Crisis Birth of Kazakhstan’s Tenge in 1993 – REVISED

It seems that some of my recent posts have carried a DO NOT OPEN warning.  This likely is because I have used links in the text to guide readers to the original source of the information.  It might also be due to overly sensitive anti-virus protections on individual receiving devices.  In any case, I have deleted the one link that appeared in the original version of this post in the hope that potential readers will be encouraged to open it.  

In his annual address to the nation on November 30, 2015, President Nazarbayev stressed that the nation will survive the current economic and currency crisis just as it survived bad situations in the past.

The president specifically referred to some past episodes but didn’t mention the chaotic conditions that led to the birth of the tenge as a new national currency.

In 1993, Kazakhstan (along with other former Soviet republics) was effectively forced to stop using the Russian ruble and into adopting its own currency. It is worth remembering this history because, over the years, there has been talk about the possible introduction of a common currency for Russia, Kazakhstan and other CIS countries.

The tenge replaced the Russian ruble as Kazakhstan’s currency on Monday, November 15, 1993, just three days after President Nazarbayev issued a Decree “About introducing the national currency of the Republic of Kazakhstan”.  (You can imagine that the folding cash and the coins had much earlier been printed, minted and stored at the National Bank’s vault.)

That there was a looming currency crisis in the weeks and months prior to November 15 was obvious to all though where the crisis was leading was uncertain, at least to the man in the street.  The ruble was tumbling in value with the result that vendors were required constantly to revise ruble prices upwards.  The U.S. dollar, already a preferred currency for the storage of value, became ever more prized by the population.

Living conditions in Kazakhstan were difficult at the time of the ruble/tenge changeover.  As if adding insult to injury, even the weather was foul.  The snow that winter came early and stayed until thawing occurred late in the spring of 1994.  The cold was penetrating and unending.  My wife, who was at KazGU at the law school at the time, remembers how there was no heating at the university buildings, or other public institutions for that matter, and faculty and students all kept on their coats, woolly scarves and hats, during the lectures.

I too remember the snow and cold, such as on a particular night when I walked down Furmanov Street.  I was on my way from my apartment at Samal-2 to the Dostyk Hotel on Kurmangazy Street.  The pathway, like the road, is on a pronounced slope, maybe a 10 degree gradient or more.  The path was covered by slick ice, made all the more smooth by children who had been sliding down it in their shoes to see who could go the furthest without falling.  An ethnic Kazakh man ahead of me was flat on the path, clearly drunk, and couldn’t regain his feet.  Moreover, he seemed to be trying to “swim” on the ice toward his fur hat which had skidded ahead.  I got him to his feet, retrieved his hat, and then escorted him to the military hospital at the intersection by Republic Square.  I figured that, even saturated with alcohol, he would freeze to death if left out alone.  I also figured from the tattoo on his hand that he had been in the military at some point and the hospital might know what to do with him.  I certainly didn’t.  When someone answered the entry door I quickly left the man to his fate.  I feared to look back to see if he was thrown out to fend for himself.  I had done what I could.  When I say that it was cold, I mean bitterly cold.

The members of my small staff and I were partly insulated from the currency chaos.  As a representative office of a U.S. firm, we were entitled to have a local U.S. dollar bank account and I was permitted to pay salaries in U.S. dollars, as I did.  Nevertheless, we were not protected from the problems in the world outside the doors of our office.  We converted dollars to rubles practically every day to meet our daily requirements.  It was no use converting a lot of money on Monday to see us through the week because the rubles purchased on Monday would not buy as much on Friday as they did on Monday, nor on Tuesday, Wednesday or Thursday.

Moreover, the people I sent out with dollars in order to buy rubles had to shop around for the best rates.  There were little exchange booths, kiosks, cubicles or offices everywhere, each one independently setting the dollar/ruble exchange rate as they saw fit.  Undoubtedly they got information from a bank or other reliable source but during the course of the day the value of the ruble changed, always downwards.  In the absence of mobile phones in those days, some of the money changers were sure to fall behind in adjusting their rates.

Presumably there was money to be made in converting currency – else why were so many engaged in this activity? – and several future entrepreneurs probably learned some of their skills while counting and handling cash. But they also faced risks, financial and personal security, and not just in getting their exchange rates wrong.

People were motivated to do what they could to beat the system or at least protect themselves from the loss of value of any cash they had on hand or in a bank.  One rather extreme example comes to mind.  I had met a nice chap from the U.S. Embassy.  He had a vague title, suggesting to me that he likely was a spook from the CIA, but he seemed highly knowledgeable about what was going on in the country.  I considered him to be well informed and a good source of information, at least until he told me that, in his room at the Hotel Kazakhstan, he had stored numerous cases of vodka stacked against one wall.  In fact, he declared to me that the entire wall was covered by vodka boxes.  I knew he drank a fair bit but he claimed that vodka was a good holder of value, i.e., he would never lose by buying and holding this popular commodity.  I didn’t disagree with him but I did wonder about his ability to commercially market his stash when the currency and prices stabilized.

Russia eventually stopped shipping rubles to Kazakhstan and the other former member countries of the Soviet Union.  I seem to remember that there was some tapering off before an abrupt termination of shipments.  During that period, it was reported that some Kazakh bankers drove to Russia, obtained large amounts of old rubles and tried to bring them back to Kazakhstan.  Unfortunately for them, they were caught and arrested at the border for smuggling.  That was during a period when “old rubles”, which no longer constituted legal tender in Russia, continued to be used in Kazakhstan.

The birth of the tenge came about because, following the breakup of the Soviet Union, it had been untenable to continue to use the same old monetary arrangements as prevailed in the USSR.  As Europe has discovered in the last few years, the successful use of a common currency requires a strong political consensus in regard to monetary and fiscal targets and a common institution going after those targets, as well as some common legislation on banking and currency exchange.  In 1993, it had become clear to the various independent states that the easy money situation would not last forever.  As such, each of them used their freedom to issue large amounts of credit such as for building works.  This explains in part why, at the time Kazakhstan was forced out of the common currency, there were so many semi-completed buildings and other construction projects.  In effect, each former Soviet republic had been competing to wrest the maximum benefit out of the ruble while the game lasted.

Lots of details about this period of currency chaos can be found in the introduction to a book entitled Kazakhstan – 1993-2000: Independent Advisors and the IMF by Lutz Hoffmann, Peter Bofinger, Heiner Flassbeck and Alfred Steinherr.

When first issued, one tenge was deemed to equal 500 Russian rubles.  Amazing as it may seem now, the tenge also initially carried the value of 4.7 tenge to one U.S. dollar.

We all quickly learned to use the new currency.  At first, this was relatively easy.  I, like many other people, had the U.S. dollar cost of things in my mind.  So, treating one tenge as about equal to one U.S. quarter, mental conversions of tenge prices into U.S. dollars were easy.  Divide the tenge price by four and round down a bit.  However, the tenge depreciated gradually against the dollar so mental conversions became more difficult.  By then, however, we had gotten somewhat used to the value of things in tenge without need of a conversion.

The tenge was propped up by National Bank interventions in the currency market for many years but was left to float more or less freely in August 2015.  It has lost more than 80% of the value it had at the start of 2015, mainly due to external forces beyond the control of the country, and currently it takes nearly 350 tenge to buy just one U.S. dollar.

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