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Russia’s economic decline looms large over Central Asia

The Russian economy is perhaps already in recession, certainly in decline. This could be contagious because a slowdown in Russia will also slow down its neighbours.

 

Aitolkyn Kourmanova
29 May 2014

Recession looms

With many sectors of the Russian economy in decline, recession is looming. The IMF believes that the country’s previous economic model – one based on rising oil prices and the use of reserve capacities – has exhausted itself. The faltering economic situation, combined with escalating geopolitical risks associated with current events in Ukraine, cannot but affect Russia’s neighbours. A multitude of important factors connect the countries of Central Asia to their former ruler, and economic cooperation between the two regions functions on all levels: from basic personal contact to international investment, macroeconomic impact and imported inflation. If the results of the 1998 Russian financial crisis were offset by the rapid growth of raw materials prices, then today – against a background of deteriorating global market indicators for raw materials and an overall withdrawal of investors from many emerging markets – the effects may be even more pronounced.

Contagion

Russia remains an extremely important trading partner for the countries of Central Asia, despite the fact that their foreign trade is oriented towards the export of raw materials, and towards countries outside Russia’s traditional ‘near abroad.’ China, for example, has become the number one trading partner for Central Asia thanks in large part to a particularly sizeable turnover with Kazakhstan. Indeed, in 2013, Sino-Kazakh trade accounted for more than half of China’s trade with Central Asia. Despite this, it is Russia that remains the most attractive market for goods from Central Asia, and, in the face of a severe economic downturn in Russia, the demand for imports from the region will inevitably decrease. This especially hurts Kyrgyzstan and Uzbekistan, which offer more diverse exports. 

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China is now the number one trading partner for Central Asia. Photo cc: Daniel Foster

A reduction in social services and limited perspectives for growth of salaries and jobs is already a reality in Kazakhstan.

For several Central Asian countries, Russia’s economic difficulties threaten a reduction in Russian investment. With the collapse of the Soviet Union, Russia was no longer the main investor in the region. Nevertheless, Kyrgyzstan and Tajikistan are hoping for promised Russian investment in their critically important hydroelectric projects (the Kambarata-3 hydropowerplant and the Rogun Dam). These investments, among others, are a key issue in the negotiations on the accession of these countries to the Customs Union. Without direct subsidies, the Central Asian countries will not perceive any significant advantage to integrating with the Union. Given continuing capital flight from Russia, it is a matter of key importance to ascertain whether Moscow can afford to grant such subsidies.

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The devaluation of the tenge earlier this year resulted in pockets of protest throughout Kazakhstan. Photo cc:BurumbatorRussia’s energy pipeline system, transport infrastructure and technological expertise are of great significance to the countries of Central Asia. The oil and gas exporting countries of the region, Turkmenistan, Uzbekistan and Kazakhstan remain dependent on a Russian transit corridor. According to figures from 2006, around 90% of Turkmenistan’s exports to Russia comprise natural gas; oil represents 55% of Kazakhstan’s exports; and 36% of Uzbekistan’s exports are natural gas. Meanwhile, the only constructed alternative routes for exporting hydrocarbons from Central Asia are towards China, a limitation that is already having an impact on the attractiveness of future projects in Central Asia for Western investors. Widely advertised future projects such as the development of Kazakhstan’s Kashagan offshore oil field or those of Uzbekistan in the Aral Sea are no longer quite so tempting. Russian investment in these projects is also unlikely. 

The crisis in Russia could have various general implications for the countries of Central Asia and their populations. Russia’s neighbour Kazakhstan, a future member, it seems, of the same Customs Union, is closely tied to the Russian economy, as is its own currency – the tenge – with the Russian rouble. A reduction in social services and limited perspectives for growth of salaries and jobs is already a reality in Kazakhstan, especially in the raw materials sector. The devaluation of the tenge, following on the devaluation of the rouble, dealt a severe blow to the population; there were even protests. Kazakhstan depends on a wide range of imported goods from Russia, including fuel, raw materials and components; and the rising costs of these goods leads to imported inflation, thus reducing purchasing power in the country even further. Given that Kazakhstan’s economy still suffers from unresolved problems in the financial sector (in which Russian banks play a growing role), it is obvious that the repercussions of external shocks will be more strongly felt.

Labour migration politics

If Central Asian migrants come home (and have to re-adapt to a household economy), there could be even graver consequences.

In more isolated countries with controlled exchange rates, such as Turkmenistan and Uzbekistan, there are already high levels of poverty. Unlike Kazakhstan, the governments of these countries share less of the export revenues with their citizens, for whom talk of a ‘new’ crisis is redundant, seeing that they have spent the best part of 20 years in crisis. Nonetheless, a reduction in such social benefits as gas delivered free of charge or at a reduced price (which is already the case in Turkmenistan) can cause social tensions – indeed, Ashgabat has recently discontinued a free petrol allowance. Moreover, crucially, for countries such as Uzbekistan, Tajikistan and Kyrgyzstan – the origin of a large number of labour migrants to Russia – any industrial downturn will significantly reduce the amount of remittances these labour migrants are able to send home. This will have a detrimental impact on household spending, especially in Tajikistan and Kyrgyzstan, where labour migrants’ remittances account for 48% and 31% of their GDP respectively

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Tajikistan released these two ethnic Russian pilots after Moscow deported hundreds of Tajiks, seemingly in retaliation.

If Central Asian migrants come home (and have to re-adapt to a household economy), there could be even graver consequences – not least for the governments of these countries, for whom the resulting social fallout could represent a possible threat to their positions. Labour migration is therefore an economic tool enabling Russia to exert political pressure. This became abundantly clear in 2011 when Tajikistan detained two Russian pilots; the Russian government's harsh response was directed at Tajik labour migrants. The disgruntled President of Uzbekistan Islam Karimov recently dismissed his countrymen working in Russia as ‘idlers’, fearing that Moscow might use them to exert pressure on Uzbekistan.

Playing politics

Political factors are no less important when talking about relations with Russia. Moscow is always ready to mount an aggressive defence of its economic interests, and a crisis in its domestic economy will only strengthen this resolve. In effect, this means making political capital from the application of phytosanitary protective measures (known in Russia as the ‘Onishchenko method’) towards imports from Central Asia, an unpredictable policy towards labour migration, and a selective regulation of fuel prices. 

Russia is searching for new approaches in its drive to modernise.

Russia is searching for new approaches in its drive to modernise, and Eurasian integration is now seen as the most effective way to mobilise domestic resources and, with the help of integrated markets, to attract foreign investment. For Russian politicians, Central Asia is an inseparable part of this process, and the crisis in Ukraine demonstrates that the Kremlin will readily apply political pressure in order to implement its economic strategy. While Kazakhstan is already a member of the Customs Union, other Central Asian countries are faced with a difficult choice. Western researchers believe that the existing CIS free trade zone across Central Asia is more beneficial for the region than the more restrictive Customs Union with Russia, fenced off from the outside world by high tariffs. 

Diversification efforts

The Central Asian states are attempting to reduce their dependence on Russia through more active cooperation with the outside world. It is vitally important for Central Asian states to increase and diversify their economic partners, if only because they still have fresh memories of a time of total control from Moscow. Unlike a number of other Soviet republics, Central Asia and Kazakhstan did not have access to world markets. Despite their plentiful natural resources, they still required significant external [Soviet] investment in industrial development, technological and urban infrastructure, and training for officials, investment that was never enough for sustained economic growth. The resulting underdevelopment and economic backwardness of the region is a matter of painful reflection in Central Asia, where their current economic partnership with Russia is seen as inequitable.

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For many ordinary people in Turkmenistan this new crisis is not so new. They have been living in crisis conditions for decades.

China, which already plays a huge role in the region in both trade and investment, could afford the Central Asian countries a degree of protection from the effects of a Russian economic crisis. As it has done in Kazakhstan, China could contribute funds for the anti-crisis programmes needed as a result of unexpected shocks such as the world financial crisis of 2007-8. Chinese investment in new infrastructure, as part of its Silk Road Economic Belt strategy, could significantly expand the geography of economic co-operation in Central Asia through a connection with the wider Asian region and the countries of the Persian Gulf.

Rightly or not, to Western investors, Russia and the countries of Central Asia are practically indistinguishable.

Looking forward, the countries of Central Asia would undoubtedly benefit from the hoped for diversification of Russia’s economy, and a more transparent political process. Yet, whilst the countries of the region continue to emulate – willingly or unwillingly – Russia’s political and economic model, the potential for economic cooperation and development is hampered by structural weaknesses. In all these countries, the political legacy of totalitarianism, the profit seeking of today’s elites, weak economic diversification, technological backwardness, the absence of the rule of law, honest competition and an open business environment all appear to be insurmountable barriers to any attempts at evading the coming crisis, let alone building for the future. Rightly or not, to Western investors, Russia and the countries of Central Asia are practically indistinguishable. Moreover, Russia’s continuing confrontation with the West, and the founding of a closed economic bloc will only exacerbate capital flight from these countries, thus reducing investment and weakening the process of modernisation, making it even more unlikely that Central Asia will ever achieve long-term economic independence and sustainability. 

Photo 3: (c) Lidiya Isamova via RIA

Photo 4: (cc) Jeane Menge

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