If the war in Ukraine persists, resulting in a widening of sanctions or shifting of geopolitical alliances, the economic ties between the Caucasus and Central Asia (CCA) region and Russia could come under pressure, with possible adverse implications for CCA economies, Report informs referring to the International Monetary Fund (IMF).
“Despite the CCA region’s strong trade, remittances, and financial links with Russia, to date, the adverse impact of Russia’s war in Ukraine on the CCA region has been milder than initially expected. To a large extent, this reflects the near-term resilience of Russian economic growth, unexpected money transfers, and policy measures to avoid secondary sanctions. Moreover, trade routes remain open, financial flows continue (reflecting the many nonsanctioned Russian banks), and existing arrangements (for example, membership in the Eurasian Customs Union and long-term gas contracts) are helping to mitigate the impact of higher food and energy prices,” the IMF noted.
Although oil exporters have received a boost from high commodity prices, high frequency indicators suggest that the postpandemic recovery is also continuing in the region’s oil-importing countries: “Available data indicate that the unexpected relocation of businesses and individuals from Russia may have played a significant role.
In recent months, money transfers into several CCA countries (to Armenia - $1.5 billion, Azerbaijan - $1.6 billion, Georgia - $1.7 billion, Uzbekistan - $2.2 billion in the first half of the year) have increased significantly. Such transfers cannot be explained by regular flows of remittances; instead, they may signal capital movements, including from returning expatriates. These inflows have contributed to growth in banking deposits and local currencies, reversing initial postwar losses against the US dollar in Armenia, Georgia, the Kyrgyz Republic, and Tajikistan.”
The impact is particularly evident in Armenia, where the number of arrivals from Russia has increased significantly (an increase of 200 percent in the first quarter of 2022 compared to the same period in 2021 and 50 percent compared to prepandemic levels) and hotel occupancy rates are at record highs. Reported arrivals from Russia to Georgia increased in comparison to 2021 but are still lower than in 2018−19. However, arrivals from Belarus and Kazakhstan also increased significantly (increases of 114 and 36 percent, respectively, in the first half of 2022 compared to the same period prepandemic), which may reflect relocations from Russia in the absence of regular direct flights to Georgia.
“Whether these relocations are temporary or more permanent remains to be seen. While host economies are benefiting from a short-term consumption boost, the medium-term impact is less certain. So far, it is unclear whether these relocations will drive a large-scale increase in new businesses,” reads the report.
The war in Ukraine will remain a multidimensional risk surrounded by substantial uncertainty and will demand proactive and agile policy responses. Spillover risks related to inflation, food security, and external financing loom large.
Compared to the latest forecast in April, economic growth in the CCA region for 2022 has been revised up by 1.2 percentage points to 3.8% this year, and 4% real GDP growth is expected in 2023, according to the report. This year, the forecast for the growth of real GDP of oil and gas exporters in the Caucasus and Central Asia is set at 2.6%, and in 2023 - 3.8%. At the same time, the growth of non-oil GDP in these countries is projected at the level of 3.5% and 3.2%, respectively.
The upgrade reflects an upward revision to Russia’s real GDP growth
forecast (up 5.1 percentage points from April); unexpected inflows, such as the relocation of workers and firms from Russia and significant money transfers (of capital and income), which have fueled consumption (Armenia, Azerbaijan, Georgia, Uzbekistan); resilient trade, supported by trade settlement in rubles (Armenia) and a surge in cargo shipments through alternative trade routes, particularly the Trans-Caspian International Transport Route (Azerbaijan, Georgia); and fiscal stimulus in some countries (Kazakhstan, Tajikistan).
Inflation is expected to accelerate from 9.2 percent in 2021 to 12.9 percent in 2022 and remain elevated at 10.5 percent in 2023, an upward revision of 2.2 and 1.9 percentage points in 2022 and 2023, respectively. For oil and gas exporters, consumer price growth rates are expected at 14.1% and 11.1%, respectively.