Fears of Currency Controls in Kazakstan

As the authorities in Kazakstan plan tighter controls over foreign currency transactions, some economists are warning of the emergence of a new black market.

The Kazak parliament is currently debating two pieces of legislation relating to monetary controls, one a package of legal amendments giving the authorities the right to strip any of the country’s 2,500 privately-run currency exchange shops of its license to operate, and the other a bill designed to curb money-laundering.

The amendments also contain provisions that would allow the Kazakstan president – in an emergency – to force companies to sell foreign currency export earnings on the domestic market, to ban transfers of foreign currency abroad by individuals, and also by businesses which do not indicate who the recipient is.

Some economists are now warning that in the present financial crisis, the measures the government is proposing will tend to shift transactions into the parallel economy as people try to avoid onerous restrictions.

Tulegen Askarov, economic commentator for the weekly Respublica, says a black market in foreign currency is inevitable, and the state itself will be the biggest loser.

CENTRAL BANKS BACKTRACKS ON EXCHANGE OFFICE CLOSURE

The provision on currency-exchange offices appears to be a watered-down version of a proposal which the chairman of the National Bank of Kazakstan, Grigory Marchenko, made on March 1, calling for all privately-run money exchanges to close so that banks would have exclusive rights to exchange tenge for foreign currencies.

In a television interview, Marchenko accused private traders of spreading false rumours following the February 4 devaluation of the tenge. (See Kazakstan Struggles With Devaluation Impact, RCA No. 566, 13-Feb-09.)

Because the move depressed demand for foreign currency by making it more expensive, Marchenko said, the traders put it about that the central bank was planning a further devaluation, in the hope that this would encourage people to come back to them and buy dollars before the tenge lost more value.

Marchenko concluded that the currency market would be more predictable if it was controlled by the banks.

His statement provoked an outcry from the business sector. The Independent Association of Entrepreneurs urged President Nursultan Nazarbaev to protect the interests of the business community.

“No factual evidence was provided to show that exchange offices violated currency exchange legislation,” said the association’s letter to the president.

The association’s head, Talgat Akuov, told a press conference that Marchenko’s proposal would undermine Kazakstan’s image as a business-friendly environment, and could create a situation like that in neighbouring Uzbekistan, where tight state controls over currency transactions have fostered a lively black market.

Because the contents of the bill were not made public before it went before parliament, many people assumed – wrongly – that Marchenko’s plan to abolish exchange kiosks had been introduced wholesale into the planned legislation, leading to heated discussions and a protest campaign.

However, in its present form the draft law merely gives the authorities the right to revoke exchange offices’ operating licenses if they see fit.

In any case, the central banker seems to have softened his own position. Speaking at a press conference on March 10, Marchenko said the central bank was looking at ways of regulating exchange activities without resorting to “radical measures”, for example by requiring them to sell only foreign currency that they have bought from customers, rather than from the banks.

Oraz Jandosov, a former central bank chairman who heads the Centre for Economic Analysis, warns that cutting the private traders out of the market would make the market less competitive and allow the banks to increase the margin between their buying and selling rates, to the detriment of the consumer.

That would create space for black-market traders to step in and offer keener exchange rates, he says.

Economist Rahat Alshanov agrees that prohibition almost always leads to the creation of a black market. Although he agrees with Marchenko that private dealers engage in speculative trading, the answer lies in clear guideless imposed by the financial authorities

MONEY-LAUNDERING BILL SETS BARRIER TOO LOW

The second bill bears the self-explanatory title “Preventing the Legalisation (Laundering) of Illegally-Acquired Income and the Funding of Terrorism”.

Finance Minister Bolat Jamishev said the bill was essential as Kazakstan wanted to become part of the Egmont Group, an international body that coordinates the activities of financial intelligence units which monitor money laundering and other illegal activities in just over 100 countries.

The criticism levelled at the bill is that it sets a low threshold of 2,500 US dollars, above which any commercial transaction in a foreign currency must be reported to a new financial watchdog which will carry out checks to prevent laundering or the funding of terror groups. Lawyers, banks and notaries are all under an obligation to report any transactions of this kind that come across their desks.

Askarov says the bill will set Kazakstan back by 15 years.

“It would be understandable if the monitoring was to apply to transactions of upwards of 100,000 dollars, or deals involving property and major assets,” he said. The bureaucratic machine simply won’t be able to cope. In addition, many deals will be done illegally, reducing the volume of transactions going through the banks and clearly affecting their balance-books.”

Jandosov says the 2,500-dollar limit is far too low to be practicable, and the job of tracking all transactions of this kind will place an extra burden on the banks.

Alshanov believes migrant workers from other Central Asian states living in Kazakstan and sending home money to their families account for a large proportion of transfers of such modest sums.

He believes people will evade the complex rules by resorting to informal money transfer schemes. This new area of the grey economy will, he believes, be run by criminals.

“Organised crime has interests wherever shadow-economy business exists,” he said.

Despite such criticisms, the economists interviewed for this report said it was understandable why the authorities wanted to impose tighter regulation.

In contrast to some commentators, Aytolkyn Kurmanova, acting director of the Institute for Economic Strategies in Central Asia, wholeheartedly supports the idea of tightening up on foreign currency transactions, and says the main aim is to stop capital flight – the flow of funds out of Kazakstan.

“We have had an open foreign currency market, and many companies have used it to conduct offshore operations,” she said in an interview with the weekly magazine Expert Kazakstan on March 25.

Georgy Kovalev is an independent journalist in Almaty. Galiaskar Utegulov is a pseudonym for a journalist in Kazakstan. Additional reporting was done by Mirgul Akimova, a journalist in Bishkek working under a pseudonym.