History explains why Kazakhstan doesn’t want to be in a common-currency zone01 june 2015, 13:52
President Vladimir Putin’s recent proposal that the Eurasian Economic Union have a common currency was deja vu all over again for those who helped take Kazakhstan independent.
Those leaders’ memories of what happened when the Russians promised Kazakhstan a common currency in the early days of statehood are far from pleasant.
So it wasn’t surprising recently to hear a government official pour water on Putin’s proposal. Basically, Kazakhstan doesn’t want to go through another common-currency debacle again.
“We think the time has come to discuss opportunities to form a potential currency union,” Putin said at a meeting with Kazakhstan President Nursultan Nazarbayev and Belarus President Alexander Lukashenko in Astana on March 22 of this year. “Working shoulder to shoulder, it is easier to react to external financial and economic threats, and protect our common market.”President Vladimir Putin, President of Kazakhstan Nursultan Nazarbayev and Belarusian President Alexander Lukashenko pose for photographs during a meeting at the Akorda residence. ©RIA Novosti
The proposal landed with a thud with Russia’s EEU partners. President Nazarbayev and President Lukashenko’s silence spoke volumes about what they thought of the proposal.
In case anyone had doubts about what President Nazarbayev was thinking, a top member of his economic team made Kazakhstan’s position crystal-clear on April 22.
“We are not discussing such questions (of a common currency),” Deputy Economy Minister Timur Zhaksylykov said in response to a journalist’s question.
“I wish to stay that Kazakhstan has a clear and consistent position on excluding the possibility of introducing a single currency within the framework of the EEU,” he added.
Zhaksylykov did not say why Kazakhstan failed to embrace the idea of a common currency, but history explains why.
Kazakhstan’s economy was in turmoil in the early days after independence in 1991, according to many accounts, including British author Jonathan Aitken’s book “Nazarbayev and the Making of Kazakhstan.” Kazakhstan's President Nursultan Nazarbayev. ©RIA Novosti
The economies of Kazakhstan – and all other Soviet Republics – had been tied to Russia’s during Soviet times. The Kremlin produced the economic plans the republics followed, and Russia was the major consumer of their output.
When the Soviet Union disintegrated, the former republics had to reorient their economies, including creating both domestic markets and new export markets.
As if that chaos weren’t enough, a cloud of currency uncertainty hung over the new countries’ economies.
Russia, Kazakhstan and other former republics were using the only currency they had: the Soviet ruble.
The key question was whether Moscow would issue a new Russian ruble, and, if it did, whether it would be available to Kazakhstan and other former republics as a replacement for the Soviet ruble.
With the Kazakhstan economy so fragile, President Nazarbayev was hoping to avoid a currency crisis that would make things worse, according to the president and members of his founding team.
At the time, a shortage of Soviet rubles in Kazakhstan was already hamstringing the economy.
The Russian parliament confirmed Viktor Chernomyrdin as President Boris Yeltsin’s prime minister in December of 1992, and Chernomydrin’s first state visit was to Kazakhstan.Russian Prime Minister Viktor Chernomyrdin (left). ©RIA Novosti
The currency question was at the top of the agenda when President Nazarbayev met Chernomyrdin in Almaty.
“Chernomyrdin gave assurances that the cash flow of (Soviet) rubles” from Moscow to Kazakhstan would improve, Aitken wrote. “He also promised that if Russia did introduce its own currency, then Kazakhstan would remain in the new ruble zone.”
But President Nazarbayev, and many members of his team, had a nagging feeling it wouldn’t turn out that way.
He ordered the team to plan the introduction of a new Kazakhstan national currency just in case.
A disquieting sign of Russia’s intentions was that a shipment of Soviet rubles that Chernomyrdin had promised would arrive in Kazakhstan on April 1, 1993, to ease the country’s currency crunch failed to materialize.
Unbeknownst to Kazakhstan, Russia’s Central Bank had stopped printing Soviet rubles a few weeks earlier. The shortage made it even more difficult for Kazakhstan to keep its economy on track and pay wages and pensions.
In the meantime, Moscow had secretly arranged to create a new Russian ruble that it decided Kazakhstan and other republics would not have access to.
President Nazarbayev said the first he heard of this was in a phone call from Chernomyrdin on June 30, 1993, the day before the new Russian rubles were to begin circulating. He was shocked and his sense of betrayal was palpable, he has told Aitken and others.
The president ordered the head of his economic team, Daulet Sembayev, to move as quickly as possible to introduce a new currency that would be called the tenge.
Making Kazakhstan’s sting of being denied the new Russian ruble even worse, massive amounts of old Soviet rubles started flooding into Kazakhstan. Some were sneaked across the border by speculators trying to make money on the currency turmoil. Others were cycled through Russia’s eight military bases in Kazakhstan.
Despite the duplicity he’d encountered on the currency issue, President Nazarbayev initially thought it would still be better for Kazakhstan to stay in a new Russian ruble zone. He convinced the leaders of Belarus, Armenia, Uzbekistan and Tajikistan to join Kazakhstan in signing a new ruble-zone agreement with Russia on October 7, 1993.Russian President Boris Yeltsin center], Kazakh President Nursultan Nazarbayev [left] and Uzbek President Islam Karimov [right] discuss establishment of ruble zone involving their three countries in the Kremlin. ©RIA Novosti
The Russians were hard-nosed on the terms of the agreement. Kazakhstan and the other countries had to agree to let the Russian Central Bank control the money supply. They also had to agree to align their budgets, taxes, customs duties and interest rates with Russia’s.
President Nazarbayev “decided to accept the terms of the deal” to buy time, because Kazakhstan was only weeks away from being able to implementing its secret plan of introducing the tenge.
At this point, fate stepped in to prevent a new ruble zone from taking effect. A constitutional crisis arose in Russia that was rooted in disaffection with Yeltsin’s rule.
Before Yeltsin could get a handle on the situation, a faction emerged in the Russian government that opposed a new ruble zone.
On October 19, Russian Deputy Prime Minister Alexander Shokhin flew to Almaty to deliver bad news to President Nazarbayev. The ruble-zone agreement was dead, Shokhin said.
On Friday, November 12, President Nazarbayev went on national television to announce to the people of Kazakhstan that they would have a new national currency three days later -- on Monday, November 15.A 3 tenge banknote
As might be expected, the introduction of the tenge generated economic hiccups. But the new currency took hold, eventually becoming a pillar of economic strength.
“The tenge was an important element in changing the country’s economic course from chaos to competitiveness,” Aitken wrote.
Even more significant was the confidence that a national currency gave the new nation, he and others have noted.
“Once the banknotes were in circulation and the roller-coaster descent of (an initial 50 percent) devaluation had slowed to the more gentle pace of a float, there was widespread national pride in the creation of an independent national currency,” Aitken wrote.
Summing up the new currency’s success, President Nazarbayev observed that “the tenge is part and parcel of our history, and a landmark of its time.”
A key lesson that Kazakhstan learned from this tumultuous early currency history was that being part of a currency zone means you’re putting your country’s economy at the mercy of others in the zone, particularly the most powerful.
Kazakhstan’s currency independence was forged through an excruciating trial by fire that neither the leadership nor the rank and file wants repeated.
That’s why Deputy Economy Minister Zhaksylykov’s recent comment that Kazakhstan is not entertaining the idea of becoming part of a new common-currency zone again makes perfect sense.