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Georgian and Armenian currencies collapse

Georgia’s currency has collapsed to its lowest level versus the dollar in more than a decade and the Armenian dram to its lowest since 2006 as the Russian rouble quake sends tremors across the former Soviet Union.

Russia’s neighbours are closely tied to their former master’s economy through trade ties and remittances. When the rouble plunges it piles pressure onto their currencies.

Kazakhstan was forced to devalue the tenge earlier this year when the rouble first began to slump, but now the heat is on Armenia and especially Georgia. The latter is also being hurt by a budget shortfall, and Russia signing agreements with its separatist regions Abkhazia and South Ossetia.

Georgian president Georgi Margvelashvili told reporters in Warsaw today that the agreements “threatens and undermines the territorial integrity and sovereignty of Georgia”, reports Henry Foy.

We see the trends that have emerged. We see Ukraine, which we see as a basic continuation of Russia’s foreign policy… Russia is targeting its neighbours, in what it sees as its own back-yard… to make political decisions based on military force

We want to trade with Russia, we want to be good neighbours with Russia. And the only condition of that is that Russia accepts the territorial integrity of Georgia.

The Georgian lari slumped 4.4 per cent against the dollar today, extending its rout since the beginning of November to 14.4 per cent. The Armenian dram has fallen 1.4 per cent versus the dollar, taking its decline over the same period to almost 10 per cent.

Timothy Ash of Standard Bank wrote:

Armenia and Georgia have similar macro stories, small economies, with managed float FX regimes. Both have relatively strong/robust public finance profiles, i.e. low budget deficits/public debt ratios, and have been growing at decent rates, of 3-4%. However, their weaknesses are both on the external financing side, i.e. persistent current account deficits, and limited FX reserve cover.

Russia is an important trading partner for both, as they have both benefitted from worker remittances, which are likely stalling now with weak growth in Russia, and lower oil prices. Exports to Russia have also been quite significant for both – Georgia has tried to refocus on Russian markets as relations warmed a bit following the departure of President Saakashvilli. Russian tourism has been a new “boon” for Georgia in recent years – a rediscovery for many Russians from the Soviet era. These are obviously lagging now.

Both also have significant agro exports to Russia, and had hoped to benefit from Russian sanctions on the West – but massive Russian devaluation is clearly threatening this trade. So these managed currency weakenings are only to be expected – inflation is low single digits, so inflation pass thru should be relatively limited.