If Crimea Sanctions Bite Russia, Central Asia Will Feel the Pain

As Western governments mull additional sanctions in response to Russia's invasion and subsequent annexation of Ukraine's Crimea region, Washington and Brussels won't be the only world capitals watching to see the impact: Should the new restrictions bite into Russia's economy, they will have a painful trickle-down effect on the former Soviet republics of Central Asia.

Twenty-two years after they formally freed themselves of Moscow's dominance, most of the region's economies are still intricately tied to Russia's. Kazakhstan is bound to Russia by a customs union, while the region's two poorest countries, Kyrgyzstan and Tajikistan, are both deeply dependent on migrant remittances.

This reliance was clear well before Moscow's confrontation with the West over Ukraine-and early this year Russia's economy was already struggling. Moscow's dependence on high oil and gas prices to balance its books has spooked investors who fear a widening fiscal gap. To make matters worse, Washington eased its bond-buying program late last year and investors began turning away from emerging markets.

Most immediately noticeable was the dampening of local currencies. The ruble has fallen 11 percent against the dollar so far this year, most of that before Russian troops (unacknowledged by Moscow) fanned out across Crimea. Trailing the Russian currency, the Kyrgyz som has lost about 10 percent of its value against the dollar this year and Kazakhstan was forced to let the tenge slide almost 20 percent in February. These currency realignments have challenged growth forecasts and boosted inflation expectations around the region.

"Kyrgyzstan is very much under the influence of the ruble, therefore our currency will behave in the same way as the ruble. If Russia is hit by further sanctions or its economy worsens, our som will also lose value," said Uluk Kydyrbaev, head of the Kyrgyz Chamber of Tax Consultants. The first business day after Russian troops appeared in Crimea, the som fell 15 percent on the streets of Bishkek, only to recover somewhat later.

Even more worrying for many Central Asian officials and economists is the region's dependence on migrant remittances and the specter of unrest by workers flooding back from Russia only to find no jobs at home. By various estimates, over one million Tajiks, almost a million Kyrgyz, and several million Uzbeks work abroad, mostly in Russia and Kazakhstan. In Tajikistan, migrant remittances contribute the equivalent of 47 percent of GDP, according to the most recent World Bank data available. In Kyrgyzstan the transfers contribute the equivalent of 29 percent of GDP. In both countries, as well as Uzbekistan, almost everyone has a relative working in Russia or Kazakhstan. And the sinking ruble and tenge have hurt, because the transfers are generally converted to dollars before being sent home.

"Tajikistan, Uzbekistan and Kyrgyzstan are fed by migrants," said Izzat Amon, head of the Union of Tajikistan's Youth, a migrant support group in Moscow. "If there's an economic downturn in Russia, migrants are the ones who will suffer the most," losing their jobs on construction sites, as janitors, and as market vendors around the country.

Central Asian governments are eyeing events in Crimea nervously, fearing that Russia's heavy-handed assertiveness against Ukraine could bode ill for them.

But the threat of disgruntled migrant workers forced to return to their impoverished countries is a far more realistic threat than invasion and land grab, said a senior Western diplomat in Dushanbe. "I can see a scenario where you get demonstrations on the streets with returned migrants who are more than a little peeved that there are no jobs in Tajikistan," the diplomat said.

During the global financial crisis of 2008-2009, Central Asia's economies suffered as transfers fell and unemployed laborers returned home, possibly contributing to the uprising that ousted Kyrgyzstan's Kurmanbek Bakiyev in early 2010.

Beyond remittances, a downturn could also affect Russian spending in Central Asia, said Lilit Gevorgyan, senior economist at IHS Global Insight who analyzes risk in the region. Ukraine's political chaos may scare Russian capital away from former Soviet republics, meaning lower foreign direct investment from Russia into Central Asia, where hundreds of millions of dollars have been promised for energy infrastructure. There would also be "pressure on Russian state-run companies to invest domestically to create new jobs, which again would affect capital inflows to the Central Asian states," Gevorgyan said.

Finally, "should the downturn be protracted, Russian energy companies operating in the region may also seek increased tariffs" - a painful blow for Kyrgyzstan and Tajikistan, both of which now enjoy duty-free oil products from Russia.

So far, American and European sanctions have focused on a few dozen officials and may not have a huge effect on the Russian economy overall. But that doesn't solve the country's larger economic woes, and analysts say the impression that Moscow is willing to thumb its nose at the West and annex part of a sovereign neighbor has frozen the investment climate. On March 17, Russia's Deputy Economics Minister Sergei Belyakov was quoted as saying the country's economy "shows clear signs of crisis." If he is right, then Central Asian economies must brace themselves for crisis as well.