Central Asia feels the effects of Ukraine crisis

The region’s economies are highly dependent on Russia’s

The countries of Central Asia are under increased pressure from the fallout of the war in Ukraine. As former Soviet states, they are still in the process of building their own independent economies and faced a number of political, economic and security challenges even before the conflict began.

Now, the weak Russian ruble and heavily sanctioned Russian economy are compounding these problems.

Central Asian nations are fiercely protective of their independence, and thus try to remain as neutral as possible. The Ukraine crisis is no exception. They haven’t recognized the independence of the self-proclaimed Luhansk and Donetsk people’s republics, Georgia’s breakaway regions of Abkhazia and South Ossetia, or Kosovo. Nor have they recognized Crimea as Russian territory. Still, they remain heavily reliant on Moscow for both economic and military support, so Russia’s economic problems will also hit these countries hard.

Despite their growing links to other countries around the world, they’re unable to cut their long-standing ties with Moscow, even at a time of substantial economic strain in Russia. How they manage to cope, however, will depend on how fast they can adapt to the new realities.

Economic Fallout

The economies of Central Asia are so intertwined with Russia that if the Russian economy falters, so too will the economies of this region. Thus, the disruptions caused by the sanctions imposed as a result of Russia’s invasion of Ukraine will surely cause ripple effects in Central Asia.

First, the decline of the Russian rouble has already negatively affected the currencies of the region. The Kazakh economy appears to be one of the most affected because of the country’s existing financial difficulties that began after anti-government protests in January, when many withdrew their capital from country for fear of political instability. Before Russia’s invasion of Ukraine, the tenge, Kazakhstan’s currency, was worth 427 to the dollar. By March 13, its value plummeted to 524 tenge to the dollar, a new record low. The Central Asian branches of Russian banks like Sberbank and VTB, both of which are subject to U.S. sanctions, are also in limbo.

To stop the bleeding, the central banks of Central Asian countries have begun to impose restrictions on the exchange, purchase and sale of foreign currency. In Kyrgyzstan, for example, those conducting business abroad must keep more than 80% of their revenue in rubles. Kazakhstan, meanwhile, said earlier this month that it carried out currency interventions worth $198.9 million to support the tenge and banned the export of gold and foreign currency. Uzbekistan is also preparing a series of measures to mitigate the negative effects of the sanctions.

Russia’s economic downturn could also impact employment opportunities for migrant workers from Central Asia as businesses begin to close or suspend operations and as Russian employers start to consider hiring refugees from eastern Ukraine who speak better Russian and have more in common with Russian culture. This would, in turn, affect remittance payments, which are already set to decline in value because of the depreciation of the rouble. This is especially true in Tajikistan, Kyrgyzstan and Uzbekistan, which rely on remittances from Russia for 30%, 28% and 11% of their gross domestic products, respectively, according to World Bank estimates.

As the sanctions begin to hit the Russian economy, these payments are likely to decrease. Remittances to Uzbekistan alone could drop by 20-50%, according to preliminary estimates.

There are also potential problems with the transit of goods between Russia and Central Asian countries. Supply chain disruptions, especially for joint ventures, have already been reported.

A number of suppliers from third countries have refused to export goods to Russia, which has led to suspensions in operations and layoffs in Central Asia. In Kazakhstan, most oil products are delivered to markets abroad through Russian ports, including the port of Novorossiysk, but many countries have refused to accept oil delivered from Russian harbours.

Inflation, driven largely by panic-buying, has also increased. In Kazakhstan, the prices of several key products have surged. The price of Nutrilon brand baby formula increased from 8,900 tenge to 10,730 tenge, diapers from 7,489 tenge to 10,000 tenge, and bread by 15-20 tenge. In Tajikistan, rumours of another hike in flour prices caused a spike in demand, leading the price of a 50-kilogram bag of flour to jump from 270-280 somoni to 290-325 somoni. Some traders even temporarily suspended sales. In some cases, the panic is well-founded.

Earlier this month, Russia introduced a temporary ban on the export of grain and sugar to member states of the Eurasian Economic Union, which includes Central Asian countries Kazakhstan and Kyrgyzstan. The ban is especially concerning for countries whose domestic supplies don’t meet their internal needs. Kyrgyzstan, for instance, produces enough wheat to cover only 45% of its needs, and Kazakhstan imports about 58% of its sugar.

Economic Opportunities

But as the risks mount, Central Asian states are also being presented with new opportunities to expand relations with other countries, gain access to a more diverse supply of foreign goods and act as intermediaries between Russia and the rest of the world. This all could have benefits for Russia,

too.

Diversification of foreign trade, more active cooperation with China and Turkey, attraction of U.S. investments and increased trade with the European Union could give Central Asian countries greater access to imports and could open the door to migration into the West, Europe, East Asia, Turkey and beyond, giving Russia access to muchneeded resources. This could help Central Asia offset the loss of Russian remittances and give it and Russia access to more technology and goods – though this likely won’t be a quick process.

Moreover, Central Asian countries can become intermediaries for economic transactions between Russia and the rest of the world. As in 2014, Russia may use its Central Asian partners to try to restore logistics networks that were severed by sanctions. Central Asian companies can help deliver supplies to Russian firms and Russian goods to foreign markets, while

Russia may try to expand projects and contracts with Central Asian businesses. Such exchanges are already taking place: Russian travel companies began offering tours to Uzbekistan for Russians who want to apply for Mastercard and Visa credit cards.

To make this all feasible, the countries of Central Asia have adopted a neutral stance on the conflict between Russia and the West, and are trying to set boundaries with Moscow. Kazakhstan, for example, refused to completely switch to roubles in its trade within the EAEU and proposed that import customs duties in Kazakhstan, Armenia and Kyrgyzstan be distributed and credited in dollars, as usual, while Russian roubles will be used for crediting and distributing import customs duties to Russia and Belarus. The Kazakh government also postponed the signing of an already agreed-to deal with Sberbank on the country’s digital transformation.

But Russia doesn’t have to worry too much about its influence diminishing in these countries. Many migrants from Central Asia will still prefer to work in Russia because they speak Russian and face fewer travel restrictions there. Third countries won’t be willing to offer large enough investments to counterbalance Russian funds, since many developed economies are still recovering from the pandemic and see little opportunity for substantial return on their investments in the region. And Central Asian products will still be in higher demand in Russia than in other parts of the world where competition is stiff and export networks are not as well developed.

As the effects of the sanctions set in, Russia will need friends that can act as an outpost to help Moscow reach more distant frontiers through trade or economic projects. Central Asia stands to benefit too, as this arrangement can help mitigate the effects of the crisis on the region’s economies. To what extent will depend on how quickly Central Asian countries can adapt.