Despite their membership in the Eurasian Economic Union and close economic ties, Kyrgyzstan and Kazakhstan currently lack the practical conditions necessary to switch to mutual settlements in their national currencies — KGS and Tenge.

If you’ve traveled to a neighboring country, you’ve likely exchanged KGS for Tenge. And upon returning, you may have noticed how little is left when converting the remaining Tenge back to KGS. It’s not just about spending — the reason lies in negative currency arbitrage.

Now let’s imagine this scenario. A craftsman from Kyrgyzstan sells one of his creations for 5,000 KGS. Suddenly, a collector from Kazakhstan takes interest in the item. The price is fine with him — he checks the current exchange rate for KGS in Kazakhstan and transfers the amount equivalent to 5,000 KGS. It’s a fair price, reflecting the artisan’s labor, materials and a modest markup. However, when the craftsman receives the payment in Tenge, he’s left confused — after conversion and transaction fees, only 3,659 KGS show up in his account. So, despite successfully selling the item and receiving payment, he ends up in the red — with no profit and, in fact, missing part of the production cost. This is how negative currency arbitrage quietly hits the most vulnerable participants in cross-border trade.

Currently, the official exchange rate of the Tenge to KGS is not calculated directly. The National Bank of Kyrgyzstan uses a cross-rate, which is based on the average market rate of the U.S. dollar to KGS (on the domestic market of Kyrgyzstan) and the tenge-to-dollar rate published by the Kazakhstan Stock Exchange (KASE). This approach provides a more stable reference point than a direct comparison between two relatively volatile currencies.

But if this imbalance is so obvious, why isn’t anyone doing anything about it?

It all comes down to the floating exchange rate regime, which has been in place since 1993. This means the value of any foreign currency is determined solely by supply and demand. The National Bank does not intervene — except in cases where sharp fluctuations could threaten financial stability.

This approach makes the market flexible — but also vulnerable. Especially for currency pairs with low liquidity. And the KGS/Tenge pair is exactly that. Even with existing trade between the two countries, the volume of direct transactions between their currencies remains minimal.

In an official response to Akchabar, the National Bank emphasized that commercial banks and exchange offices set their own buying and selling rates based on market conditions. And in the absence of stable demand for the Tenge in Kyrgyzstan (and vice versa — for  KGS in Kazakhstan), they simply have no incentive to trade these currencies in significant volumes.

As a result, both businesses and individuals most often settle payments in U.S. dollars. This is because the dollar remains the most stable and liquid currency, despite regular statements within the EEU about the need to develop settlements in national currencies.

In order to switch to mutual settlements in KGS and Tenge, at a minimum, the following steps are required:

• full-fledged bilateral currency markets,
• developed clearing infrastructure,
• high liquidity of national currencies in each other's markets,
• stable and predictable exchange rate.

So far, none of these factors have been fully implemented.

Therefore, in the short term, settlements between Kyrgyz and Kazakh companies in national currencies are unlikely. The model using the dollar remains the most convenient and understandable for the market. Moreover, the national banks of both countries do not plan to introduce new mechanisms or regulations in this direction.

Nevertheless, trade between Kyrgyzstan and Kazakhstan continues to grow. In January 2025 alone, it exceeded 101 million USD. The majority of mutual trade is still conducted in U.S. dollars. As of the third quarter of 2024, 85% of payments from Kazakhstan for Kyrgyz goods were made in dollars, and 76% of Kyrgyz payments for Kazakh goods were also in this currency.

It is worth noting that Kazakh companies almost never use Tenge in settlements with Kyrgyzstan — it accounts for only 0.1% of payments. Meanwhile, Kyrgyz entrepreneurs sometimes pay for Kazakh goods in Tenge, and this share reaches 18.4%.