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When Russia sneezes, Central Asia catches a cold

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Russia’s financial crisis has produced a contagious effect in Central Asia, where cheap oil is exacerbating the poor economic outlook.

 

Simon Schmidt
12 March 2015

The economic crisis that has befallen Russia since the imposition of US/EU sanctions in 2014, has sent shockwaves through Russia’s business and economic sectors. Russia’s financial crisis has produced a contagious effect in Central Asia, where cheap oil is exacerbating the poor economic outlook.

In the light of the perfect storm that is hitting Russia, Central Asia will face more than a few squalls.

In the light of the perfect storm that is hitting Russia, Central Asia will face more than a few squalls. Recently, The International Monetary Fund (IMF) downgraded the economic outlook of post-Soviet countries. The IMF is forecasting that Central Asian oil- and gas -exporting countries – Turkmenistan, Kazakhstan and Uzbekistan – will expand by 4.9% (-0.8%) in 2015 while energy importers Tajikistan and Kyrgyzstan are expected to grow by 4.4% (-0.4%). But the five Central Asian states aren’t equally affected by Russia’s decline. This is due to the various levels of integration with their northern neighbour. Indeed, Turkmenistan’s isolation has thus far cushioned it from most spill-over effects, while the other four countries are showing varying degrees of socio-economic ramifications.

Kazakhstan’s problems

Kazakhstan is undoubtedly most volatile to exogenous shocks. Due to the sharp decline in oil prices, it is speculated that the government in Astana will need to make a further devaluation of the tenge, in order to keep exports competitive. This would mark the second such measure in 12 months, following the initial devaluation of 19% in February 2014, which led to a hike in inflation and even spontaneous demonstrations. So far, the government is dismissing any speculation of an inflation hike.

Kazakhstan’s budget planning is based on the price of oil at $80 per barrel, which, given the recent much lower price, seems highly unlikely. The IMF expects the country’s expenses to outweigh income by 2.3% this year, and losses from lower oil prices to amount to 20% of GDP. It has been announced that $3 billion of the country’s oil fund will be re-allocated for domestic investment. It is hoped that this re-allocation of funds will propel the growth of the manufacturing sector, but this is wishful thinking. Any serious commitments to restructure the economy, and to lessen the overwhelming sway of the hydrocarbon sector, are inconceivable. Neither would this hoped-for restructuring reduce Kazakhstan’s dependency on Russia in the immediate future.

The IMF expects the country’s expenses to outweigh income by 2.3% this year

Ironically, Kazakhstan’s economic problems have come to a head just as the country formally co-founded the Eurasian Economic Union (EEU) together with Russia and Belarus. Astana had aspirations to benefit from the EEU by gaining access to its neighbours’ markets. However, Astana disagreed wholeheartedly with Moscow’s decision to sanction Western food imports, and Russia’s demands to prevent the re-export of goods through Belarus and Kazakhstan. The current downturn will only foster the negative sentiment towards Russia’s integration plans. President Nazarbayev was eager to portray the EEU as a purely economic project, and to assure Kazakhstan’s independence, but a different understanding has surely already settled in Astana.

Decline in remittances

In the poorest Central Asian countries, Kyrgyzstan and Tajikistan, lower oil prices have been a boon for the government by reducing the cost of energy imports. However, the two countries will nevertheless still suffer fiscally due to the anticipated affect that Russia’s slowdown will have on major investment projects. 

Even more importantly, the collapse of the rouble threatens the primary source of national income – remittances from labour migrants. As the rouble sharply depreciated, and Central Asian currencies weakened correspondingly less against the dollar, so their relative value rose. Tajikistan’s somoni gained 35% against the rouble, making it much less attractive to look for work in Russia, and to send money back home. Remittances to CIS countries dropped by 32% in November 2014 against October. This fall outstripped seasonal declines according to Russian payment providers, and reflects both the weakening of the rouble and the worsening economic situation that labour migrants face. 

Remittances to CIS countries dropped by 32% in November 2014, against October.

Since the beginning of this year, migrant workers are required to both pass, and bear the cost of Russian language exams; they also now need to spend a large proportion of their income on work permits. Remittances provided 42 % of Tajikistan’s GDP and 32% of that of Kyrgyzstan according to World Bank data in 2013. These enormous figures demonstrate the risk that the Tajik and Kyrgyz economies face. Kyrgyzstan will officially join the EEU in May, which should make the movement of labour to and from Russia easier, but it will not fix the underlying problem of being dependent on these transnational payments. For Tajik migrants, however, with no EEU support mechanisms, no such relief can be expected.

An exodus of Central Asian labour migrants back to their home countries would have serious socio-economic implications as unemployment and poverty would rise drastically, potentially driving the country into even deeper poverty. In this scenario, Uzbekistan would particularly suffer as some 600,000 to 700,000 Uzbeks are considered to work in Russia. The number of illegal immigrants can be estimated to be even larger. A mass return of labourers to their home country would lead to intensified hardship for the local population as Uzbek families will find it difficult to compensate for the vanished income sources through low-paid local employment.

Finding opportunities in the crisis

Central Asian countries are united only in the fact that their current struggles derive from external influences. A dual dependency on oil and Russia has highlighted the fundamentally weak structures of their economies, threatening social unrest, but, at the same time, they also mark an opportunity to deal with homegrown problems. If oil prices were to remain at the current level and fiscal windfalls to dwindle, governments would be encouraged to invest in other sectors, promote regional trade, build up fiscal reserves and allow for more exchange rate flexibility. This would allow a more effective protection from external shocks, and increase competitiveness in the long run.

A mass return of labourers to their home country would lead to intensified hardship for the local population

Unfortunately, there is little hope of Central Asian governments launching bold reforms at this point. In energy-exporting countries, the hydrocarbon sector is the main source of wealth for the ruling elite, and any calls for diversification are listened to only half-heartedly. In Uzbekistan, the exchange rate is fixed, breeding a gigantic currency black market and what amounts to an informal parallel economy. Kyrgyzstan’s economic policy is centred on the exploitation of the country’s only gold mine, with nationalisation of the mine being contemplated regularly. It remains to be seen what actions Central Asian leaders will undertake to address their economic problems, but we can expect little appetite for structural reforms, and instead expect to see rather short-term focused attempts to weather the crisis.

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