Russia spillover, low oil price will challenge Astana

Significance

The slowing down of Kazakhstan's economy continues against a background of slow global growth, the turbulent economic situation in Russia and low oil prices. Lower-than-projected oil prices will reduce budget revenues and forecasts; on January 16, Astana said it was revising its budgets for 2015-17 to mirror an average oil price of 50 dollars/barrel, as current budgets were based on 80 dollars/barrel. The blow will be softened by substantial reserves, which are expected to be used to stimulate the economy. Dwindling demand for commodities will negatively affect the profitability of Kazakhstan's major producers. The cumulative spillover from the Russian-Ukrainian crisis is substantial, although manageable at present.

Impacts

• Further devaluation of the tenge would undermine public confidence in Kazakhstan's national currency.
• Increased dollarisation of Kazakhstan's economy will make regulation difficult by monetary policy.
• Ruble depreciation will put pressure on the tenge and promote replacement of domestic products with Russian imports.