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The Kazakh tenge has shown a notable strengthening against both the US dollar and the Russian ruble over the past month, a trend that has caught the attention of many. In local exchange offices, the ruble's value has dropped below 6 tenge, a significant decrease from previous rates. Simultaneously, the Russian currency has weakened not only against the tenge but also against the dollar, hitting multi-year lows. Amidst these shifts, the tenge has demonstrated resilience, with the dollar trading around 487 tenge in the capital.

Economist Arman Beisembaev shared his insights with Kursiv.media, explaining the reasons behind the tenge's appreciation, its potential duration, and whether it's a good time to buy or sell currency.

Understanding Tenge-Ruble Dynamics

Beisembaev clarified that the tenge's exchange rate against the ruble isn't an independent indicator. Instead, it's a derivative of two primary currency pairs: the dollar-ruble and the dollar-tenge. "If you take the current tenge exchange rate and divide it by the current dollar-ruble exchange rate, for example, 480 divided by approximately 82, you get the ruble-tenge ratio – it's all quite simple," the economist explained.

Consequently, the fluctuations in the tenge-ruble pair are directly tied to the performance of these two base pairs. This can lead to situations where one currency weakens significantly while the other remains relatively stable. Historically, the ruble-tenge rate has been higher, around 6.7-6.8 tenge per ruble, reflecting a weaker tenge and a stronger ruble. Last year, the tenge weakened considerably, reaching up to 550 against the dollar, while the ruble remained relatively stable between 70-80 against the dollar.

The situation has recently reversed. The weakening of the Russian currency has led to a decline in the ruble-tenge exchange rate. However, Beisembaev cautions against assuming a long-term trend, as the ruble has shown volatility after periods of weakness.

Factors Driving Tenge's Strength

The current strengthening of the tenge is not linked to political events, such as referendums. Beisembaev noted that while past exchange rate manipulations occurred, the market is now more developed, although not yet fully free-floating. "The exchange rate, like a mirror, reflects the entire economy. Whatever your economy is like – its stage, its problems – that's the kind of exchange rate you'll have," he stated.

A primary driver for the tenge's current strength is monetary policy. The National Bank of Kazakhstan's high base interest rate, currently at 18%, makes tenge-denominated assets attractive to investors. This high rate encourages capital inflow, as investors buy tenge to invest in high-yield instruments like bonds or stocks. The process of buying tenge typically involves selling dollars, increasing demand for the national currency and thus strengthening it.

The National Bank's hawkish stance further supports this. The regulator has signaled its readiness to maintain high interest rates at least through the first half of the year, potentially even increasing them if necessary. This bolsters investor confidence in the continued high returns of tenge assets.

Contrasting Monetary Policies: Russia vs. Kazakhstan

Kazakhstan and Russia are currently in different stages of their monetary policy cycles. While Kazakhstan maintains a high interest rate to support the tenge, Russia is moving in the opposite direction.

The Central Bank of Russia has passed its tightening phase. After a period of high inflation, it gradually raised its key rate to 22% to cool down an overheating economy. These measures have led to a slowdown in inflation, now estimated to be below 6% annually. The Russian economy is showing signs of cooling, with growth rates near zero and some indicators suggesting a potential recession.

In response, the Bank of Russia has begun a cycle of interest rate cuts, with the market anticipating further easing, which could weaken the ruble. Additional pressure on the Russian currency comes from fiscal policy changes, including a potential reduction in the oil price floor and restrictions on the Finance Ministry's currency market operations, both contributing to a weaker ruble.

Furthermore, Russian businesses have expressed a preference for a weaker national currency, viewing a range of 95-110 rubles per dollar as favorable. Some market participants even predict the rate could reach 100 rubles or higher.

In contrast, Kazakhstan's high base rate and the National Bank's firm rhetoric continue to drive demand for the tenge. Domestic factors, including capital flows and changes in tax legislation, also contribute to the tenge's strengthening.

Tax Season and Future Outlook

A significant factor contributing to the tenge's current strength is the tax season. By the end of March, companies are finalizing budget obligations under the old Tax Code, increasing demand for the national currency. Major exporters actively convert their foreign currency earnings into tenge to pay VAT and corporate income taxes, temporarily boosting the tenge.

However, this effect is short-term. As tax payments conclude, demand for foreign currency is expected to rise due to increased imports and the implementation of state programs. The spring-summer period typically sees a surge in import purchases, with state-funded projects requiring foreign currency conversion for procurement, often denominated in dollars.

Beisembaev suggests that the current tenge rate may not be sustainable long-term. He points to the significant dependence on the Russian economy, noting that a continued weakening of the ruble could eventually pull the tenge down with it. "We need to understand that our dependence on the Russian economy is very large: a lot of imports from Russia, large settlements in national currencies. We need rubles much more than Russia needs our tenge," he stated.

He projects that if the ruble approaches 100 per dollar and the tenge weakens to 550, the exchange rate would be around 5.5. Such combinations will shape the future currency market movements.

Oil Prices and Geopolitics: Limited Immediate Impact

Despite escalating tensions in the Middle East and rising global oil prices, a direct impact on the tenge's exchange rate is not immediately apparent. While higher oil prices might typically strengthen a resource-exporting nation's currency, the connection is complex and subject to time lags.

The tenge's current strengthening began well before the recent oil price surge and is primarily driven by domestic factors, notably the National Bank's high base rate. The sharp increase to 18% halted the tenge's depreciation and initiated a period of steady appreciation throughout the winter.

The rise in oil prices is a more recent phenomenon, spurred by geopolitical tensions in the Middle East. However, by this time, the tenge had already weakened significantly, from approximately 550 to 480 against the dollar, indicating that oil prices were not the primary driver of recent dynamics.

The delayed reaction is also due to the nature of export contracts. Kazakhstan sells oil under forward contracts with a time lag, meaning current deliveries are priced based on agreements made months prior. Consequently, price increases resulting from Middle Eastern events will only affect currency revenues three to six months later.

Currently, the market is more focused on monetary policy than oil prices. It's important to note that a significant portion of the current strengthening is attributed to capital inflows, which can be speculative and prone to rapid reversals if market conditions change, such as a rate cut or increased demand for foreign currency.

Investment Advice: Navigating the Strong Tenge

With the tenge strengthening, many are questioning whether to sell dollars or wait, and if speculating on the ruble is worthwhile. Beisembaev advises caution and a rational assessment of risks.

He strongly discourages individual investors from speculating on the ruble. "Don't play with the ruble at all. Unless you are a professional speculator who knows what you are doing, I would never, under any circumstances, advise playing with the ruble; it's a very bad move. It will end badly for you," he warned.

Regarding the dollar, there is no one-size-fits-all answer, as it depends on individual goals and investment horizons. However, the core argument remains that Kazakhstan's economy has not undergone fundamental changes, meaning the current tenge strengthening lacks long-term structural support. The current situation is a result of temporary factors.

In this context, Beisembaev advises against rushing to sell currency, especially if there is no immediate need for the funds, as losses are not realized until an asset is sold. He cannot precisely predict the timing of exchange rate shifts, noting that the current range might persist for some time, or a significant weakening to 550-600 tenge per dollar could occur by year-end.

Further evidence for potential tenge weakening comes from fiscal policy. Government projections set the exchange rate around 540 tenge per dollar. The current strong rate poses a risk of revenue shortfalls, as a strong national currency reduces the tenge equivalent of export earnings, which form a significant part of the budget's revenue.

Therefore, the current exchange rate should be viewed as a temporary deviation from the typical range. While supported by domestic factors for now, a reversal is possible once these factors weaken.

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