The National Bank of Kazakhstan (NBK) has spent more than $400mn on stabilising the exchange rate of the tenge in just two days, despite freeing the currency last month.

With oil prices plummeting, the central bank was forced to make a painful choice between burning through its hard currency reserves but maintaining a stable exchange rate, or allowing the currency to rapidly lose value against the dollar, which inflicts pain on people and inflation on the economy. The central bank followed Russia and chose the former.

The problem is the swings on the exchange rate market for the newly untethered currency became so wild this week that the central bank felt forced to intervene in the exchange markets, giving it the worst of both worlds – a devalued tenge but still burning through reserves at an alarming rate.

Russia was put in the same position, in what some analysts have dubbed a “dirty float”. The jury is still out on what costs a country more in the long run: falling confidence in the national currency if exchange rates are too volatile, or the huge amounts of cash that have to be spent to calm the market.

The National Bank said in a statement on September 16 that because of “the increasing volatility of the exchange rate of the tenge caused by speculative operations by currency market players in conditions of the lack of objective and significant changes in fundamental macroeconomic factors, the National Bank of the Republic of Kazakhstan decided to carry out currency interventions to stabilise the situation on the domestic currency market from September 16”.

The same day it spent $144mn on bringing down the exchange rate from historic lows of KZT300 to about KZT285 against the dollar and a further $270.4mn on September 17 when the tenge settled at around KZT271, the level maintained for the previous few days. On September 18, the exchange rate remained at that level in morning trading on the Kazakhstan Stock Exchange (KASE) and weakened 3.3% to KZT279.48 by the end of the day, but it is not clear to what extent the National Bank’s interventions steadied the slide.

The NBK has had to resort to currency interventions less than a month after it announced it would allow the tenge to float freely on August 20. According to President Nursultan Nazarbayev, the Kazakh central bank interventions cost the country $28bn between February 2014, when the tenge was devalued by 19%, and August 20, when it was allowed to float freely, resulting in an immediate 29% drop in the value of the tenge against the dollar.

The question is now whether the National Bank has abandoned the free-floating exchange rate regime less than a month after it announced the abolition of a trading corridor for the tenge’s exchange rate. bne IntelliNews’s repeated attempts to reach the National Bank for comment have been left unanswered.

Anuar Ushbayev, an analyst and managing partner at the Almaty-based Tengri Partners investment firm, doesn’t think the latest interventions mean the National Bank’s has departed from the policy of a free-floating exchange rate regime, which, according to the bank, is supposed to set the exchange rate “by market demand and supply, taking account of fundamental internal and external macroeconomic factors”. He explains the bank’s behaviour by its desire to calm down the market despite the cost.

“Panic is engulfing the local currency market and economic agents do not know where the bottom is and there are no reference points,” Ushbayev tells bne IntelliNews. “I don’t think the National Bank has abandoned its new policy but it is preferring to show the market some stability because if it doesn’t intervene the panic may take the exchange rate further away than the fair rate.” The analyst thinks that without the National Bank’s interventions the tenge’s exchange rate would have driven down to KZT350-370 to the dollar, which is “beyond the fair level”.

Some analysts believe that the tenge started depreciating sharply because it was relatively overvalued against the Russian ruble, the currency of Kazakhstan’s major trading partner. On September 16 the exchange rate of the tenge against the ruble reached KZT4.65, the closest to the five-year average of KZT4.61 to the ruble. “The weak tenge compared to the ruble encourages imports from the neighbouring country, exerting pressure on the tenge’s exchange rate via trade channels,” analysts at Halyk Finance investment bank believe.

Deputy National Economy Minister Timur Zhaksylykov believes the tenge’s exchange rate against the ruble will not reach the previous levels of 5-to-1 established before the ruble started devaluing in mid-2013. He reasons that devaluation and inflationary pressures in Russia are developing faster than in Kazakhstan. “The annual rate of inflation reached 22-24% in Russia […], whereas inflation stood at 3.9% in our country in the first six months of 2015, which means we were in absolutely different economic realities,” Zhaksylykov said on September 3.

At the same time, Deputy Investment and Development Minister Albert Rau reckons the KZT4.5/RUB1 level is “comfortable” for Kazakh industrial enterprises and farmers. “The opinion of [Kazakh] businesses is that KZT4.5 to the ruble is more or less comfortable,” Rau said on September 17.

The level of KZT300/$1, which the tenge touched in intraday trading on September 16, translates into KZT4.65 to the ruble, which is “close” to the fair rate and there is no sense in keeping the tenge stronger than that, Ushbayev believes. The National Bank should not try to prevent the tenge’s free-fall because the market will still try to push it down.

“The market should be allowed to reach the level at which most players start believing that the tenge is undervalued so they will start offering a higher rate for it,” he says. “This is what will most likely happen, but the National Bank is trying to resist it. But I believe it is futile.”