Moscow will seek to minimize a bumpy fiscal ride for its Central Asian trading partners, while China can also lend a hand.
Central Asian economies can expect “significant collateral damage” from the war on Ukraine and international sanctions against Russia, according to the European Development Bank’s Regional Economic Outlook in a budget report.
The region will be negatively affected by five main channels, according to the report.
First, remittances are a major source of income and foreign exchange for Central Asian economies (31% of GDP in Kyrgyzstan, 26.7% in Tajikistan and 11.4% in Uzbekistan). Russia is a major source, mainly through seasonal labor sending capital to their home country, and accounts for more than 50% of the total received in the first nine months of 2021 by the Tajikistan and Uzbekistan, and more than 80% of the total received by Kyrgyzstan. However, the 2022 harvest has not yet started and the results in this sector could improve if the Ukrainian conflict is resolved. Work will always be necessary regardless of the circumstances.
Second, uncertainty affects investment and job creation. National labor markets may be slow to create new jobs due to major uncertainty affecting investment (as EBRD clients have previously reported). Both Kazakhstan and Kyrgyzstan are still recovering from recent political upheavals, and labor market pressures could affect their political stability.
Third, returning migrants can put a strain on labor markets. If Russia enters a protracted Ukraine crisis, many Central Asian countries will see migrant workers (usually menial labor such as restaurant servers, street cleaners and taxi drivers) return to the region, which will put pressure on wages and increase competition in the low-skilled segment of each country. Central Asian labor market. These pressures can be particularly strong in Uzbekistan and Tajikistan due to the concentration of their migrant workers in the Russian construction industry (Russian-speaking Kyrgyz migrants are mainly employed in the Russian service industry).
On the other hand, the influx of Russian, Belarusian and Ukrainian migrants to Central Asia can provide a strong boost to knowledge-intensive sectors in the region, since many of these migrants are entrepreneurs, developers and nomads. digital.
Fourth, rising energy prices will negatively affect net energy importers – Kyrgyzstan and Tajikistan. Kazakhstan, Mongolia, Turkmenistan and Uzbekistan, on the other hand, will reap significant benefits. High prices for gold, ferrous and non-ferrous metals will be a major offsetting factor for all Central Asian economies.
Finally, supply chain disruptions will affect all countries in Central Asia, but will be particularly acute for countries with the highest share of transit trade through Russia, such as Kazakhstan and Mongolia. Continued Covid-19 restrictions at the Chinese border will be an aggravating factor. Turkey will likely become a major regional distribution center serving Western, South Korean and Japanese companies, which will incur additional transportation and logistics costs.
Russia’s share of Central Asian imports is significant, ranging from 42% for Kazakhstan to 21% for Turkmenistan. Central Asian economies will also face devaluation and rising global commodity prices due to inflation. The first weeks of the Ukrainian crisis led to a loss in value of most Central Asian national currencies (around 20% in Kyrgyzstan and Kazakhstan, 15% in Tajikistan and 7% in Uzbekistan) – despite the interest rate hikes and market interventions by their respective central banks. Some of those early losses have been erased in recent days, however, in sync with the Russian ruble also recovering in value.
A significant drop in remittances is one of the immediate causes of this turbulence (Tajikistan officially reported a 75% drop in the value of remittances received in the first 10 days of March 2022, which had an impact on their liquidity supply in foreign currencies).
Another problem is the dependence on Russian banks for the provision of hard currency physical cash and correspondent bank accounts (for example, 75% of all correspondent accounts held by financial credit institutions in Tajikistan are held in Russian banks). The impact of currency devaluation on inflation is likely to be significant given that imports represent a very large share of consumption throughout Central Asia (eg 60% in Tajikistan).
Most Central Asian economies could face soaring food and consumer goods prices. Major wheat producers, such as Kazakhstan and Uzbekistan, will seek to limit price increases by setting export quotas. Importers will have no choice but to subsidize basic food products, which will weigh on fiscal balances. Rising fertilizer costs are expected to impact agricultural productivity and the prices of locally produced food, although, tellingly, Moscow announced yesterday that it had increased production and rejected export tariffs.
Kyrgyzstan, China’s neighbor, has additional resources because of this, as its economy is more China-centric. In January 2022, the country introduced sweeping tax and customs administration reforms, which are expected to reduce illicit trade and informal economic activity. Since then, China’s trade statistics have shown a surplus of US$5-6 billion in Chinese exports to the country (equivalent to 70-80% of GDP) more than officially released Kyrgyz data.
Assuming that the ongoing reforms are at least partially successful in curbing smuggling activities, Kyrgyzstan will register significant gains in terms of tax revenue and official GDP statistics over the next few years (although, paradoxically, the impact on real income may be negative due to reduced trading volumes) .
Another special case is Turkmenistan, which is able to reap the benefits of its “splendid isolation”, immense energy reserves, strict rationing of access to hard currency and its favorable location for transport. on the Caspian Sea.
It should be noted that the EBD is an institution of the European Union and it lacks initial information on Central Asia. As noted above, concerns about fertilizer imports have already been alleviated by Russia. In view of the EDB report, it should be taken into account that the Central Asian states are closer to Moscow than the EDB and that it is not excluded to further dampen the movements against the economies of Central Asia. All but Turkmenistan are members of the Commonwealth of Independent States (CIS) whose finance ministers are in daily contact with Moscow, while Kazakhstan and Kyrgyzstan are members of the Eurasian Economic Union, which is part of a free trade bloc with Russia. China can also help alleviate some of the fiscal challenges through funding tied to the many projects of the Central Asian Belt and Road Initiative.
Briefing Russia is written by Dezan Shira & Associates. The company has 28 offices across Eurasia, including China, Russia, India and ASEAN countries, assisting foreign investors in the Eurasian region. Please contact Maria Kotova at [email protected] for Russian investment advice or assistance with market information, legal, tax and compliance issues throughout Asia.