 and 2015, the Kazakh government is more concerned about the tenge's rate versus the ruble than the dollar.
"Kazakh authorities have now pegged the tenge to the ruble, and tenge movements against the dollar will be determined by the ruble's movements," Svoik said. "There are now conditions that favor devaluation of the tenge, albeit in a controlled manner, but the new administration of President Tokayev cannot afford a sharp devaluation before he establishes himself as a real president."
Tokayev as speaker of the Senate, became interim president after Nazarbayev resigned on March 19, as called for under the constitution. The move has sparked nationwide protests over the lack of political and civil freedoms, as well as social issues.
In response, Tokayev has begun a massive and costly populist program to try to win over socially vulnerable people by promising to write off their arrears on mortgages and taxes. This will strain the government budget.
Foreign investors and members of the elite close to Nazarbayev who control large swathes of the Kazakh economy favor devaluation. It would also be good for the country's fiscal position, given that the economy depends heavily on export earnings in dollars, whereas the government's expenditures are in tenge. Small businesses and the general public are mostly against devaluation because much of their consumption comes in the form of imports.
The shrinking economy -- Kazakhstan's gross domestic product fell from about $240 billion in 2013 to $170.5 billion in 2018, according to the International Monetary Fund -- has worsened relations among members of the elite, who have started taking cash out of the country.
"After Nazarbayev's resignation the risk of political uncertainty has increased, and this has added politics to the fundamental factors influencing the exchange rate," said a financial analyst at a Kazakh holding company with interests in the oil, agriculture and transport sectors. "Because of fears that power will ultimately be transferred from Tokayev to Nazarbayev's closest relative, the elites are taking their capital out of the country," the analyst said, speaking on condition of anonymity.
Tokayev could prevent capital flight by limiting the state's involvement in the economy and providing clear guarantees to private investors that their investments will be safe during his tenure, the financial analyst believes. "Without Tokayev's political will, a sharp devaluation of the tenge is a matter of time."