Russia’s Economic Fallout Hits Central Asian Remittances
Apr 1, 2022
The decline of Russia’s economy and the drop in the value of the ruble has negatively affected a critical pillar of Central Asian economies: worker remittances.
Besides a vital stream of income to millions in the region, remittances have been an important source of external financing in Central Asia, including acting as a stabilizing factor during periods of economic stress. During the COVID-19 pandemic, remittances provided critical financial inflows that contributed to better-than-expected economic conditions in Central Asia. Having sizeable portions of their populations working abroad also reduces social and other pressures at home, including the need to create thousands of additional jobs annually. At the same time, however, dependency on foreign economies is a vulnerability. Economic shocks in the country where the migrant laborers have been working can increase volatility in their home countries and can negatively affect their economic growth.
Shared linguistic and historical ties have made Russia a leading destination for Central Asian workers, who fill a niche for low-cost labor in construction, agriculture, and service sectors. More than 50 percent of remittances in Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan came from Russia in 2021. For many Central Asians, foreign jobs offer opportunities that poor domestic labor markets cannot, and provide a source of household income for family members to purchase basic necessities.
The ruble’s stability in recent years and the low cost of sending remittances from Russia further contributed to Russia as an attractive destination for migrant workers from Central Asia. In addition, Russia is one of the lowest-cost senders of remittances globally with the cost of sending remittances falling from 1.8 percent in 2020 to 1 percent in 2021.
Funds that Central Asian workers sent home account for significant portions of these countries’ GDPs. In Kyrgyzstan and Tajikistan, the two Central Asian countries most reliant on remittance inflows, remittances account for 31.3 percent and 26.7 percent of their GDP, respectively. These numbers are comparable to, or larger than, the countries’ exports of goods and services. Compounding the problem of declining remittances, Kyrgyzstan and Tajikistan have reached critical levels of debt. Thus, they might not be able to increase public spending in the face of falling remittance receipts.
The impact of the sharp decline in remittances will be felt across Central Asia as part of the broader economic adjustments taking place since sanctions were imposed on Russia because of its invasion of Ukraine. Growth rates that were initially projected in the range of 2 to 7 percent have been revised downwards; the region is now projected to have negative growth rates, averaging negative 25 percentage points in 2022. As the Central Asian country most reliant on remittances from Russia, Kyrgyzstan is expected to experience the largest economic contraction in the region, projected at negative 33 percent. Countries with more diversified economies like Kazakhstan will be better positioned to handle Russia’s economic fallout, but close economic ties and wider effects of the ruble’s decline will make it impossible to escape unharmed.
While international financial institutions have moved quickly to provide Ukraine and its neighbors with financial support, additional packages to address more widespread economic fallout have yet to be implemented. The most notable stabilization effort comes from the European Investment Bank which is working on a multi-billion euro package for the EU Eastern and Southern Neighborhood, the EU Enlargement Region, and Central Asia in general to address the refugee crisis and alleviate the social and economic fallout of the war. In the coming weeks, it will be important for governments in the region, the World Bank, International Monetary Fund, and other international financial institutions to engage with each country, develop an accurate assessment of the situation, and put together plans for managing the dislocations resulting from a disrupted Russian economy.