The economies of the Commonwealth of Independent States have seen five years of steady growth and low inflation, a welcome contrast to the economic slump and financial instability of the early 1990s. They have also managed to shift their trade patterns away from their former partners in the Soviet Union, to varying degrees, and have found a niche in the global economy.
In 2004, GDP grew by an average of 8%, with little variation across the region. Russia recorded 7.1% growth, while Ukraine led the pack at 12%. Inflation averaged 11%, ranging from 4.1% in Kyrgyzstan to 18.1% in Belarus. The currencies of the region are holding their value, and budget deficits are under control. This is a remarkable turnaround from the situation a dozen years ago, and is testimony to the fact that the “Washington Consensus” — the package of policies promoting liberalization and stabilization of finance and trade — has sunk in across most of the former Soviet Union. Turkmenistan is the only CIS country that has not introduced current account convertibility, while Belarus maintains a broad array of state controls over the economy. However, progress in structural reform — privatization, transparency, rule of law — has been much slower.
Despite this rosy macroeconomic picture, there are worrying signs that there may be less to the recovery than meets the eye. The economic revival is largely driven by exports of a small group of commodities. Oil accounts for 90% of Azerbaijan’s export earnings and 58% for Kazakhstan (with ferrous metals another 24%). Natural gas is 57% of Turkmenistan’s exports and oil makes up another 26%. Uzbekistan’s exports are 42% cotton and 10% gold.
Such commodity dependency is troublesome for several reasons. First, it leaves these countries vulnerable to world price fluctuations: the recent high prices for copper and cotton will not continue indefinitely. Second, even if oil and gas prices stay high, future growth will depend on their capacity to extract more resources and get them to world markets, neither of which can be taken for granted. Third, the revenue from commodity exports is not trickling down to citizens living in rural areas or run-down industrial cities physically isolated from the new growth nodes. In countries without resources to export, such as Moldova and Georgia, the situation is grimmer still. About one-third of the labor force has emigrated, and remittances make up a substantial proportion of national income.
These economies all have very low levels of per capita GDP and a very high proportion of the population (from one-third to two-thirds) lives in poverty. These numbers have only slightly improved during the last five years of growth. Meanwhile, during those years the infrastructure of public services inherited from the Soviet period (health and education) has steadily eroded, leading to deteriorating health standards. Infant mortality per 1,000 births, for example, is 116 in Tajikistan, 99 in Kazakhstan, 61 in Kyrgyzstan, 31 in Moldova, and 21 in Russia.
According to the World Bank, at current exchange rates Gross National Income per capita in 2003 was a meager $330 per year in Kyrgyzstan, $310 in Uzbekistan, and $190 in Tajikistan. This puts them below Bangladesh, where GNI was $380. Moldova is the poorest country in Europe, with GNI of $590, followed by Ukraine at $970, and Belarus $1,590. Albania is the next poorest country in Europe, at $1,740.
The income figures look a little better when one allows for the highly undervalued exchange rates. In terms of purchasing power parity, the annual GNI per capita ranking is: Russia $8,080, Kazakhstan $5,630, Belarus $5,500, Ukraine $4,800, Turkmenistan $4,780, Azerbaijan $3,010, Armenia $3,230, Georgia $2,270, Uzbekistan $1,640, Moldova $1,600, Kyrgyzstan $1,560, and Tajikistan $930. (Bangladesh PPP GNI per head is $1,770 and Albania $4,960.)
Trade now accounts for 50-100% of the value of GDP in these countries, though this proportion is artificially high due to the under-valued exchange rates. Many of them remain heavily dependent on trade with other CIS states, principally Russia. The CIS share of imports in Belarus is 70%, Tajikistan 68%, Kyrgyzstan 57%, Ukraine 50%, Kazakhstan 47%, Azerbaijan and Georgia both 32%, and Armenia 22%. Exports are more likely to go beyond the CIS. Belarus sends 55% of its exports to the CIS, the corresponding figure for Georgia is 50%, Ukraine 26%, Kazakhstan 23%, and Azerbaijan 13%. Despite Russia’s political commitment to CIS cooperation, its economy is the least dependent on CIS trade because of it huge oil and gas sales to Europe. Only 15% of Russian exports go to the CIS, which supplies 26% of its imports.
The trade integration beyond the former Soviet Union has not been accompanied by an inflow of foreign direct investment (FDI), except for oil-rich Azerbaijan and Kazakhstan. The stock of FDI is equal to 47% of GDP in Azerbaijan, a very high figure by international standards (only thee countries have more than 30%), and 12% in Kazakhstan. It is around 5% in Georgia, Moldova, and Armenia and less than 2% elsewhere.
During the 1990s several countries borrowed heavily, with debt service taking up 34% of export earnings in Kazakhstan and 25% in Kyrgyzstan. Moldova’s debt service hit 60% of exports 2002, rescheduling has brought it down to 20%. The stock of official debt was around $1 billion for each of the smaller countries, rising to $4.3 billion in Uzbekistan, $4.6 billion in Turkmenistan, $12.6 billion in Ukraine, and $16.5 billion in Kazakhstan.
The post-Soviet economic transition falls into three phases. The first phase, from 1991 to 1995, was one of chaotic disruption and catastrophic decline (the “transition recession”). The second phase, beginning in 1996 but not really taking root until after the Russian crash of 1998, has seen financial stability and steady growth. But the third and most difficult phase will be transforming the institutions and infrastructure of these countries to overcome the barriers of geographic isolation and corrupt, rent-seeking elites.
(World Bank, IMF Direction of Trade Statistics, CIA World Factbook, cisstat.com)