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of Independent States (CIS). Turkey is the financial and economic centre of
a patch centring on southern Europe thanks to its proximity and the shared language and cultural heritage with the other countries.
A “golden triangle” of co-investment and trade has appeared between Turkey,
through trade and banking, the fall of the ruble has more to do with the threat of “crushing” sanctions being imposed on Russia this autumn by the US.
The ruble has sold off to levels not seen since 2016 and growth forecasts have already been cut. However, analysts say that the drop in the ruble will be limited
“Prudent macroeconomic policy-making and strong growth in external earn- ings helped the GEL remain immune
to the sell-off in regional currencies until early August 2018. However, the TRY’s collapse on August 10 affected the GEL through the expectations channel when the currency lost 3.9% in one day against the dollar trading at GEL2.57. Taking into account the ongoing cur- rency crisis in Turkey and sour global sentiment in EM currencies, we expect the USD/GEL rate to weaken to around GEL2.7 compared to our previous GEL2.6 projection for end-2018,” Tblisi- based investment bank Galt & Taggart said in an August 13 update on the impact of the crisis.
The problem for all these countries is the lira has fallen so far and so fast that it has altered the terms of trade, forcing the local currencies to adjust as their exports to Turkey become much more expensive and imports from Turkey much cheaper. The same is true for their relations with Russia, another key trad- ing partner, where the drop of the ruble has had the same, but less extreme, effect. The double whammy of these currency shifts is causing limited devalu- ations across the entire region.
“The gradual adjustment in the USD/ GEL rate is likely a necessary correction
“Turkey’s currency woes are having a spill over effect on its neighbours”
Georgia and Azerbaijan, manifest in the new Baku-Tbilisi-Kars (BTK) railway link opened last November.
Turkey’s trade with the entire region has flourished, exposing the participating countries to Ankara’s current problems. Kyrgyz and Kazakh trade has been grow- ing steadily, despite some hiccups caused by the creation of external tariff barriers under the Moscow-led Eurasia Economic Union (EEU). Ankara’s business ties with Tajikistan, which does not share a Turkic language like the other Central Asian states, have also developed and more recently Uzbekistan, after the death of former president Islam Karimov, has opened up this one-time hermit state. Turkish business has rushed in.
Turkmenistan is insulated from the lira’s fall as it is maintaining its dollar peg policy for the currency for the mean- time. And Armenia’s lack of meaningful contact with Turkey has isolated it from the meltdown, as there is little trade or investment between the two countries.
Russia
The countries in southern Europe are being hit on both sides at the moment. While Turkey is grabbing the headlines, the Russian devaluation is just as painful, if not more so, due to the big role Russia’s economy still plays across the whole terri- tory of the Former Soviet Union (FSU).
Russia has been in the front line too in August after its currency fell some 17% since the start of this year in parallel with the Turkish lira’s tumble. However, while the two countries are connected
and the government can weather the storm thanks to its healthy currency account surplus and large hard cur- rency reserves.
Russia’s current account surplus increased to $60.7bn in 7m18, versus $53.2bn in the first half of 2018, according to preliminary data from the CBR. The trade surplus also rose to $104bn from $90.6bn, thanks to higher than expected oil prices.
At the same time Russia’s gross interna- tional reserves (GIR) have been rising and were just shy of $460bn as of the start of August – more than enough to cover 17 months of imports, when economists say the minimum needed to ensure the stabil- ity of the currency is three months. And
“The booming tourism industry in Georgia will assay the devaluation pressure”
the Russian budget is on course to run a budget surplus of as much as 2% of GDP after several years of deficits.
With these reserves the fall of the ruble will be limited, but even the 17% fall spills over into the Caucasus and Central Asia.
Georgia
Thanks to their close ties, the fall of the lira (TRY) has had the most noticeable affect on the Georgian lari (GEL) and the Azeri manat (AZM), but in Georgia’s case the strength of the economy has limited the damage.
to rectify the GEL’s real gains against the TRY and RUB – Georgia’s two largest trading partners. We also believe that depending on FDI/tourism inflows and import performance, pressure on the GEL might subside in August–September 2018,” Galt & Taggart added.
The booming tourism industry in Geor- gia will assay the devaluation pressure somewhat as an independent source
of foreign exchange earnings, but this support will wear off in the next month as the tourist season comes to an end. However, Georgia is unlikely to feel as much pain as Turkey: in the deep deval-
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