On February 25, the United States and European Union simultaneously announced new sanctions against Russia for its invasion of Ukraine. This is the third and strictest package of sanctions. It covers financial, energy, transport, technology sectors, as well as the visa policy.
Experts disagree on how this would affect Russia. In 2014, the Russian Federation already survived sanctions, and now the country’s economy is stronger. There are those who believe that Russia will not survive, and there are those who believe that it will only strengthen its position on the world arena.
But Western sanctions affect not only Russia, but also states that are dependent on it. Kyrgyzstan is one of them. The economy of the Kyrgyz Republic is closely linked to what is happening in the partner countries of the Eurasian Economic Union. The republic has the strongest relation with Russia. In the current situation, it is rather a disadvantage. Kyrgyzstan has already felt the first consequences of sanctions.
50 per cent of the Kyrgyz economy – money remittances from Russia
According to the National Bank of Kyrgyzstan, every year migrants (in the last five years) remit to their homeland 2.5 billion dollars in average, including 98 per cent – money remittances from Russia. According to various estimates, today over a million of Kyrgyzstanis work in Russia.
The dependence of the economy of Kyrgyzstan on money remittances is very strong. Receipts from migrants in 2021 exceeded the state budget income almost by one fourth. In other words, over a half of money in the national economy comes from Russia. The families of migrant workers spend this money to buy all things needed by taking part in such economic spheres of the republic as services, trade, etc.
The majority of those receiving remittances are in Bishkek, Osh and Dzhalal-Abad regions.
It is important to note that remittances from Russia come to Kyrgyzstan in roubles and afterwards are converted into “hard” currency. It is logical that the weakening of the Russian currency against the United States dollar would result in a decline in revenues only because of the exchange rate difference. In 2021, the average rouble to dollar exchange rate was 73.7 roubles, while in March 1 the US currency strengthened to 93.6 rubles (+27 per cent). In other words, given the today’s rate, Kyrgyzstan would have received 726 million dollars less from Russia in 2021.
In addition to the inflation …
In January 2022, Kyrgyzstan experienced the highest increase in consumer prices in the Eurasian Economic Union, with inflation rate at 11.2 per cent by January 2021. The National Bank of the Kyrgyz Republic promises to keep it to 12 per cent. However, it will not be easy to achieve this goal. After the weakening of the rouble, the som decreased against the dollar - first to almost 95 som (+11.7%), then, after the intervention of the National Bank, the course rolled back slightly. As of 26 February, the new official exchange rate was 89.1 som (+5%) to the dollar. On March 1, the exchange rate rose again, and was officially fixed at 93.291 som.
The weakening of som against the American currency carries several risks. The first thing that ordinary citizens will feel is the rise in the prices of goods imported into the country in dollars. Such goods include petroleum, oil, lubricants. While Kyrgyzstan purchases 90 per cent of fuel from Russian refineries, all settlements are made in dollars. Oil traders have already reported that due to the currency surges, an increase of 3-4 som per litre is expected soon.
What other goods will probably get up? To answer this question, it is enough to look at the goods imported by Kyrgyzstan from the euro and dollar zones. Thus, in 2021, the volume of foreign and mutual trade of goods of Kyrgyzstan was 7.229 billion dollars, according to preliminary estimates. More than a half of them, namely 52.6 per cent, are the trade with third countries. The import of goods to the Kyrgyz Republic in 2021 was estimated at 5.570 billion dollars. Less than 10 per cent of the total volume, 5.8 and 3.13 per cent, respectively, fall on Europe and the United States.
+30 billion som to the foreign debt
The increase in the American currency is hazardous for the country because it carries rise in the foreign debt. The point is that the republic earns in som, and 81 per cent of foreign debt, according to the currency structure, is in dollars. Thus, given the current official exchange rate of 93.291 som, the debt of the Kyrgyz Republic to foreign creditors becomes 29 billion 680.8 million som more only due to the change in the American currency exchange rate.
If the foreign debt was 4 billion 294.57 million dollars by the end of 2021, or 364 billion som translated at the National Bank’s exchange rate of 84.7586 som for 1 dollar, now it is 393.7 billion som.
The Ministry of Finance always warns about these risks when calculating the debt service.
“There is always a risk of shortage of budget funds allocated for the national foreign debt servicing when the exchange rate of dollar to som increases, or when the cross rate of other currencies to the dollar increases,” according to the republic budget approved for 2022.
A justified question arises then, “Why can’t the Kyrgyz Republic fix the exchange rate of dollar at the level of 85 som understanding all these risks?” There are at least two explanations. First, it is expensive to keep the dollar within the given limits. Of course, Kyrgyzstan has quite large gold and currency reserves in recent years. As of the end of January 2022, they amounted to 2 billion 792.4 million dollars. In the meantime, the country spent 465.95 million dollars (16.7 per cent of total reserves of the National Bank of Kyrgyzstan) in 2020, yet failed to keep the dollar at the level of 69.5 som (+20.1 per cent).
Rouble and dollar
However, high prices is not the only reason. In the given situation, the National Bank faces a dilemma of whether to keep the dollar rate, and then the rouble will fall (it fell down to 50 tyiyn these days), or to accept the new price of the American currency. And given the fact that the regulator carried out only one intervention in the currency market after the rouble collapsed against dollar and sold 13.05 million dollars, it has chosen the latter option.
It can be explained by the fact that over a million of citizens work in Russia, as was previously said. It is easier to find a job there for a person with low skills, and the rouble recently cost more than the som. It means that unskilled workers with low Russian salaries could feed their families in Kyrgyzstan. If there is no such currency difference, there will be no use of working abroad. If all these people get back to their homeland, the country will face the social explosion.
Another reason is export. The EAEU is the main marketing area for the Kyrgyzstan goods, and Russia is the largest buyer of the Union. Based on 2021 results, the exports of the Kyrgyz Republic to the EAEU member states were estimated at 803 million 247.8 thousand dollars, with Russia’s participation of 51.4 per cent.
The products of Kyrgyzstan are in demand in the Russian market not only for their quality, but for their price, which is critical. While the som costs less than the rouble, the production of the republic can compete in terms of its price. If this balance changes, the goods produced in the Kyrgyz Republic become more expensive and therefore become less attractive. This will particularly affect the light industry and agriculture.
SWIFT and stable banking system
The banking system of the republic remains stable and sustainable. Commercial banks continue to operate full-time and provide clients with a full range of banking services, including payments under both national and international payment systems.
According to the regulator, Kyrgyz banks have concluded agreements on correspondent relations with banks in countries outside the Kyrgyz Republic, EAEU and CIS, which makes it possible to make payments for goods and services outside the republic without interruption.
“Most of commercial banks of the Kyrgyz Republic are connected to the SWIFT system via the National Bank or directly, so the risk of disconnecting individual banks of the Russian Federation from the SWIFT system will not lead to the suspension of payments for the clients of Kyrgyzstan-based banks. Also commercial banks have alternative channels of communication for the transmission of financial messages,” said the National Bank of Kyrgyzstan.
National payment system and remittance systems are functioning as usual. The degree of influence of country risks on the functioning of national payment systems and remittance systems is minimal.
“The National Bank is constantly monitoring and controlling the situation on the foreign financial markets, economies of the countries that are our trade partners, and will take measures, as necessary, to ensure the stability of the banking and payment systems of the country,” the regulator said.
Some commercial banks of the country have already announced the change in banking details for incoming payments in dollars and euros.
How will we get out of the crisis?
According to the statement of head of the Ministry of Economy that he made at the meeting with the business community and state bodies, the republic is among the viewers in this situation. This is confirmed by the fact that no specific measures to support the economy have been announced so far.
Business representatives were asked not to speculate on prices, while the cabinet of ministers promised not to intervene in case of the steep rise in prices. However, it is unclear so far how it is going to control the prices of imported goods as the country has nothing to replace them with because of the lack of a developed domestic producing sector.
Title photo: 24.kg