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Currencies of the Commonwealth of Independent States (CIS) and
the wider region will be influenced in the months to come not only
by global energy prices and monetary policies of key markets, but
also by domestic exchange rate policies, economic fundamentals and
sovereign debt position.
Heavy dependence on commodities will act as a key transmission
channel for adverse external shocks.
Many regional currencies will avert a full-blown financial
crisis helped by the exchange rate policy adjustments made during
the last recession.
Amid adjustments of external finances, the currencies of
Belarus, Azerbaijan, Russia, and Ukraine will experience
depreciation, triggered by geopolitical events, policy regimes'
shortcomings, and recent real exchange rate developments.
Much like other emerging markets, Eastern European and Central
Asian (EECA ) economies—which include the nine CIS countries
plus Ukraine, Georgia, and Turkmenistan—have been hit by the
collapse in both external and domestic demand in the wake of the
coronavirus disease 2019 (COVID-19) virus pandemic. EECA is heavily
dependent on energy production for export revenues. This structural
deficiency has only amplified the blow from the pandemic to the
regional economies and their currencies.
Mixed bag of FX news
The Belarusian rouble has been the worst performing currency
this year so far, closely followed by the Russian rouble and the
Ukrainian hryvnia.
Both the Azeri manat and the Turkmen manat remain stable due to
an expensive effective peg to the US dollar, although the Turkmen
manat's black market value declined by around 25% in recent months
compared to pre-pandemic levels.
Bucking the trend, the Moldovan leu after an initial
depreciation has since strengthened by 4.2%, moving in the same
direction as the euro, which during the nine-month period
appreciated by 6.4% against the US dollar.
Exchange rate risks signalled by external financial
metrics
The COVID-19 crisis and the renewed stress on regional
currencies have also brought back into the spotlight any weaknesses
in the countries' solvency and liquidity position. Intensifying
pressure from external finances is likely to be reflected in
increased exchange rate stress.
Using the above metrics, Tajikistan presents as the CIS economy
signalling the highest vulnerability, with all indicators flagging
potential risks.
On the other end of the spectrum, Russia is in a favourable
position with total foreign debt standing at 30% of GDP, whilst the
debt service to external earnings ratio is only at 15%.
Azerbaijan does not show any external financial risks on purely
data grounds. The assessment was done prior to the start of the 27
September military campaign, which will have an unavoidable
worsening impact on Azeri metrics.
Initial resilience faces new risks
Compared to the most recent 2014-15 recession and exchange rate
volatility, EECA currencies have thus far proven more resilient.
The inflationary impact of the exchange rate weakness is being
counteracted by weak household consumption. The policy responses
have improved, as the Russian rouble, Ukrainian hryvnia, and Kazakh
tenge are now floating, thereby acting as shock absorbers.
The US dollar's weakness and extremely low interest rate
environment in advanced markets also ease some of the pressure on
the EECA currencies. Meanwhile, political pressure on central banks
to ease policy to stimulate the real economy during the pandemic
makes supporting the exchange rate more challenging.
Overall, in the short term the exchange rate risks tilt to the
downside for most of these currencies due to their
commodity-dependency, as they will mostly move along the trajectory
of market crude oil prices.
Policy missteps and geopolitical risks may add to the downside
risks for Azerbaijan, Belarus, and Moldova. The Azeri manat remains
vulnerable to the developments in Nagorno-Karabakh, which still has
a potential of turning into a regional conflict and threaten its
key energy and other infrastructures. A sharp increase in Azeri
military spending and an even larger FX interventions to defend the
manat's peg suggest that a devaluation of at minimum 18% is
inevitable, most likely by end-December if not earlier.
Lastly, weak investment capital and remittances inflows will be
an overhang from the 2020 global recession.
