How do the CIS countries cope with the crisis?
EDB believes that an expert discussion of monetary and foreign exchange policies is needed in the region.
By Arman Akhunbayev, Deputy Head of the Department for Strategic and Sector Research at EDB, and Konstantin Fyodorov, Deputy Head of the Division for Sector Research
In the last two years the CIS countries were affected by several negative shocks: the dramatic fall in prices of energy carriers and other exports from the region; the outflow of capital from developing countries, aggravated by the sharp worsening of access to international capital markets for the region's largest economy (Russia); and mutual restrictions on international trade imposed by the sides to foreign policy conflicts, first around Ukraine and then Syria.
As a result, the CIS countries' GDP fell by 2.7% in the first to third quarters of 2015 (as estimated by the IMF). Until the middle of 2015, the recession affected, in the first place, the region's western parts: Russia, Ukraine (reaching dozens of percentages there), and Belarus. In Central Asia and Transcaucasia, no significant deterioration in the economic situation was observed until the second half of the year. Kazakhstan's growth slowed down noticeably because of falling oil prices (remaining positive, nevertheless) and in other countries its rates did not change significantly.
In the second six months of the year the situation reversed. While the CIS' western economies stabilised or slowed their recession (with GDP growth rates, however, remaining very negative, compared year-on-year), Central Asia and Transcaucasia began to experience the signs of the crisis, the first of which was the wave of devaluations after the central banks of several countries decided to untie their currencies from the US dollar. Growth rates in industries, trade and construction began to worsen very quickly. At present, the main economic risks in the region, associated with unstable balances of payments and/or public finance, concentrate in its south and east.
This is explained, to a greater degree, by different approaches to macroeconomic policies in the western and eastern parts of the region, rather than objective circumstances. However, the latter played their part in certain countries (Armenia and the Kyrgyz Republic, in particular, received support in connection with the commissioning of metal extraction and production facilities in the past year).
It is no secret that falling oil prices were the external shock that affected Central Asia's key economy, Kazakhstan, simultaneously with Russia. The main channels for shock distribution in the region (trade, credit and investment, and labour migrants' remittances, which are especially important to many countries in the region) were also rather quick. Central Asia and Transcaucasia's slow reaction to the shocks of 2014-2015 and the current risks is explained by the fact that their central banks pursued significantly less flexible policies with respect to their currencies, as compared to the Bank of Russia.
The fiscal policies of Central Asia and Transcaucasia's authorities were more complicated until the end of 2015. Kazakhstan and Azerbaijan's significant reserve funds and external borrowings helped Central Asia and, to a lesser degree, Transcaucasia (because of Azerbaijan's limited regional role) to stay aside from the crisis for some time. Some countries, without reserve funds, managed to maintain a counter-cyclic fiscal policy thanks to finance extended by the IMF and other donors, and due to increasing their public debt.
It should be pointed out that the region's central banks underestimated the importance of Russia's switching to flexible exchange rates. Although, Russia's central bank had to complete the process in the crisis environment and too quickly, this was not unexpected and had been prepared for a rather long time and in a gradual fashion. At the same time, most countries in the region continued to experiment with their currency pegs to, in most cases, the US dollar. Their de-dollarisation policies were not too consistent. As a result, in 2015 Russia's flexible foreign exchange rate policy, which was adequate for Russia (having, in general, no other alternatives), destabilised the real economic activity in neighbouring countries and their balances of payments.
As Central Asian and Transcaucasia's central banks will get more opportunities to focus on their strategies, the issue of what monetary and foreign exchange policies will be more viable for them, will need serious discussion. Attempts to initiate such a discussion were made during the past year. Later, interest in it weakened because the aggravated economic situation during the second six months diverted the expert community's attention to other issues.
Another reason for this discussion having become less intense is that it was concentrated on radical ideas such as the introduction of a single regional currency. We believe that renewing this discussion and focusing it on more pressing, economically important and politically feasible proposals is an important task of the region's expert community. International organisations working in the CIS could also contribute to the process.