Sanctions against Russia: Limited influence on Kazakhstan’s economy
Arman Akhunbayev
Deputy Head of the Department for Strategic and Sector Research at EDB
WORLD ECONOMY: MAIN TRENDS, RISKS AND CHALLENGES
18 August 2015, 12:00-1:30 p.m., Astana
1. In 2014-2015 Russian and Kazakh economies faced a double negative shock. First, because of greater competition in the oil market, prices of energy resources, which are the main exports from Kazakhstan and Russia, fell drastically. Second, the introduction and, starting from autumn 2014, toughening of sanctions caused by the crisis around Ukraine have significantly restricted Russian companies and banks’ access to foreign capital, the use of which for the refinancing of debts would make it possible for the economy to more smoothly adapt to the external shock in normal conditions. Because of the massive devaluation of the ruble and the influence of inflation, which accelerated because of it, the Bank of Russia (Central Bank of the Russian Federation) increased its “key rate,” which reached 17% in December. The result of these events was a decline in consumer and investment activity in Russia and Kazakhstan.
2. The most tangible effect of sanctions on the Russian economy was their influence on transborder capital flows (the outflow of capital), financial markets, inflation, the amount of money in the economy, and lending. The net outflow of private capital increased sharply. In the context of reduced prices of raw materials, in particular energy, the growing outflow of capital caused significant fluctuations in the ruble exchange rate with respect to world’s leading currencies. Interventions in the foreign exchange market, which were fostered by the Bank of Russia to smooth fluctuations of the national currency, have decreased the central bank’s international reserves. At the same time, to control devaluation and limit the inflation effects it causes, the central bank toughened its monetary policy. This increase and the above currency interventions resulted in the slower growth of money in the economy. However, the balance of payments in Russia turned to be more stable than in 2008-2009.
3. The influence of sanctions on real economic activity in Russia and public finance was less evident. The growth in GDP began to slow down even before the sanctions were introduced, due to accumulated structural problems. This slowdown was associated, to a significant extent, with lower investment activity. It had place before the sanctions against Russia were introduced and even before the Ukrainian crisis achieved its acute phase. The decline in 2015 was directly associated with the negative effects of lower energy prices, devaluation and high inflation, among other things. It should be pointed out specially that the effect of counter-sanctions imposed by Russia had a rather positive effect on real activity in the country, since they have gradually become the basis for stimulation of production and agriculture in the longer term than expected from import substitution. At present, the double shock had a limited negative effect on public finance.
4. Kazakhstan’s economy does not suffer from direct consequences of the imposition of international sanctions against Russia. Personal sanctions against influential Russian politicians do not influence in any way the political elite of Kazakhstan. Sanctions against Russian state-funded financial institutions do not extend to Kazakh banks, which already do not have an opportunity to refinance their loans in Western financial markets. As for the sanctions limiting military and technical cooperation, these have practically no relation to Kazakhstan.
5. However, because of the existing economic ties between the two countries, the events in Russia have moderate negative, indirect effect on Kazakhstan’s economy. In particular, negative effects in Kazakhstan are felt in the banking sector, foreign trade, financial flows (including the intensity of foreign direct investment, where Russia accounted for 6.4% of inflows in 2014), the gross foreign debt (4.4% of GFD), the outflow of capital, and, as a result, the balance of payments and the stability of the national currency. Certain negative effects are faced by Kazakh corporations listed on the London Stock Exchange and other global exchanges. These are associated, to a greater extent, with increased political risks, which escalate, in turn, the cost of new foreign loans. However, this concerns a limited number of companies (Kazmunaigas and Kazakhmys). The influence of sanctions is, to a greater extent, indirect and manifests itself in the influence of Russia’s macroeconomic policies on Kazakhstan’s macroeconomic policies.
6. The influence of international sanctions on Kazakhstan’s banking sector remains limited. Four financial institutions registered in Russia operate in Kazakhstan: Home Credit Bank, Alfa Bank, VTB Bank, and Sberbank of Russia. The latter two are under the sanctions imposed by the U.S. and the E.U. At present, only Sberbank is among Kazakhstan’s systemically important banks. The share of loans of the Russian group in the Kazakh sector approximates 12%. The four banks account for a total of approximately 9% of the market. The Russian banks in Kazakhstan are primarily funded by business. Corporate deposits make up 76% in the aggregate deposit portfolio. The possible decrease in funding for the parent banks of the Russian group because of sanctions enhance the risk that this situation will extend to the Kazakh subsidiaries of the banks, which are included in this list. However, this will cause only a limited reduction in lending in Kazakhstan (given the small share of the Russian group in the market).
7. The limited influence on foreign trade is explained by its specific structure. In terms of structure, Kazakhstan’s foreign trade is linked to a greater extent to foreign countries and the export of oil, metals and agricultural produce. The specifics of Kazakhstan’s foreign trade explain the potentially limited influence of international sanctions against Russia. In 2014, Kazakhstan’s foreign trade with the Customs Union countries was worth only US $21 million (17% of overall foreign trade). Significant amounts of Kazakh exports go, in addition to Russia, to Germany, the U.S. and China. At the same time, Russia accounts for 33.4% of imports to Kazakhstan and 8% of Kazakh exports. In terms of imports, the negative effect for Kazakhstan’s foreign trade is that Russian imports decrease at a slower rate (-17.5%) than Kazakh exports to Russia (-26.9%), which affects the foreign trade balance. In terms of exports, the influence of sanctions is extremely limited, provided that no sanctions apply to oil exports from Russia. It is obvious that exports are primarily affected by falling oil prices.
8. The increased volatility in Kazakhstan’s financial market and the toughened macroeconomic policies The changes in Russia’s macroeconomic policies, in particular the toughening of its monetary policy, the increased rates and, to a greater extent, the shift to flexible foreign exchange rates, had a significant indirect influence on the Kazakh financial market. The National Bank of Kazakhstan found itself in a difficult situation and preferred to maintain a stable rate, which restrains the slowdown in domestic demand and ensurs low inflation. On the other hand, the stable exchange rate - in the context of the ruble devaluation and the overall significant appreciation of the dollar in global markets - worsens the competitive ability, which - given that the balance of payment indicators worsen too - aggravates this situation and forces the National Bank to make currency interventions. The National Bank has to toughen monetary conditions after Russia and this slows down lending and economic activity on the whole.
9. The anti-crisis measures taken by the EDB member countries’ authorities have stabilised the region’s economy. In Russia, in particular, the additional capitalisation and restructuring of banks and the subsidisation of mortgage loans made it possible to avoid a systemic crisis in the banking sector, which could follow the sharp devaluation and the worsened access to international finance. In addition, these measures helped to ensure that reductions in lending and domestic demand were less massive than during the crisis of 2008-2009. Measures to support systematically important enterprises and the indexation of pensions also had a positive effect. In Kazakhstan, economy was stimulated by means of increasing expenses (primarily capital expenditure), which were initially planned in the Nurly Zhol programme, and consolidating expenses that had lower priority. In addition, Kazakhstan supports its domestic producers during the crisis period. In the context of credit contraction and the sharp decrease in domestic consumer demand, these capital expenditure supported investment and, in the end, economy activity. In the framework of its anti-crisis measures, after the period of tough monetary policy aimed at maintaining macroeconomic stability, the National Bank began to move towards a more flexible foreign exchange regime.