Tumbling Russian Rouble Leaves Kyrgyzstan Trembling

As Russia’s invasion of Ukraine hammered the Russian rouble, millions of remittance-dependent households in Central Asia are taking the hit of the unfolding economic crisis.

The region’s economies, closely tied to Russia’s, are bracing themselves for bad news. There are about seven million Central Asian nationals working in Russia, largely from Uzbekistan, Kyrgyzstan and Tajikistan.

Kazakstan, the region’s wealthiest, saw its tenge currency rapidly losing value, leading the central bank to inject over 200 million US dollars to ease the pressure on the national currency. The pressure, however, is particularly strong on Tajikistan and Kyrgyzstan.

Like Kazakstan, the latter is a member of the Russia-led Eurasian Economic Union (EEAU), the economic block. Its currency, the som, rises and falls in synch with the Russian currency.

Economic ties between the two countries are close. Over a million Kyrgyz live and work in Russia. According to the central bank, migrant workers sent 2.77 billion dollars back home in 2021, accounting for 50 per cent of Kyrgyzstan’s gross domestic product (GDP) – almost 25 per cent more than the state budget in 2021.

The transfers are largely done in roubles. In 2021, one dollar was worth about 73 roubles; on March 2, the exchange rate climbed to 111 roubles. In dollar terms, therefore, the value of the remittances flowing into the country has substantially dropped.

INFLATIONARY PRESSURES

Families are left with little cash and rising prices. In January 2022, Kyrgyzstan experienced the EEAU’s highest increase in consumer prices, with an inflation rate of 11.2 per cent compared to the previous year. But a fall in the value of the Kyrgyz som could make things even worse.

After the weakening of the rouble, the dollar appreciated by 11.7 per cent against the som before the central bank intervened, setting an official exchange rate of 89.1 som on February 26 – five per cent above the previous rate. On March 1, the exchange rate rose again and was officially fixed at 93.291 som.

This carries several risks for Kyrgyzstan. Ordinary citizens will feel the rise in prices of goods imported into the country in dollars, such as petroleum, oil and lubricants. Although Kyrgyzstan purchases 90 per cent of fuel from Russian refineries, all settlements are made in dollars. Oil traders expect an increase of three to four som per litre soon, a high hike in a country where the average salary is 19,668 som (207 dollars). Goods and services from Europe and the US are likely to become more expensive too, even though they comprise less than ten per cent of the country’s total imports.

The cost of servicing Kyrgyzstan’s foreign debt, 81 per cent of which is in dollars, will also be affected. In domestic currency, the value of the country’s debt has now risen by 29.7 billion som (about 224 million dollars), simply because of changes in the exchange rate.

“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,” the 2022 budget stated. That risk has now materialised.

The National Bank is facing a dilemma: whether to maintain the som’s value in relation to the dollar or to let it slide in relation to the rouble. So far, it seems to be choosing the second option. The reliance of remittances from Russia is key, as Russia allows low-skilled workers from Kyrgyzstan to find work and feed their families back home. If the som were worth more than the rouble, then remittances would lose their value and migrant workers could move back home – with potentially catastrophic consequences for the country’s economy and society.  

A weak currency also keeps Kyrgyzstan’s exports competitive. Russia is its principal market, accounting for 51.4 per cent of the country’s total exports. If the som were to be worth more than the rouble, the country’s exporters – particularly in light industry and agriculture – would lose their edge.

SWIFT AND STABLE

Fortunately, the country’s banking system remains stable, despite the expulsion of Russian banks from the SWIFT system. Kyrgyz banks have concluded agreements on correspondent relations with banks in countries outside Kyrgyzstan, the EAEU and CIS, which makes it possible to pay for goods and services outside the republic without interruption.

“Most of the 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,” the National Bank of Kyrgyzstan announced.

The national payment system and remittance systems were functioning as usual, with minimal risks expected, the statement continued.  

“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 in the country have already announced a change in banking details for incoming payments in dollars and euros.

Yet the soaring price of imports will continue to cause problems, as the lack of a developed productive sector means that Kyrgyzstan has nothing with which to replace them.