Central Asia under Duress from Falling Oil

January 27, 2016 3:30 PM

The falling price of oil and the corresponding devaluation of national currencies have wreaked havoc on once buoyant Central Asia. Political response has been swift. Kazakh President Nursultan Nazarbayev called early parliamentary elections. The Azeri president introduced capital controls. And the Turkmeni president ordered parliament to extend presidential terms to seven years, from the current five, and introduced capital controls.

A recent blog post on the collapsing currencies in Central Asia opined that trouble looms ahead for the region's autocracies. But unlike in previous crises, for example at the outset of the global financial crisis in 2008, this time political reactions have been quick to follow. Lessons from events in Armenia last year may be the reason.

Kazakhstan depends on oil for 80 percent of its exports and 60 percent of its public revenues. Azerbaijan depends on oil and gas for 95 percent of its exports and 75 percent of its public revenues. Turkmenistan is equally dependent on commodity exports, which account for 90 percent of export revenue and 80 percent of overall public revenue. The falling price of energy commodities has rapidly reduced trade balances and emptied government coffers. It has also cut the value of national currencies in half.

In the past year, the Azeri currency has lost 60 percent of its value against the dollar. The country's budget is so reliant on these exports that the 2015 budget deficit reached 10 percent of GDP.1 Kazakhstan's currency lost 53 percent of its value versus the dollar in the past year, from January 2015, and the Turkmeni currency lost 27 percent.

With oil prices falling even further this year, Azerbaijan imposed capital controls in mid-January 2016: a 20 percent tax on transactions to remove cash from the country. The government also ordered currency exchange bureaus to close, creating a black market. Turkmenistan has followed suit with similar measures. These steps are likely to stem the flow of illicit capital outflows but hardly help governments in patching up their 2016 budgets.

As in Russia, which is also suffering from the collapse of commodity prices, governments in Central Asia have two options to deal with the revenue shortfall. One is to offer potential investors some assets for sale, for example shares in state-owned banks or oil companies. This option has been announced by Azeri President Ilham Aliyev, but a precise list of potential assets is yet to be made public.

The second option is for governments to dig deeper into their reserve funds and hope for better times soon. Azerbaijan has $40 billion in reserves, Kazakhstan about $60 billion, and Turkmenistan $36 billion at the end of 2015. These funds can serve to prop up government expenditures for up to two years at their current levels. Significant cuts will have to be made then.

Reducing public expenditure is a big political risk for Central Asian leaders, with a population that has become used to improving standards of living in the past two decades. Armenia presents a recent example of mishandling such a risk. An attempt by the Armenian government in the summer of 2015 to increase electricity prices by 22 percent prompted strikes and calls for a switch from a presidential to a parliamentary system of government. The resulting referendum significantly reduced the power of the presidency. Presidential jobs may soon be in danger in Central Asia too.

Note

1. Jack Farchy, "Azerbaijan resorts to capital controls as oil crunch worsens," Financial Times, January 19, 2016.

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Simeon Djankov Former Research Staff

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