ArmInfo.Caucasus and Central Asia (CCA) countries will feel the brunt of the direct effects of the war and associated sanctions mainly through trade, remittances, and financial links with Russia and Ukraine. Such a forecast is given in the IMF's April 2022 Regional Economic Outlook (REO): Middle East and Central Asia, which describes the direct spillover effects of the war in Ukraine and sanctions against Russia on the Caucasus and Central Asia.
Lower exports, tourism, and remittances
The IMF notes: "The deep recession in Russia and Ukraine and limitations on international transactions and trade finance could lower exports sharply from the CCA to these two countries, with Armenia and Georgia the most exposed. In addition, sanctions against Russian companies and reliance on Russian and Ukrainian pipelines and ports for oil exports (Kazakhstan) could affect energy exports and investments in some oil-exporting CCA countries. Tourism is also likely to be affected because Russia, Ukraine, and Belarus make up more than 15 percent of total tourist arrivals for Armenia, Azerbaijan, Georgia, and Tajikistan. Lower growth in Russia, pressures on the ruble, and restrictions on payment systems are expected to drastically hamper remittances to the CCA, which account for between 7 and 25 percent of GDP for the Kyrgyz Republic, Tajikistan, and Uzbekistan. A drawn-out war carries the risk of large numbers of workers returning home, resulting in high unemployment and social pressures."
Supply shortages, food and energy insecurity, and affordability
"CCA countries are markedly exposed to wheat and fertilizer imports from Russia and Ukraine (Armenia, Azerbaijan, Georgia) and energy imports from Russia (Armenia, Kyrgyz Republic). Potential border closures, outright import bans, and trade-financing restrictions can all imply potential shortages unless offset by strategic reserves or alternative sources. High food and energy prices will exacerbate these risks, likely leading to an increase in subsidies to offset these pressures in the context of heightened social unrest risks."
Exchange rate pressures
The IMF states: "Currencies in the CCA have depreciated against the dollar, also reflecting the tendency of regional currencies to move in tandem (Georgia, Kazakhstan, Kyrgyz Republic), but still appreciated against the ruble. This could aggravate inflation pressures further, complicate policy trade-offs, and pose financial stability risks in countries with foreign exchange balance sheet mismatches."
Banking exposures and cross-border payments
"Sanctions against Russian banks will weigh on their subsidiaries, which have a footprint in some CCA countries (4, 5, and 14 percent of total banking sector assets in Georgia, Armenia, and Kazakhstan, respectively, before the crisis). After the sanctions announcement, Georgian regulators facilitated offloading the portfolio of a Russian bank subsidiary. In addition, the exclusion of Russian banks from the Society for Worldwide Interbank Financial Telecommunications System and sanctions on the Russian banking sector could limit cross-border payments as scaling up alternative payment systems and corresponding banking relationships will take time and be more costly. Some CCA countries could also experience secondary spillover effects from Kazakhstan, which intermediates trade and payments, including through its bank subsidiaries (Kyrgyz Republic)."
War spillovers shaping outlook and risks
"Countries in the region are being affected by the ongoing war and sanctions through a multitude of direct and indirect channels. CCA countries are among the most exposed, given geographic proximity, close trade and financial linkages with Russia, reliance on remittances and tourism, and exchange rate spillovers. In addition to these direct linkages, they are also exposed to global spillovers, in particular from higher commodity prices in the context of already high domestic inflation.
Oil-importing emerging markets and low-income countries in MENA are vulnerable through global commodity prices and supply chain disruptions, as well as their reliance on wheat and energy imports from Russia and Ukraine, and on tourism in some countries.
Financial market uncertainty and tighter financial conditions may significantly impact countries with high debt through reduced capital flows and rising borrowing costs. In addition, a slowdown in Europe would amplify the negative effects on trade and tourism. If donors redirect support to emerging urgent needs and to countries that are directly impacted by the war, LICs could face aid diversion.
In contrast, MENA oil and gas exporters, and to a lesser extent those in CCA, would benefit from a rise in energy prices, offsetting the impact of tighter global financial conditions. They will, however, be exposed to higher volatility in oil and gas markets and, in some cases, lower tourism revenues."
Outlook: Diverging Recoveries
A Confluence of Factors Shaping the Outlook: The war in Ukraine will be the dominant factor shaping the region's recovery in 2022 (Figure 1.9). Most countries will focus on preventing inflation from becoming entrenched, while EM&MI countries and LICs will have limited or no macro policy space to effectively counter shocks. The faster-than- anticipated normalization of monetary policy in advanced economies, compounded by heightened market volatility, will likely affect capital flows, borrowing costs, domestic interest rates, and the pace of the recovery.
China's slowdown will add to a less-supportive external environment, especially for EM&MI countries. Meanwhile, in countries with weak vaccination rates, potential new pandemic waves remain a drag on growth, although the impact is expected to be weaker than in earlier waves. Thus, ME&CA's recovery is set to lose steam, with increasing divergence across sub-regions and countries."
