Energy-rich Azerbaijan, whose economy has been hit hard by falling oil prices, withdrew support for its currency, the manat, on Monday, causing it to plunge by nearly a third against the dollar.
"The central bank took the decision to switch to a floating exchange rate for the national currency as of Dec. 21," the Central Bank of the Republic of Azerbaijan (CBA) said in a statement. The CBA said the decision was taken because "falling oil prices and the continuing devaluation of partner countries' currencies has begun to negatively affect the Azerbaijani economy."
The central bank decided to devalue the manat by 47.63 percent to 1.55 manats per dollar, and 1.68 manats per euro, which actually corresponds to a devaluation of 47.88 percent, the statement said. The manat was trading at 1.55 against the dollar on Monday, down 32.3 percent from Friday.
The country's central bank has spent more than half of its foreign currency reserves to support the currency, which has been in freefall since the beginning of the year. Following Monday's move, the bank's currency reserves increased by 3.1 billion manats ($2.9 billion).
Azerbaijan's decision came after the energy-rich Central Asian nation of Kazakhstan abandoned its currency band for a free-floating exchange earlier this year.
Analysts said the move would not affect the Russian ruble but would negatively impact the majority of regional currencies. "The move can be considered to be neutral for Russia: The weak ruble, in addition to low oil prices, was itself the trigger for Azerbaijan's currency move," said Oleg Kouzmin, an economist with Renaissance Capital. He described the prospects for Kazakhstan's tenge as "slightly negative," adding that the Georgian lari – which has lost nearly 45 percent of its value against the dollar since November 2014 – is expected to be most affected.
Oil and gas account for 95 percent of Azerbaijan's exports and 70 percent of government revenue, making the Caucasus country's economy highly dependent on global oil prices. The Caspian nation in February abandoned its dollar peg, switched to a dollar-and-euro basket and also devalued the manat by more than 33 percent.
Oil prices extended losses on Monday, with Brent crude at one point sinking 2.1 percent to $36.09 a barrel – its weakest since July 2004.
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