Effects of increasing sanctions against Russia on post-Soviet countries

Anar Khalilzade, International Economic Relations, UNEC

In today’s world one of the most pressing international problem is Ukrainian crisis as it is affecting several geopolitical regions since 2014. The main contributors of this crisis are Russian Federation, Ukraine, United States and European Union. Following the military intervention of Russia to Ukraine, Western Countries imposed economical and political sanctions on Russia which lead to counter sanctions to EU, US and other western countries.

 

Currently Russia inflicts embargo on import of agricultural products from US, EU, Norway, Canada and Australia. As a result the crisis inflates and causes massive financial losses for the involved countries. The estimated financial damage to EU is more than 100 bln. Russia which possesses the largest economy in its region suffers with economic crisis following radical decrease of oil prices along with the increasing pressure of sanctions. Moreover, the economic struggles of the leading country in post-soviet region impacted other countries which had economic, political and social ties with Russia due to the shared history of Soviet Union.

 

This article will present analysis with theoretical and empirical approach of current relations between Russia and post-soviet countries, subsidiary effects of sanctions on Russia to the region and economic measures taken by former Soviet countries .

 

Dissolution of the Soviet Union lead to independence of the union states. Some of the post-soviet countries conserved relations with Russia. Several organizations formed to preserve economic relations and security as Commonwealth of Independent States, Euroasian Economic Union and Eurasian Customs Union. On the other hand Baltic countries preferred to join NATO and EU.  The relations between these newly independent republics with Russia is presented in Table 1.

 

 

Table 1: The relations between Russia and CIS, Baltic states.

 

Russia defines the region consisting the newly independent countries as “near abroad”. This term mentioned on their several foreign policy documents  as a special area of interest since events occuring in this region is crucial for Russia in geopolitical perspective. As an example, the cause of  military intervention of Russia in the territory of Ukraine was the Russian minorities who had spread all over the post-Soviet region especially in the Crimea due to above-mentioned historical relationships with the Russia. Russia considers this intervention as a humane step to protect its own people. [2]

 

The Ukraine crisis which is ongoing till today started when Viktor Yanukovych suspended the preparations on implementation of association agreement with EU. Subsequently it lead to mass protest of the people who supported the agreement and forced resignation of Yanukovych. Following Yanukovych’s resignation, uprising of his supporters who were Russian minorities drove East and South region of the country to instability. Protests, formed civil war, military intervention of the Russia to these region and declaration of Ukraine’s Crimean territory as the Autonomous Republic caused the current political crisis [3][4]

 

In response to occupation of Crimea some Western countries, EU and US lead international organisations imposed sanctions on influential russian citizens and politicians. Consequently the spread of tension in Eastern regions and onset of current war on the Donbas region brought intensified sanctions against Russia.

 

On general 3 types of sanctions is implemented: supply of technology for oil and gas exploration, ban on investments and loans to Russian oil and gas companies and state banks, travel ban on influential Russian citizens who are associated with  president and those who were involved in invasion of Crimea. In response to these actions Russian government imposed sanctions on some Canada and US citizens. On August 2014 and embargo placed on the import on agricultural goods from EU, US, Canada and Australia. [5][6]

 

Ukrainian crisis and related sanctions is still an ongoing international issue,  sanctions that were inflicted by US and EU is valid till 1 June 2018. The restrictions set against Russia will affect the economy of local CIS countries due to the economic relations with Russia on trade, remittance and direct investments.

 

First of all, most of the CIS countries majorly exports to Russia. Historical ties and arrangements as Eurasian Customs Union prevents export diversification of post-soviet states. It is recorded that 10% of Belarus and Turkmenistan GDPs is formed by good and service export to Russia. On the other hand for Caucasian and Central Asian countries Russia is profitable niche market. As an example, half of Azerbaijan’s non-oil sector revenue is from exported goods and services to Russia; The dynamics of  Armenian economy is directly dependent on the export to Russia; Georgia’s relation with Russia was shook by the 2008 conflicts which resolved in 2012 and currently Georgia’s export to Russia is increasing; Turkmenistan and Uzbekistan sells 25% of their total gas export to Russia.

 

Imported energy and other products from Russia valued as more than 5% of GDP of CIS countries. Especially in Belarus, Armenia and Ukraine the 20% of the energy demand is supplied by Russia. Considering the major oil contracts are set for long term, the countries that depend on Russian energy resources are unable to benefit from low oil prices which enhances influence of Russia in the region.

 

	2010	2012	2013	2014	2015	2016
Exports
Totals	59601	79219	73922	63984	45018	37358
Of total exports by countries:
Azerbaijan	1562	2846	2943	3373	2287	1508
Armenia	700	920	998	1094	1051	957
Belarus	18081	25085	20228	206052)	15350	14051
Georgia	289	476	583	575	625	675
Kazakhstan	10690	15697	17632	14113	10786	9427
Kyrgyzstan	991	1634	2029	1743	1302	1026
Republic of Moldova	1108	1609	1321	1480	1036	912
Tajikistan	673	679	724	891	763	662
Turkmenistan	757	1211	1430	1156	914	571
Uzbekistan	1889	2324	2804	3121	2235	1965
Ukraine	23148	27215	23813	17062	9294	6280
Imports
Total	31728	44899	38587	32806	21037	19332
Of total imports by country:
Azerbaijan	386	564	636	636	518	446
Armenia	159	301	352	314	210	378
Belarus	9954	13723	13959	153462)	8869	9406
Georgia	34	46	190	274	162	206
Kazakhstan	4449	10051	5887	7396	4783	3612
Kyrgyzstan	393	196	110	73.8	71.7	171
Republic of Moldova	421	477	417	316	186	249
Tajikistan	214	68.3	37.9	37.3	52.2	26.4
Turkmenistan	148	184	139	90.9	73.5	331
Uzbekistan	1557	1391	1257	875	602	761
Ukraine	14047	17945	15791	10749	5673	3951
In 2016 in total volume of exports of Russia the share of Belarus was 4.9%, Ukraine – 2.2, Kazakhstan – 3.3%. In imports predominated shipments from Belarus – 5.2% of total imports volume, Ukraine – 2.2, Kazakhstan – 2.0%. ——————— 1) Since 2015 – the Eurasian Economic Union (EAEU) includes the Republic of Belarus, the Republic of Kazakhstan, the Republic of Armenia and the Kyrgyz Republic (starting from August 12, 2015). 2) Including recalculations of unrecorded mutual trade of the Russian Federation.

Table 2: External Trade of the Russian Federation with the CIS countries (at actual prices; mln. US dollars)

 

Remittances have been one of the main sources of negative economic blow for the oil importer CIS countries as these countries are in the top of the list on remittance recipients in terms of remittances percentage of real GDP. The transfers are mainly generated by CIS immigrants in Russia. The dependence of Russian economy on oil revenues and the economic tension following the sanctions leads to unemployment thus reduces remittance. For Tajikistan, Kyrgyzstan and Armenia the remittance marks noticeable share of their GDPs as 45% , 30% and 20% respectively (2013)

Post-soviet countries have very limited access to the global financial markets, investment tools therefore foreign direct investments from Russia and two-sided bank systems are less affected by the sanctions. The direct investments from Russia to CIS countries measures as less that 2% of total GDP of CIS countries and more than 5% for Tajikistan and Armenia.

 

The Russian shares in  banking industry of CIS is not more than 10%. On the other hand the share of subsidiary companies of Azərbaijan and Kazakhstan banks in Russia is not more than 2% of real GDP. These indicators minimize the impact of Russian investments to banking. İndirectly the banking sector is heavily affected by declining  exchange rates and remittances.

The  “over-dollarization” of foreign currency exchange operations in banks and the sharp decline in remittances led to an increase on unmet liabilities in the CIS countries.

 

Considering the above mentioned affecting factors and close political and economic relations with Russia sanctions on Russia is affecting the local economies in post-Soviet countries negatively. The local economies, especially including oil exporting countries which were growing in rapid rate since 2008 economic crisis, experienced reduction of economic growth rate, devaluation of national currency against USD and high inflation for 2014-17 period.

 

Country Name	2010	2011	2012	2013	2014	2015	2016
Armenia	9.260	10.142	10.619	11.121	11.610	10.553	10.572
Azerbaijan	52.903	65.952	69.684	74.164	75.244	53.074	37.848
Belarus	57.222	61.758	65.685	75.528	78.814	56.455	47.407
Georgia	11.639	14.435	15.846	16.140	16.509	13.994	14.378
Kazakhstan	148.047	192.627	207.999	236.635	221.416	184.388	137.278
Kyrgyz Republic	4.794	6.198	6.605	7.335	7.468	6.678	6.551
Tajikistan	5.642	6.523	7.633	8.507	9.236	7.853	6.952
Turkmenistan	22.583	29.233	35.164	39.198	43.524	35.800	36.180
Ukraine	136.013	163.160	175.781	183.310	133.503	91.031	93.270
Uzbekistan	39.333	45.915	51.822	57.690	63.067	66.904	67.220
Russian Federation	1524.916	2051.662	2210.257	2297.128	2063.663	1365.864	1283.163

Table 3: Real GDP of post-soviet countries

 

The recorded decline in economic growth constrains the CIS countries to keep conservative budget forecast. This, in turn, reduces credit ratings of international organizations in the region. In case of the imposed sanctions against Russia intensifies, the foreign investments on CIS countries will drastically reduce due to mentioned relations with  Russia. Therefore  the tendency developed in  countries financed by oil and gas revenues, such as Kazakhstan and Turkmenistan on building relations and cooperating on major projects with China and other Asian countries.

 

Country Name	Currency Parity	2010	2011	2012	2013	2014	2015	2016	2017
Armenia	USD/AMD	373.66	372.50	401.76	409.63	415.92	477.92	480.49	482.72
Azerbaijan	USD/AZN	0.80	0.79	0.79	0.78	0.78	1.02	1.60	1.72
Belarus	USD/BYN	0.30	0.50	0.83	0.89	1.02	1.59	1.99	1.93
Georgia	USD/GEL	1.78	1.69	1.65	1.66	1.77	2.27	2.37	2.51
Kazakhstan	USD/KZT	147.36	146.62	149.11	152.13	179.19	221.73	342.16	326.00
Kyrgyz Republic	USD/KGS	45.96	46.14	47.00	48.44	53.65	64.46	69.91	68.87
Tajikistan	USD/TJS	4.38	4.61	4.74	4.76	4.94	6.16	7.84	8.55
Turkmenistan	USD/TMT	2.85	2.85	2.85	2.85	2.85	3.35	3.40	3.40
Ukraine	USD/UAH	7.94	7.97	7.99	7.99	11.89	21.84	25.55	26.60
Uzbekistan	USD/UZS	1543.0	1640.0	1834.0	2086.0	2230.0	2457.0	2788.0	3207.0
Russian Federation	USD/RUB	30.37	29.38	30.84	31.84	38.38	60.94	67.06	58.34

Table 4: Official exchange rate (LCU per US$, period average)

 

The local currencies lost value vastly against the US dollar due to devaluation of ruble and low oil prices. The currencies of CIS countries that ties with  Russian economy had to follow radical financial policies to overcome these shocks. Oil exporting countries as Azerbaijan, Kazakhstan and Turkmenistan have adopted  floating exchange rate policy. Therefore, Russia’s policy on ruble impacts CIS countries. In order to reduce dependency on foreign currency self sufficiency  required to be established on domestic production and self-sustaining food.

 

The currency devaluation and the economic downturn that began in 2014 have led to high inflation in the CIS. Given that most of the imported products are regulated by the US dollar, it is ineffective to control inflation with managing amount of nominal effective currency. According to World Bank statistics, in 2020, it is projected that in most countries in the region inflation will be 5% inflation in respect to 2014-2016.

 

Country Name	2010	2011	2012	2013	2014	2015	2016
Armenia	8.18	7.65	2.56	5.79	2.98	3.73	-1.27
Azerbaijan	5.67	7.85	1.01	2.38	1.39	4.17	4.18
Belarus	7.74	53.23	59.22	18.31	18.12	13.53	11.84
Georgia	7.11	8.54	-0.94	-0.51	3.07	4.00	2.13
Kazakhstan	7.12	8.35	5.11	5.84	6.72	6.65	14.51
Kyrgyz Republic	7.97	16.50	2.69	6.61	7.53	6.50	0.42
Tajikistan	6.42	12.43	5.83	5.01	6.10	5.71	6.00
Turkmenistan	4.80	5.60	6.50	6.00	4.42	7.00	6.17
Ukraine	9.38	7.96	0.56	-0.28	12.19	48.72	13.90
Uzbekistan	7.20	7.40	7.00	6.80	6.10	5.60	5.70
Russian Federation	6.85	8.44	5.09	6.74	7.83	15.53	7.05

Table 5:  Inflation Rate (%) 

 

In conclusion, intensified sanction regimes on Russia have drastical negative effect on post-soviet countries. Although setbacks on oil and gas industry due to low oil prices formed the environment to increase in investments and could have been a cause of positive initiative on development efforts on non-oil sectors for oil dependent economies in CIS, however applied sanctions on Russia in this circumstances drove CIS region to financial instability. The economic relations with Russian Federation is impacting  economic growth, currency exchange rates and inflation in the CIS economies by means of remittances related to employment of immigrants from post-soviet countries and direct investments. Outlook on sanctions and Ukraine crisis is unclear as it will depend on bilateral politics of Russia and Western countries.  Therefore  post-soviet region should  reduce dependency on Russian  market with building new relations with other large economies and with stimulating development of domestic production and  food security.

 

References

 

[1] Sharkov, Damien (19 June 2015). “Russian sanctions to ‘cost Europe €100bn'”. Newsweek.com. Retrieved 1 November 2017

[2] “I reiterate, we are talking here about protection of our citizens and compatriots, about protection of the most fundamental of the human rights – the right to live, and nothing more,” Lavrov told on Tuesday the UN Council on Human Rights in Geneva.

[3] Russian President Vladimir Putin attends a press conference at the Kremlin in Moscow on March 5, 2015 (AFP interview)

[4] Рокировки в СБУ. Кто такие Маликов, Остафийчук и Фролов [Castling the SBU. Who are Malikov, Ostafiychuk and Frolov]. Novoe Vremia (in Russian). 25 June 2015. Retrieved 1 January 2016.

[5]  “Russia hits West with food import ban in sanctions row”. BBC News. 7 August 2014.

[6] Payton, Laura (7 August 2014). “Russia sanctions: Vladimir Putin retaliates,    sanctions Canada”. CBC News.