From Market Watch February 4 2009:

Kazakhstan devalued its currency by about 18% Wednesday, as the mineral-rich, central
Asian country struggles to contain a banking crisis and deal with the impact of tumbling oil
prices.
The National Bank of Kazakhstan decided to allow the country's currency, the tenge, to fall by
around 18%. The central bank set a new target rate for the tenge at 150 versus the U.S. dollar,
allowing the currency to fluctuate within 3%, up or down, from that level.
The devaluation comes only days after the Kazakh government vastly expanded its role in the
financial sector by nationalizing two of the four largest banks and taking 25% stakes in two other
lenders. The move also follows currency devaluations in Russia, Ukraine and Belarus. News of
the devaluation drove Kazakhstan's five-year CDS [credit default swap] spreads higher by a
further 65 basis points to 1,083 basis points, according to RBC Capital Markets.
The country's CDS spreads have been climbing
steadily in recent weeks, signaling that investors see a
greater risk of sovereign debt default.
In London Wednesday, the shares of Kazakh mining
firms rallied following the devaluation of the tenge and
after Eurasian Natural Resources said it doesn't have a
need to cut production further. The Kazakh miners
have costs in tenge -- notably labor -- but sell the
metals they extract in dollars

A page from Russia's playbook?

The plunge in oil prices -- which are down 54% over
the last 12 months -- has put pressure on Kazakhstan's
economy as well as that of neighboring Russia, which
has allowed the ruble to fall sharply in recent months.
Both Russia and Kazakhstan have a vast wealth of natural resources, including petroleum and
natural gas.
"In taking a page right out of the Russian playbook, Kazakh policy-makers are trying to peg the
tenge again after the failed attempt to defend it after oil prices plunged," said Win Thin, senior
currency strategist at Brown Brothers Harriman & Co.
"As such, we look for continued pressure on the currency," Thin said, adding that the market is
betting that the new peg will be broken. Twelve-month forward contracts -- which allow
investors to bet on or hedge against the future fluctuations of a currency -- show the tenge at
186.315, or another 20% from current levels.
In January, Russia ended its policy of managed mini-devaluations of the ruble and allowed one-
off 10% devaluation, but also set a new trading limit for the currency. Subsequently, the ruble
has continued to come under pressure, raising speculation about whether the Russian central
bank will continue to aggressively defend the exchange rate by spending its international
reserves.
Like other emerging markets, Kazakhstan may be forced to approach the International Monetary
Fund for help in the coming weeks, Thin said.
Banking crisis
"The latest devaluation will pressure Kazakh banks and companies, which have severe currency
mismatches," Thin said. "Kazakhstan is struggling with a banking crisis along the lines of
Iceland."
Iceland, a North Atlantic island nation, was plunged into crisis last October as its once-vibrant
banking sector collapsed, sending its currency and stock market into a nosedive.

"All in all, Kazakhstan is being viewed as a smaller version of Russia: heavy state involvement
in the economy, high dependence on oil exports, and falling foreign reserves."Win Thin, Brown
Brothers Harriman & Co. Responding to its own banking crisis, Kazakhstan's government has
bailed out all four of its biggest banks. On Monday, it effectively nationalized BTA Bank and
Alliance Bank) , while it took 25% stakes in Kazkommertsbank, ) and Halyk Savings Bank.

The devaluation of the tenge, which is aimed at preserving reserve levels, carries "certain risks
for the sovereign," said Standard & Poor's in a statement Wednesday. A weaker currency is a
positive for those export-oriented companies whose operating costs are denominated in tenge,
the ratings agency said.
However, "the impact on the banking sector, which is highly leveraged externally, is negative,
suggesting a further rise in contingent liabilities to the sovereign," S&P said.
The impact for the sovereign "so far seems containable," as Kazakhstan's fiscal and monetary
reserves, at 42% of gross domestic product, remain substantial relative to nearly all peers, the
agency said.
"The second chief risk is that confidence in monetary stability and, by association, the banking
system could weaken further, triggering more downward pressure on the exchange rate," S&P
said.
Thin of Brown Brothers Harriman said: "All in all, Kazakhstan is being viewed as a smaller
version of Russia: heavy state involvement in the economy, high dependence on oil exports, and
falling foreign reserves."
And sentiment toward Russia and all of Emerging Europe remains very bearish.
Fitch Ratings cut Russia's sovereign credit ratings to only two notches above non-investment or
"junk" status Wednesday, saying the sharp decline in commodity prices, capital flight and the
rapid depletion of its foreign exchange reserves have weakened the country's balance sheet.
Written by Polya Lesova a New York-based reporter for MarketWatch.