Soviet Forex

The value of the Russian ruble has stabilized in the last three months, but it could be giving people a false sense of calmness. Those who do business in any of the former Soviet republics should be aware that many of those currencies are continuing to lose their purchasing power. 

Money owed to Czech businesses is probably getting more expensive to obtain. And it is clear that many financial institutions in the region are very concerned about the ability of individuals and businesses to pay their bills.

Everyone is aware of the collapse of the ruble near the end of 2014. What many people do not realize is that in the first quarter of 2015, many of the world’s weakest currencies are found in the former Soviet republics.

Except for Ukraine, the reason for the weakness is not political, but economic. For many of these countries, Russia remains as an important trading partner. The weak ruble has caused Russian-made products to be relatively cheap, to the disadvantage of locally made goods. Kazakhs have reportedly been buying all types of Russian products, from automobiles to toilets. According to Kazakhstan’s central bank, the demand for rubles was 4 times higher in January compared to the same period last year. Kazakh president Nursultan Nazarbayev has appealed to citizens to be more patriotic and buy locally produced products.

Many analysts believe that Kazakhstan will again devalue its currency after elections on April 26, after the central bank previously devalued the currency in February 2014. If they do, they will be joining Belarus, Turkmenistan, Azerbaijan, Armenia, Georgia, Moldova, and Ukraine in weakening their currencies.

All of this has lenders and central bankers in the region concerned about worsening credit quality. A weak currency reduces the purchasing power for everyone, of course. But the situation is much more severe for those individuals and companies who have borrowed money in foreign currency. Those debts are now more costly to repay. In Azerbaijan, for example, an estimated 19% of debts are in foreign currency, primarily U.S. dollars. In Armenia, the share of debts in USD is 62%.

This is a dangerous situation for Czech businesses, even if their transactions are not in U.S. dollars. That counter-party to the east might not be able to pay because they need more cash to pay other loans.