LONDON/ALMATY Aug 20 Farangees Islomova is
worried. Her husband, who labours on a construction site in
Moscow's Schelkovo suburb, usually sends 15,000 roubles home to
Tajikistan every month. But in July he sent her just two-thirds
"My husband says they haven't started a new building yet. He
had wanted his younger brother to join him in Moscow...but
recently he called and said: 'The master says he won't take any
new workers and there will be lay-offs'", said Islomova, a 36
year-old mother of three, whose family relies on the money her
husband sends from Russia.
She says another brother-in-law, a supermarket worker in
Moscow, recently had his salary cut, as Russia's deepening
economic gloom bites into consumer and housing demand.
Islomova is not the only one worried. To paraphrase the
adage: when Russia sneezes, the rest of the ex-Soviet Union
catches a cold.
Storm clouds were also gathering over the Russian economy
well before the Ukraine crisis took hold late last year, with
long-range official projections weakening alarmingly.
But Western sanctions over its role in Ukraine's conflict
have undermined it further. Russia now faces recession this year
and countries with post-Soviet economic ties face the fallout as
Kiev breaks away to the West.
Across the Commonwealth of Independent States (CIS) bloc,
memories linger of 2008, when Russia's economic slump played out
across the region of 300 million people, causing recession,
triggering housing crashes and bank debt defaults.
"There is a very strong transmission channel from Russian
economic weakness to surrounding areas," said Christopher
Granville, managing director at consultancy Trusted Sources, who
describes Russia's economy as being in a state of "slow
"Russia's recession in 2009 was a major blow to the CIS..all
in all, it's a bleak outlook for the whole region."
In many ways, the economic weakness in most of these
countries, run by unpopular authoritarian governments, is
structural, due to lack of reform, reliance on commodity exports
and weak institutions. Some countries, including Armenia and
Azerbaijan, also have their own geopolitical disputes.
In desperately poor Tajikistan, remittances from Russia fell
more than 13 percent in the first three months of 2014 from
year-ago levels, the country's central bank says.
Given that remittances make up 40 percent of Tajik gross
domestic product (GDP), falling receipts from Russia are likely
to hit growth as well as the somoni currency, which has already
weakened 5 percent versus the dollar this year.
Such fears are spreading across the CIS, whose citizens sent
home $25 billion from Russia last year. Just over $4 billion was
sent in the first quarter of 2014.
Then there is trade. Armenia for instance, sends a fifth of
its exports to Russia. This revenue is crucial for its balance
of payments deficit, a huge 10 percent of GDP. Its other
mainstay is remittances, of which 80 percent flow from Russia.
Of the other CIS states, a quarter of Uzbek exports go to
Russia, the Asian Development Bank says. Russia also takes 15
percent of Kyrgyz and almost a tenth of Kazakh exports.
"Russia's economy hasn't gone from 4 percent growth to 0.8
percent because of the Ukraine crisis, the deceleration began a
while ago," said Commerzbank analyst Tatha Ghose.
"But if the crisis doesn't de-escalate soon, we will see the
multiplier effects becoming more evident across the region."
Russia's economy will barely grow in 2014, its worst
performance since 2009. Interest rates, up 250 basis points this
year, may rise further as food import bans push up inflation.
Unsurprisingly, consumer demand, which has underpinned
Russia's economy, is cooling as real wages grow at the slowest
pace in years. The rouble is down 8 percent against the dollar
so far this year.
Rouble depreciation creates its own headaches for regional
governments, especially for Kazakhstan and Belarus which earlier
this year entered a free trade zone with Russia.
To protect its trade in the face of the rouble's sharp
slide, Kazakhstan devalued the tenge by 19 percent in February
, replicating steps it took after the 2008 crisis. But the
benefits are already eroding - since end-June the tenge has
strengthened 9 percent against the fast-weakening rouble.
Kazakhstan's trade turnover with the bloc has already fallen
by a quarter in the first half of 2014 from year-ago levels, a
consequence of the Russian slowdown, said Alikhan Smailov, the
head of the country's state statistics agency.
"Kazakhstan is feeling the consequences of Russia's
slowdown," Smailov said, noting that the Kazakh economy had
grown 4 percent in the first seven months of 2014, compared with
6 percent full-year levels last year.
While Russia has not asked Kazakhstan and Belarus to comply
with the food bans, Granville says Moscow's plans to expand the
customs union into a big single market have suffered a setback.
"Not only is Ukraine now lost, the resulting economic blow
has weakened the attractions of the union to members," he added.
Russia's standoff with Ukraine and the West also carries
broader geo-political risks if the region's mostly authoritarian
governments are faced with popular discontent due to falling
incomes, returning migrant workers and potential bank runs.
The tensions, including Moscow's annexation of Crimea from
Ukraine, are reviving long-standing territorial conflicts such
as Transdniestria in Moldova and the breakaway Georgian regions
of Abkhazia and South Ossetia, ratings agency Moody's noted.
Armenia and Azerbaijan have also recently clashed over the
Nagorno-Karabakh enclave, claimed by both countries.
"Given that most CIS countries have large ethnic Russian
populations, we now consider domestic political stability to be
more at risk than prior to the crisis," Moody's added.
There could be some short-term benefits - Belarus and
Uzbekistan for instance are expecting to grow their food exports
to Russia while Moscow will allow neighbouring countries to
re-export items processed from Western raw materials.
Belarusian firms may also be able to cash in by re-routing
food imports across the border as suppliers try and sidestep
The picture is also less dire than five years ago. Russia's
economy will either flatline this year or contract by 1 percent,
while in 2008-2009 it suffered an 8 percent slump. Oil prices
are also around $100 a barrel and are unlikely to crash to $45 a
barrel as they did in 2008.
That at least may help Russia and fellow energy exporters,
Kazakhstan, Uzbekistan and Azerbaijan, to weather the storm.
(Additional reporting by Roman Kozhevnikov in Dushanbe; editing
by Anna Willard)