TOPIC OF THE WEEK: CCA currencies in a sweet spot, but for how long?
Typically, the Caucasus and Central Asia currencies have faced a weakening RUB, which creates a myriad of problems for countries that tend to run trade deficits with Russia and depend on cross-border remittances from their large neighbor. But 2025 has been different, with the strengthening RUB generating a "problem" that CCA authorities do not necessarily mind. At the same time, as a counterweight, CCA policy-makers have allowed their currencies to appreciate against the US$.
This has created a kind of sweet spot for these exchange rates. The strengthening of the CCA currencies against the US$ has been used by central banks across the region to add to FX reserves, and this has taken place in all CCA economies. The stronger currencies vs the US$ have, however, not prevented the real effective exchange rates from a welcome weakening from overvaluation positions, which is, of course, due to the RUB behavior described above. This in, turn, should help restore external competitiveness and improve current account deficits. Appreciating currencies are also welcome to fight accelerating inflation.
Can this last? My view is that, ultimately and crucially, this will depend on the RUB. There are already signs that RUB's run against the US$ may be coming to an end. The Russian Central Bank has started to ease policy, and this process is likely to accelerate over the second half of the year. Positive news about resolving the Russia-Ukraine war is increasingly hard to find, while Russian policymakers are also struggling with the stronger currency as it hurts export and fiscal revenues. All this may be slow to unfold, and we may continue to enjoy the sweetness of CCA strength for some time, but eventually I think the RUB will succumb to market forces and turn around. History suggests that this will have its expected adverse effect on the CCA currencies.
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