Ukraine Crisis: Central Asia’s Search for New Economic Partners
Jul 7, 2022
The Russian invasion of Ukraine triggered a sweeping wave of Western sanctions that have drastically affected Russia and the five Central Asian States that have now found themselves in a vulnerable geopolitical and economic position. Strategically located at the crossroads of Russia, China, South Asia, and the Middle East and tied to Russia by their Soviet legacy, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan have constantly grappled with the predicament of navigating “the complex quagmire of power relations.” Against the backdrop of Russia’s war in Ukraine and an unprecedented level of Russian isolation from the global economy, the balancing act has become ever more challenging.
From the beginning of the Ukraine crisis, the Central Asian nations have partially managed to maintain their strategic neutrality by, for instance, being absent or formally abstaining from the March 2 and March 24 United Nations General Assembly (UNGA) resolutions condemning the Russian invasion. While the incursion and Vladimir Putin’s imperialist rhetoric have prompted fears for their own sovereignty, the states recognize their economic interdependence on Moscow and are reluctant to openly rebuke Putin’s actions. Nevertheless, they are still at risk of becoming collateral damage, given the blow that the Russian economy will take from the West’s sanctions.
In 2022, the Russian economy is expected to shrink by up to 10 percent, although some experts predict a contraction closer to 15 percent. As inflation skyrockets and the unemployment rate heads towards 8 percent (from the previous 4.1 percent), Central Asia will increasingly bear the consequences of these shifting realities. Inflation in the region had already hit 10.7 percent by the end of April, following currency depreciation pressures and commodity price surges. The Russian labor market has long been an economic lifeline for some of the Central Asian nations as remittances have become a critical poverty alleviation tool for the region. In 2021, the World Bank reported that remittances were the largest source of external financing in the region, exceeding foreign direct investment, official development assistance, and portfolio investment put together. For example, remittances from Russia are close to 30 percent of GDP in Kyrgyzstan and Tajikistan.
Tajikistan will soon face a 22 percent fall in remittances. In addition, in 2021 alone, Tajikistan and Russia’s trade turnover amounted to $1.3 billion, including oil products, wood supplies, and metals. Similarly, Uzbekistan is expected to see a 21 percent decrease in remittances. In 2021, Uzbekistan was the leading remittance recipient from Russia with approximately $3.2 billion. In the first quarter of 2022, 60,000 Tajik and 133,000 Uzbek migrants returned from Russia to their home countries, straining the labor markets of governments that already struggle with a high unemployment rate. Further, 1.55 million migrants from Kyrgyzstan were registered by the Russian Internal Affairs Ministry, and there is a projected 33 percent decrease in remittances from Russia. The country also depends on Russia for 90 percent of its petroleum products.
When it comes to Kazakhstan, Russia accounts for almost 42 percent of imports and about 11 percent of exports. In 2021, remittances from Russia accounted for more than 51 percent of total remittances to Kazakhstan. The country is expected to see a 17 percent decrease. The Kazakhstani unit of Sberbank, Russia’s biggest lender, recently said that its loan portfolio had also shrunk by $1.7 billion in April. Kazakhstan exported more than 90 percent of its crude oil (68 million barrels) through Russia in 2021. The country provides about 10 percent of the total oil demand in the European market. These economic challenges are especially excruciating as the country is still stumbling to restore investor confidence following violent unrest in January 2022.
In an environment of extreme economic turmoil, Central Asian states are largely leaning toward engaging with other regional actors, particularly China. China’s total trade with the regional economies exceeded $46 billion in 2019, against Russia’s $29 billion. Turkmenistan has already become very dependent on China because it sends close to 85 percent of its gas exports to that country. Additionally, Beijing holds over 40 percent of Tajikistan’s and Kyrgyzstan’s national debts. China also recently pledged $37.5 million of “free financial assistance” to Uzbekistan “for the implementation of joint socially significant projects.” Some experts view the reconfiguration of geopolitical balance as a positive phenomenon, giving Central Asia more choice and leverage and an opportunity to “pick and choose among great powers.” However, these countries need to tread carefully in order to not find themselves in debt traps or security dilemmas.
While a Central Asian divergence from Russia might be viewed favorably by the West, the United States and Europe should be wary of China becoming a more dominant actor in the region. China’s ambitions do not stop at the economic level; Beijing is looking to exert influence in the area through security-related initiatives and arms deals. In his recent meeting with the Foreign Minister of Kazakhstan Mukhtar Tileuberdi, Secretary of State Antony Blinken confirmed the United States’ “commitment to minimizing the impact on allies and partners, including Kazakhstan, from the sanctions imposed on Russia.” In May, Assistant Secretary Don Lu visited the Kyrgyz Republic, Uzbekistan, Tajikistan, and Kazakhstan in order “to strengthen U.S. relations with the region and advance collaborative efforts to create a more connected, prosperous, and secure Central Asia.” The United States and its allies should continue strategic engagement with Central Asia by increasing their economic and security assistance in order to create more balanced regional dynamics and reduce the Central Asian nations’ dependence not only on Russia but also on China. Of special importance, Washington needs to increase its visibility in the region through regular, high-level visits.