Central Asian Economies Face Difficult Times in 2022 

The full-scale military invasion of Ukraine by the Russian armed forces and the subsequent series of unprecedented sanctions adopted by Western countries against Russia have led to significant economic consequences not only for the culpable but also for the whole world, especially the former Soviet republics. 

Among these consequences, it is necessary to distinguish between both negative and positive and short-term and long-term impacts. Moreover, the effect does not much depend on whether the country is a member of the Eurasian Economic Union (Kazakhstan and Kyrgyzstan) or not (Uzbekistan, Tajikistan, and Turkmenistan). In almost all of these countries, Russia is the leading trading partner and one of the prominent investors. At the end of 2021, the trade turnover with Russia was around 20-30% in Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Therefore, the state of the Russian ruble could not but affect the national currencies of these countries.

Table 1. External trade turnover of central Asian countries by the end of 2021

	Kazakhstan	Kyrgyzstan	Tajikistan	Uzbekistan
	bn USD	%	bn USD	%	bn USD	%	bn USD	%
Total Turnover	101.5		7.2		6.4		42.1
with Russia	24.2	24%	2.3	32%	1.4	21%	7.5	18%
with China	18.2	18%	1.5	21%	0.8	13%	7.5	18%
with Kazakhstan	–	–	1.1	15%	1.2	18%	3.9	9%
with Turkey	4.1	4%	0.7	10%	0.4	6%	3.4	8%

Among the short-term implications, it is necessary to highlight the impact on the Central Asian states’ financial and banking spheres. Although significant, far less strong sanctions were adopted against Russia back in 2014 and had already affected the ruble exchange rate – it fell by almost half against the US dollar, which forced the Central Bank of Russia to significantly raise its interest rate, which, in turn, severely limited the access of businesses and citizens to bank loans. As a result, economic growth slowed down considerably, which led to a long stagnation of the Russian economy and caused, along the chain, similar problems in Central Asian countries. For instance, the Kazakh national currency was also in free fall while inflation rose sharply.

This time, immediately after the adoption of the first packages of sanctions, the Russian ruble immediately collapsed, falling from 80 to 120 against the US dollar. But in a short time, the Central Bank managed to stabilize the ruble exchange rate by raising the interest rate to 20% (a bit later, this rate was reduced to 17%) and through restrictions on the conversion and export of foreign currency from the country. The return of the ruble exchange rate to its pre-war status was also facilitated by a radical reduction in imports to Russia due to its disconnection from SWIFT and measures to restrict Western exports to Russia. However, despite the stabilization of Russia’s financial and banking sector, commercial credit has again become unaffordable for businesses and citizens. As a result, GDP is expected to drop by 8.5% this year.

The short-term depreciation of the ruble led to a sharp drop in exchange rates of the national currencies in Central Asia, too, for example, in Kazakhstan – by 22%, Kyrgyzstan – by 24%, Tajikistan – by 15%, and Uzbekistan – by 7%. Likewise, following the stabilization of the Russian ruble, these national currencies restored somewhat, but not completely. 

The exchange rates of the central Asian countries were affected by the fact that these economies are dependent on remittances from labour migrants. Since Russia introduced significant commissions and restrictions on the purchase and export of US dollars, labour migrants have had no choice but to transfer their incomes to their homeland in Russian rubles, which has led to an oversupply of this currency in the local currency markets of these countries.

There is, and will continue to be, longer-term implications caused by the expected recession in Russia. This recession will negatively impact the incomes of labour migrants and the state of Central Asian countries’ foreign trade. For example, in Uzbekistan, remittances from labour migrants reached $7.6 billion in 2021, mainly from Russia, constituting 11.6% of the country’s GDP. In Kyrgyzstan and Tajikistan, this share is even higher – 27.8% and 30.1%, respectively. But now, the World Bank forecasts a decrease in income from migrants this year in Kyrgyzstan – by 33%, Tajikistan – by 22%, and Uzbekistan – by 21%. 

A significant proportion of migrants from the region have been employed in Russia’s massive and, until recently, rapidly developing construction sector. Now that mortgages are becoming too expensive for Russians, production decline in this sector is expected. This means a reduction in both the income of migrants and the demand for labour in this sector. That will entail the outflow of a significant part of migrants back to their homeland, which, in turn, may lead to an increase in social tensions in the countries of the region, especially in Tajikistan, Uzbekistan, and Kyrgyzstan.  

As for foreign trade, there are two essential aspects to keep in mind. First, the fact that a significant share of foreign trade in Central Asia, especially with Europe and Asia, was carried out along the trade and logistics routes passing through the territory of the Russian Federation, primarily through seaports in the Baltic States, the Black Sea, and the Far East. Now that sanctions have been imposed on Russia on the use of European seaports and its sea vessels, the question arises as to how the countries of Central Asia will trade with Europe and Asia. For them, the routes connecting them with China and Iran remain the only ones available for the moment. 

In this regard, Uzbekistan has already intensified negotiations and reached agreements with Pakistan and Afghanistan on opening a rail-road and track trade routes that would allow for cargo transportation between Central Asia and the southern seaports of Pakistan, Karachi, and Bin Qasim. As a result of these negotiations, the first cargo from India was sent and received by Uzbekistan in March this year. However, the development of this trade route will take a long time before it becomes a full-fledged alternative to the northern ones that have developed over the past century and a half.  

In the same context, we should view the revived negotiations between Uzbekistan, Kyrgyzstan, and China on constructing a railway route through the territory of these three countries. Again, this route will not begin to operate soon. Finally, in view of the territory of Russia having turned into a logistical impasse, even China was forced to promote the project of a bypass combined railway and sea route through the territory of Kazakhstan, Azerbaijan, then Romania and other European countries, crossing the Caspian and Black Seas, with a total length of 11 thousand km. On April 13, the first cargo from China was sent along this route.

Another aspect of the impact of the war and sanctions on trade activities of the Central Asian states has to do with the region’s bilateral trade with Russia. In March, Russia imposed a ban on grain exports from the country, followed by a similar decision by Kazakhstan, which itself had previously imported Russian wheat, but in turn, provided 90% of the needs of its southern neighbours. As a result, Uzbekistan, Kyrgyzstan, and Tajikistan now face the threat of a shortage of flour for domestic consumption. 

Besides, it is no longer clear how both sides will settle payments with each other, given that settlements in dollars will be inaccessible for the Russian side. The parties will have to conduct settlements in rubles and local currency, which will complicate the process technically and in terms of pricing.

In addition to the negative consequences for the economies of the Central Asian countries, there are also some emerging opportunities for them, especially in terms of increasing exports to Russia of certain types of products, primarily agricultural ones. However, there are no signals that these new opportunities are being realised. And it is not yet clear whether the growth of exports from the Central Asian countries to the Russian Federation will be able to thoroughly neutralise the impact of sanctions.

Alisher Ilkhamov 

Central Asia Due Diligence