Russia’s war against Ukraine and the international sanctions introduced against the former have had an unexpectedly mild impact on Central Asia, despite the region’s deep economic dependence on its northern neighbour. Notwithstanding high inflation, the five Central Asian states – Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan and Uzbekistan – have so far shown surprising resilience to the economic headwinds: remittances registered record-high figures in the first half of 2022, national currencies quickly rebounded to pre-war levels after an initial drop, and an influx of skilled workers 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 start to unfold, Central Asia is faced with lingering uncertainty. This publication provides an assessment of the short-term effects of Russia’s war on Central Asian economies and the policy responses provided. It also analyses the challenges ahead and formulates policy recommendations to make Central Asian economies more resilient and diversified.
Weathering Economic Storms in Central Asia
Abstract
Executive Summary
Central Asia has so far withstood the shock created by the war in Ukraine
The effects of Russia’s full-scale invasion of Ukraine were expected to have a rapid negative economic impact on Central Asia, whose economies remain closely integrated with its large neighbour. However, contrary to predictions, GDP has continued to grow across the region in the first half of 2022 as the main engines of growth, commodity export prices and labour remittances, have been on the rise. The rebound of national currencies to pre-war levels after an initial drop, and an influx of skilled workers have further supported consumption across the region. However, rising inflation is weighing negatively on businesses and households, further adding to supply chain disruptions and raising cost of living and food security concerns, in particular for non-commodity exporters, Kyrgyzstan and Tajikistan.
However, the region’s medium-term outlook remains fragile
Central Asia’s surprising resilience to the economic headwinds comes against the backdrop of a fragile post-COVID recovery that left growth subdued and fiscal margins reduced, leaving the region with an uncertain future. As the medium-term effects of the sanctions against Russia, the global cost-of-living crisis, and China’s economic slowdown start to unfold, the impact on economies of Central Asia could be substantial and negative. In particular, if the trade channel has remained robust so far across the region, its close ties with Russia leaves it vulnerable to political and supply risks; increased uncertainty might reduce investment attractiveness, while financial market developments might weigh negatively on the sustainability of public finances.
Policy options for Central Asia to further advance their private sector development agenda in uncertain times
If growth patterns are more fragile than ever, the current situation also offers an opportunity to Central Asia to address long-term structural needs and redefine its economic relations with its two large neighbors. Doing so will require Central Asian countries to further reform their business environments, and mobilise investments for the green transition. In addition, diversifying trade away from Russia and China will not only require the opening up of new trade routes, but also, and more immediately, advancement of regional integration, both in terms of infrastructures and the harmonisation of legal and regulatory standards.
