Euromaidan’s Impacts on Central Asian Economies

Russia’s swift seizure of Crimea shocked the international community.  Undoubtedly, the events reverberated louder still in the Former Soviet nations of Central Asia.  Like Ukraine, many sit on Russian doorstep and rely heavily on their big brother to the north for trade, host sizeable ethnically Russian populations and share a history of Soviet leadership.  The Economist, however, recently noted that, “It does not look likely that Mr. Putin would suddenly resort to military intervention in Central Asia. For now, in most of the region, he has enough influence without it.”  Although we at CES tend to agree, the situation in Crimea definitely won’t make life easier for Central Asians and we’re going to break down why.

Russia’s economy has taken a serious hit in recent months.  Euromaidan and the seizure of Crimea has poured gas on the situation and holds inevitable economic aftershocks that will ripple over to Central Asia.  In reference to the ongoing tensions with Ukraine, European Central Bank President Mario Draghi said, ‘”The impact on the Russian economy is severe.”  As soon as Russia moved on Crimea the Russian Ruble and Ukrainian Hryvnia took a tumble.  “Russia’s ruble fell to a record low of below 36.4 to the dollar and below 50 to the euro for the first time on March 3.”’ This is unfortunate news for the states still within Russia’s economic “sphere of influence”.  Hang with us for some econ talk as we go through some of the impacted parties:

1.     Remittance-dependent countries: Many Central Asian nations are highly dependent on the strength of the Russian economy since they derive large shares of their GDP from work performed by their own citizens living in Russia. Remittances to Tajikistan amounted to US$3.5bn in the 12 months to September 2013, equivalent to almost 40% of the country’s estimated 2013 GDP. Dependence is also high in the Kyrgyz Republic and Moldova (25% of GDP), Armenia (14%) and Uzbekistan (11%). Citizens of these countries earning Rubles in Russia and sending money back home to their families are essentially getting a lot less bang for their buck nowadays.  This will negatively impact household earning, spending and domestic growth in remittance-based economies.

2.     Central Asian Currencies: Countries that lean heavily on the Russian economy are facing pressure to similarly devalue their currencies visa vie the US Dollar and Euro.  If these nations allowed their currencies to float on world markets, they would already have been devalued leading to export advantages since their exports would become relatively cheaper on international markets.  They would only get this advantage, however, if they were industry friendly enough to allow businesses to invest, grow and export easily which, as anyone familiar with the country knows, is not likely. As such, the price competitiveness advantage will likely be squandered as rent-seeking bureaucrats continue to leech agile potential entrepreneurs of working capital.

3.     Central Banks: To maintain Dollar/Euro exchange rates countries will be forced to sell foreign reserves and buy local currency to prop up their exchange rate, as Russia has done.  This will become more and more expensive the further the Ruble falls.  Since no Central Asian economy maintains a floating exchange rate (out of all CIS states only Georgia and Armenia have floating exchange rates) nearly every central bank in the region has had to sell reserves.  If the Ruble depreciates further due to continued poor growth or US/EU sanctions, some of the poorer central banks in the region could be hard-pressed to maintain their pegs.

4.     Central Asian Companies:  Just like individuals working abroad sending remittances home, companies that earn a large part of their revenue in Russia or Ukraine but report earnings in other currencies will suffer both due to the weakening of the Ruble and the slacking Russian economy.

5.     Trade: Given Russia’s currency devaluation, Russian goods sold abroad may cost less.  The crisis has caused all Central Asian currencies to appreciate against the Ruble.  In Tajikistan, the Somoni has already appreciated from around 6.9 at the beginning of 2014 to 7.6. This could include capital investments like heavy Russian machinery or steel.

 

TJS Somoni - Russian Ruble X-RateFigure 1 Historical Exchance Rates courtesy of Oanda.com

The crisis also deals a devastating blow to Putin’s Eurasian Union. As the Irish Times reported,

 “Without Ukraine, the Eurasian Union can’t perform its great role,” said Alexey Malashenko, a Central Asian expert at the Moscow Carnegie Center. “It’s difficult to see how it will work now.”

 Kazakhstan, already a member of the Union, will face the same consequences as Russian and Belarussian markets with respect to the organization’s trade posture to Ukraine.  Annette Bohr of Chattham House points out that

 Given the existence of the Russia-Belarus-Kazakhstan Common Market, any politically motivated Russian-Ukrainian trade wars have direct knock-on effects for Kazakhstan, as was evidenced last August when Russia’s Federal Consumer Protection Service formally requested Kazakh authorities to issue a ban on chocolates and other sweets produced by a Kyiv-based confectioner.

 As far as fears of similar uprisings and Russian military involvement in Central Asia go, we don’t see it in the cards.  The Western media currently has its hands full picking apart the disinformation so artfully spread through the region by Russia’s various propaganda engines.  Referencing the Economist’s latest note on the situation,

In Kyrgyzstan, as in other parts of Central Asia, state-run Russian media so dominate that “80-90%” of Kyrgyz people are inclined to believe the Kremlin’s spin on Ukraine, says Dinara Oshurahunova, a prominent human-rights activist. The “Kyrgyz think the Russian invasion [of Crimea] is good, that Russia is battling fascists. They eat up all this silly information and trust it.

Also, given the bloody civil war fresh in the minds of Tajiks, the crippling police control of Uzbekistan and Turkmenistan and the relative popularity of Nazarbayev in Kazakhstan, the Central Asian states are highly unlikely to walk the path of EuroMaidan.  Furthermore, Central Asia leaders, despite their aversion to democracy are usually quite sound businessmen.

The economic impacts on the region will be painful in most cases, but Central Asian countries are unlikely to dramatically alter any economic policies.  Security spending in the region may temporarily increase until paranoia of similar uprisings abates.   With a weakened Russia economy some countries may look more favorably on proposals from other strong neighbors such as China, India and Iran.  Undoubtedly, they will also lean on generous foreign donors such as the EU and US for further aid spending to bandage the hit from Russia’s recent decline.

 

2 comments

  1. Thank you for this balanced view of the larger Ukraine – Russia effects. I spent 10 years in Azerbaijan and have tried to explain the Interdepencies. This makes things very clear, even for those with little familiarity with the region. Many thanks!

    1. Thanks so much for the feedback! Much appreciated. Let us know if there are any other issues you want to read about.

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