Page 21 - bne magazine September 2023

bne September 2023 Companies & Markets I 21
Remittances. Uzbekistan, the Kyrgyz Republic, and Tajikistan are the most exposed to worker remittances and are seeing a big decline in local currency terms this year. They are under growing pressure to devalue to protect vulnerable household incomes.
Trade. Kazakhstan, Uzbekistan, and Armenia are most exposed in terms of trade and their relatively stronger currencies are hurting competitiveness. They will have to adjust “soon.”
Impact on growth expectations. The reduction in remittances is impacting consumer spending and financial sectors in Uzbekistan, the Kyrgyz Republic and Tajikistan. All three have seen growth expectations cut for 2023 because of the stronger-for-longer currencies.
The currencies most likely to see some devaluation, from the current level, are:
Kazakhstan tenge: Kazakhstan shares an open trade border with Russia and is a major trade partner. In 2015, the Kazakhs had to devalue steeply to stay in line with the weaker ruble because consumers crossed the border to buy durable goods in particular. But the devaluation will not be as steep as seen with the ruble because the government is struggling to bring inflation lower and is targeting inward investment from countries in the US, Europe, the Gulf and China, so a more stable currency is an advantage.
Kazakhstan does not have a major exposure to remittances from workers in Russia, so this is much less of a consideration than for other “stans”. The bulk of the money coming from Russia in 2022 and 1H23 is capital brought by Russians escaping the military draft.
Kyrgyz som: Also part of the Eurasian Economic Union (EEU) but imports food and energy from Russia, so the stronger som also helps the Kyrgyz Republic with inflation management. It is expected to devalue but also only slowly. The major issue is the negative impact on remittances, which account for between 30% and 33% of GDP.
In 1H23, the remittances from Kyrgyz workers in Russia fell by 32% year on year ($871mn versus $1.28bn in 1H22).
Uzbekistan som: Uzbekistan is the recipient of the largest flow of migrant remittances from Russia in monetary terms, and in 1H23 the volume is estimated to have accounted for 21% of GDP. Russia is also Uzbekistan’s second-largest trade partner and a major market for vegetable exports.
The government cannot afford to have the som strengthen too much vs. the ruble because of the loss of trade competitiveness and because of the impact on the economy from the drop in the value of remittances, in local currency terms.
According to the report of the Central Bank, in the first quarter, the monthly dynamics of transfers was higher y/y. From January to April, the inflow of remittances increased
by 21% to $3.1bn. About 87% of the amount received during this period came from Russia. The increase was because of a 72% increase in the number of migrant workers moving to Russia (an additional 630,000 people), so the additional ruble volume compensated for the currency weakness.
However, in the second quarter, the volume of transfers almost halved compared to the previous year, from $5.06bn to $2.85bn. In June, the dynamics of receipts worsened even more – the volume of transfers is 2.26 times lower than it was in this month of 2022.
Russia remains the main source of remittances. It accounted for about 80% of the total revenue for the six months.
The head of the Central Bank, Mamarizo Nurmuratov, predicts that by the end of the year, the volume of transfers will be in the region of $11-11.5bn, which is 32-35% lower than in 2022. The decline in revenues from Russia will also be associated with the devaluation of the ruble, he said.
Tajikistan somoni: Remittances from Russia account for 32% of GDP (n 2022) – although some estimates say this could be as high as 51% – so the strengthening of the somoni relative to the ruble hurts overall growth and the consumer sectors and household incomes.
The Institute for Demographic Research (Russia) reported the number of Tajik migrants in Russia by mid-year was 3mn. The entire population of Tajikistan is 10mn people, that is, a third of the country's population has already moved to Russia.
Armenian dram: Remittances account for 19% of GDP (2022), with the bulk from Russia. Last year the total was higher because of capital brought into the country by Russians escaping the military draft risk.
Russia is a major trade partner for Armenia, buying agricultural produce and machinery, so while the government will try to maintain dram stability to control inflation and attract foreign investment, it will have to manage a devaluation in the autumn for competitiveness reasons.
Georgian lari: Total remittances account for 16.3% of GDP (2022) and with a significant amount from Russians coming to Georgia to escape the draft risk. Trade with Russia has been muted for the past ten years so this is less of an issue.
The ruble has lost about half its value since last March's peak but it has yet to have a serious impact on the other currencies of the CIS, but it could.
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