IMF: Armenia and Georgia are most at risk of a sharp decline in  exports to Russia and Ukraine

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."