All five of the world’s worst-performing currencies so far this year are post-Soviet ones — and that list doesn’t include the Russian ruble. The reasons for the sharp currency devaluations differ between countries, but there is a common underlying problem: Russia’s economic crisis and aggressive policies. As long as post-Soviet countries — including ones that are not particularly friendly toward Moscow — are still economically intertwined, cascading crises of this sort are inevitable.
Here is the list of the past two months’ biggest losers as of today, following massive devaluations of the Azerbaijani manat and Moldovan leu last week:
The Ukrainian hryvnia is by far the worst performer, having lost another 11 percent of its dollar value today. In response, the Ukrainian National Bank strengthened its capital controls, banning banks from issuing hryvnia loans with the purpose of buying foreign currency and warning importers that any prepayments of more than $50,000 will be scrutinized.
Ukraine’s devaluation has more varied causes than those in other post-Soviet countries. Russia has taken out Ukraine’s biggest foreign currency sources, annexing its tourist mecca, Crimea, and unleashing a war in the eastern industrial regions where most of the country’s metals production is concentrated. In November 2014, the last month for which International Monetary Fund data are available, Ukraine’s exports stood at a little less than $4 billion, compared with $5.6 billion the year before. Meanwhile, the National Bank of Ukraine has proven remarkably inept. Its attempts to control the exchange rate amid dwindling reserves resulted in a rampant black market. When the central bank began floating the currency, at the recommendation of the IMF, it began recording its greatest losses in reserves — a reflection of pent-up demand for foreign exchange and anxieties about clueless regulatory efforts to come.
Today’s moves prove such fears were justified. Perhaps when long awaited IMF funds arrive in the coming weeks to replenish Ukraine’s foreign reserves, the National Bank will come to its senses and cancel the useless capital restrictions. In the meantime, they will contribute to the bank’s further loss of control over the foreign exchange market.
The cases of Moldova, Georgia and Azerbaijan are less extreme, but the problems of each are related to the regional turmoil.
The Moldovan leu lost more against the U.S. dollar last week than in all of 2014. The tiny nation, squeezed between Ukraine and Romania, could no longer handle a deep structural imbalance in its economy. It buys about 70 percent of all its consumer goods from abroad, so its imports are about twice as high as its exports. The shortfall was partly covered by remittances from migrant workers, which reached $1.61 billion last year. In the fourth quarter, however, the remittances fell by 20 percent, because many of the Moldovan migrants work in Russia, and as the ruble lost value, they weren’t able to send as many dollars and euros home. Moldova’s exports to Russia almost halved last year, both because of the latter’s economic problems and because Moscow was trying to pressure Moldova to stay within its economic orbit rather than integrate with the European Union.
Adding to these problems, the previous Moldovan government spent part of its meager foreign reserves to bail out three large banks, a move the country’s leftist parliamentary opposition described as a money-laundering scam. Moldova’s international reserves now stand at less than $2 billion, their lowest level since 2011. The leu devaluation is likely to continue because there’s no plausible way to stop it.
The core of Azerbaijan’s problem is that it’s an oil exporter. Since 2011, it had pegged its currency, the manat, to the U.S. dollar, but as the oil price fell, the peg became expensive to maintain. On Jan. 31, the country’s foreign reserves stood 11 percent lower than a year before. The devaluation would not have needed to be as sharp as it was, however, if Russia hadn’t been the country’s biggest export market. Those exports fell sharply last year — by 30 percent in the third quarter, the last one for which data are available.
As for Georgia, its exports to Russia actually increased last year, at least in the period for which the IMF has data. Yet exports to Ukraine, which had become a major trading partner when Georgia’s relations with Russia were particularly strained last decade, have fallen by about half over the past year. In total, Georgia’s exports in January were 20 percent lower than the year before. For this tiny economy with less than $2.5 billion in foreign reserves, that drop made devaluation inevitable.
Belarus, Russia’s closest ally, is completely dependent on Moscow for extra-cheap energy imports. So it predictably suffered more than others — except Ukraine — when Russia effectively started a price war with its neighbors by devaluing its currency.
The region’s currencies will almost certainly continue to plummet. It’s a rare opportunity to watch the kind of crisis Europe might have experienced in a world where it hadn’t adopted the euro and Germany decided to boost its export competitiveness by devaluing the Deutsche Mark. It’s all well and good to criticize the euro, but it insures Europeans against these kinds of disasters. For post-Soviet states, on the other hand, a currency shock for one can still mean a currency shock for all.