Russia’s full-scale invasion of Ukraine on 24 February has left the country devastated, while generating a global economic shock that has not spared Central Asia. Early forecasts anticipated significant disruptions to the region’s post-pandemic recovery, given its close political and economic integration with Russia, especially in terms of trade, freight transit, investment, financial links and labour. The contraction of the Russian economy induced by international sanctions, trade disruptions, and commodity price spikes was expected to dent remittances and trade flows, magnify debt vulnerabilities and disrupt the region’s financial sector. The depressed macroeconomic environment and increased international uncertainty were also seen as factors undermining Central Asia’s attractiveness as an investment destination.
However, the economies of the region have so far shown surprising resilience to the headwinds caused by Russia’s war on Ukraine, and China’s economic slowdown. Notwithstanding high inflation, the five Central Asian states registered record-high remittances levels in the first half of 2022, national currencies quickly rebounded to pre-war levels after an initial drop, and an influx of skilled workers has boosted demand for services and hospitality. However, as the medium-term effects of the sanctions against Russia, the global cost-of-living crisis, and China’s economic slowdown have started to unfold, Central Asia faces lingering uncertainty.
The current situation might therefore provide the opportunity for Central Asia to diversify trading partners, solidify the post-pandemic recovery and pursue its agenda of structural reforms to foster investment and private sector development. Russia’s economic decline might accelerate the growth of China’s economic presence in the region, but this will entail challenges, in particular in relation to debt sustainability and territorial integrity of certain Central Asian countries. Opening up new trade routes will prove essential for the region’s economic diversification, given Central Asia’s vulnerability to Russia’s international agenda and zero-COVID policies in China that have strongly undermined export opportunities. The search for alternative trading routes has recently gathered momentum, as exemplified by the ratification or ongoing negotiations of preferential trade agreements with Pakistan and the pursuit of new trade routes through Iran, Afghanistan or the so-called trans-Caspian “Middle-Corridor”.
This note explores the economic impacts of Russia’s invasion of Ukraine and ensuing sanctions against Russia on Central Asia, looking in particular at the impact of these disruptions on inflation, migration, remittances, investment, and trade. It summarises initial policy responses across Central Asia and concludes with an overview of potential responses for policy-makers to consider in the short and medium terms to mitigate the shock and increase resilience going forward