Central Asia and Russia Sanctions: Threats and Opportunities

Publication: Eurasia Daily Monitor Volume: 19 Issue: 50

(Source: central.asia-news.com)

International sanctions imposed on Russia in the wake of its massive re-invasion of Ukraine present both challenges and opportunities for Central Asian economies, which are spread asymmetrically across the region. Turkmenistan is, of course, an outlier case given its insularity and lack of truly verifiable economic data. It is too early to predict the long-term knock-on effects of those sanctions on the Central Asian economies as well as on the vitality of regionalist institutions, such as the Moscow-led and Russia-dominated Eurasian Economic Union (EEU). But clearly, much will depend on the length of the war in Ukraine and the speed and scope of lifting the sanctions following the end to hostilities.

Three decades since the breakup of the Soviet Union, Russia remains an important economic partner for the Central Asian republics, being the second-largest export and import destination for each of them. In addition, remittances from Russia account of a significant share of the GDP of three Central Asian countries: 28 percent in Kyrgyzstan, 30 percent in Tajikistan, and 12 percent in Uzbekistan.

In this region, the first economic casualty of the Russo-Ukrainian war were local currencies, particularly those of Kazakhstan (tenge) and Kyrgyzstan (som), which historically follow the ruble’s fluctuations. Though all three currencies have since stabilized, future volatility remains possible. The Uzbekistani sum and the Tajikistani somoni, meanwhile, maintained their stability and even rose against the ruble, currently trading at approximately 20 percent (sum) and 10 percent (somoni) higher.

The second negative effect was related to a slowdown in Russia’s economic activity and a drop in remittances. The rise of the sum and the somoni against the ruble alone effectively meant a drop in remittances. And the expected loss of jobs by Central Asian guest workers in Russia is expected to cause a further decrease in wages sent back home—negatively impacting their countries’ GDPs. As a point of reference, sanctions imposed on Russia in 2014 led to a 25 percent reduction in remittances for Kyrgyzstan, a 50 percent drop for Tajikistan and a 30 percent decrease for Uzbekistan through 2016 (Al Jazeera, February 12, 2022). The current sanctions imposed on Russia are much more severe and continue to tighten.

The third negative effect is the prospect of sovereign default in Kyrgyzstan and Tajikistan. These countries have accumulated significant sovereign debt (mostly to China) and have already been struggling to repay it. The loss of remittance revenue, which provided much-needed foreign currency inflows, increases the chances of default. One way to escape the default, as stated by President Sadyr Zhaparov of Kyrgyzstan, would be to transfer the control of a number of infrastructure facilities to China (Kloop.kg, January 1).

The fourth negative consequence is the prospect of secondary sanctions as well as reputational risks. Traders reported that the Caspian Pipeline Consortium (CPC), which ships 1.2 percent of the world’s oil from Kazakhstan to global markets, has already faced difficulties. Buyers are now avoiding its oil because of its mixture with Russian volumes and difficulties with insuring the ships transporting the petroleum from the Russian port of Novorossiisk (Ratel.kz, March 2).

That said, Russia sanctions present the region with several opportunities to mitigate their adverse effect and promote domestic economic development. The first is taking advantage of some Russian businesses relocating abroad. Kazakhstan, due to its common border, developed economy and widespread use of the Russian language, is likely to benefit the most. InDriver, a Russian transportation service company with 100 million customers in 39 countries, has reportedly already relocated most of its staff to Kazakhstan (Forbes.kz, March 23).

The second benefit for Central Asia is an influx of highly skilled specialists, especially from the IT sector and those who worked for foreign companies in Russia. As many as 70,000 IT specialists are estimated to have already left Russia. Most of them choose fellow EEU member states such as Armenia and Kazakhstan (Kommersant, March 24). In Kazakhstan, with its government-backed Astana Hub IT park, the arrival of these Russian digital-sector workers is expected to boost the development of the domestic IT industry.

The third inadvertently positive prospect of the sanctions for Central Asian economies is greater access to the Russian market. For instance, to compensate for the loss of European exports, Russia has allowed the resumption of vegetable imports from nine countries, including Kazakhstan, Kyrgyzstan, Turkmenistan and Uzbekistan. Uzbekistan’s tomatoes and peppers were banned in 2020 due to the alleged detection of the brown wrinkle virus (Tashkent Times, March 7).

The fourth opportunity is the development of Central Asia as a proxy market for businesses in Europe and the United States to keep trading (primarily consumer) goods with sanctioned Russia. In fact, several Central Asian officials openly suggested this. For example, Kazakhstani Deputy Trade and Integration Minister Kairat Torebayev called on Western companies to relocate their production to Kazakhstan and continue trading with Russia from there (EurActiv, March 14). However, two weeks later, presidential advisor Timur Suleimenov declared that Nur-Sultan would not aid in circumventing the sanctions regime (see EDM, April 5). Similarly, Ulugbek Kasimkhodzhaev, an official in Uzbekistan’s Ministry of Investment and Foreign Trade, whose comment was later downplayed, suggested Russian small-and-medium-sized businesses set up joint ventures with Uzbekistani companies and export their products to the European Union tariff-free, using the EU’s GSP+ preference system (Tashkent Times, March 27).

The fifth benefit of the sanctions is the realization that Central Asia needs logistical alternatives to conduct trade, particularly with the EU. The war in Ukraine and the Russia/Belarus sanctions have effectively closed off previous air and land routes. The only viable alternative for Central Asian exporters is connecting to Azerbaijan, across the Caspian Sea, with the subsequent link to the Baku–Tbilisi–Kars (BTK) Railroad and Europe. However, this rail route’s current throughput capacity is at its maximum, with little room for an increase; substituting the Russia and Belarus routes would require doubling that capacity (Forbes.kz, March 18). The best option is to boost air-cargo capacity. Air Astana has ordered two A330 freighters to be delivered in 2024, which may be expedited thanks to the cancelation of Russian orders.

It is too early to predict the severity of the Russia sanctions’ impact on Central Asia. The region has already dealt with—and survived—the sanctions imposed in 2014. Should the Russian economy collapse given the unprecedented magnitude of the current measures, a domino effect may hit the region. Nevertheless, the negative consequences can be mitigated if the Central Asian countries take the right steps now.