United Nations Development Programme
Regional Bureau for Europe and the CIS
Istanbul Regional Hub
RBEC brief: Development implications of the
“ruble crisis” for RBEC programme countries
Ben Slay, RBEC senior advisor
Draft (6 January 2015)
Overview
The sharp depreciation of the Russian ruble (Figure 1) dominated the news during mid-December. Most
of the coverage focused on the great power/east-west politics and on the financial market dimensions of the
“ruble crisis”. No less important, however, is the fact the ruble’s depreciation is likely to deepen the recession
into which the Russian economy seemed to be falling at the end of last year. This can have important
development implications for RBEC programme countries—particularly in the former Soviet Union (FSU). For
many of these economies, Russia is the largest single trading partner and foreign investor, as well as the largest
source of remittances. Moreover, some of the drivers of Russia’s currency crisis, such as the sharp declines in
global energy prices (Figure 2), threaten prospects in those RBEC countries that do not rely heavily on exports to
Russian and other FSU markets.
12/21/2014
12/19/2014
12/17/2014
12/15/2014
12/13/2014
12/11/2014
12/9/2014
12/7/2014
12/5/2014
12/3/2014
12/1/2014
11/29/2014
11/27/2014
11/25/2014
Figure 1—Exchange rates, late 2014 (rubles/$)
Figure 2—Energy price trends
100
Crude oil
Gas
40
90
50
60
80
70
2012
Daily interbank exchange rates. Source: OANDA.
2013
2014
2015
2012 prices = 100. UNDP calculations, based on IMF
data (2014-2015 data points are IMF projections).
Following the ruble’s depreciation, reductions in Russia’s imports from RBEC programme countries are
likely to deepen in 2015. These will strengthen downward pressures on exports, GDP, employment, and
household incomes in these countries. Remittance inflows to our programme countries—some of which are
extremely large (relative to GDP) in international comparison—are starting to drop as well. These declines seem
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likely to continue (or deepen) in 2015. Inflation rates in Russia have begun to rise, and are likely to spread to its
trading partners—inter alia though matching devaluations/depreciations in national currencies. Everything else
equal, unemployment, poverty, and vulnerability will rise.
It is too early to predict the scale of the impact. However, lessons from Russia’s regional role during the
2008-2009 global financial crisis, and from the 1998 ruble crisis, suggest that this impact could be substantial.
In light of this, this brief note seeks to provide some early insights into three questions, by focusing on:
1) Key drivers/transmission mechanisms by which Russian currency market “contagion” can spread to
RBEC programme countries;
2) The FSU countries which may be most vulnerable to this contagion; and
3) Possible programmatic responses by the UN, and UNDP.
The observations below necessarily have something of a preliminary character. To be most relevant and
useful, they would need to be updated and their country-specific components expanded (upon request).
“Drivers of contagion”—Ruble crisis transmission mechanisms
Recent developments with the Russian ruble can be expected to have a significant short-term (i.e., first
half of 2015) influence on RBEC programme countries via four channels:
Exports. Russian imports from other FSU countries have been dropping since 2012. However, these
declines seem to have accelerated during the first three quarters of 2014: the CIS Statistical Office is reporting a
14% reduction in Russian imports from other CIS countries. (Georgian exports to CIS countries are likewise
reported down—Figure 3.) Everything else equal, falling exports to Russia (and other CIS economies) will reduce
GDP, employment, and household incomes in RBEC programme countries. Unemployment, poverty, and
vulnerability can be expected to rise.
32%
Source: CISStat, Georgian Statistical Office.
* Georgian data are for the first ten months of the year.
1% 1%
Turkmenistan
Azerbaijan
Uzbekistan
-34%
Georgia
-26%
Moldova
-14% -13%
Ukraine
-2%
Kyrgyzstan
-17%
-5%
6% 5%
4% 4%
Belarus
-7%
10%
Tajikistan
14% 13%
12%
Kazakhstan
44%
Figure 4—Ratios of exports to other FSU
countries to national GDP (2013)
Armenia
Figure 3—Changes in exports to other FSU
countries during the first three quarters of 2014
UNDP calculations, based on IMF, ITC data.
2
For example, the 26% decline in Ukraine’s exports to other CIS economies during the first three quarters
of 2014 has been an important driver of that country’s socio-economic crisis. Similar prospects in 2015 could be
facing Belarus—which has the highest ratio of FSU exports to national GDP in the region (Figure 4), and which
has not yet fully recovered from its 2011 currency crisis.
Figure 5—Ratios of remittance inflows to GDP
(2013)
Figure 6—Income poverty rates in Kyrgyzstan
(with, and without, remittances)
42%
With remittances
Without remittances
32%
45%
25%
43%
44%
21%
40%
14%
12%
37%
38%
37%
34%
2010
UNDP estimates, based on data from the World Bank,
IMF, and Central Bank of Russia.
2011
2012
2013
Source: Kyrgyzstan Statistical Office.
Remittances and labour markets. Tajikistan and Kyrgyzstan have in recent years been the world’s two
largest recipients of remittances, relative to GDP (Figure 5).1 Virtually all of these remittances come from Russia
(and, to a smaller extent, from Kazakhstan), which are also major recipients of migrant labour from other FSU
countries. Official household budget survey data (e.g., from Kyrgyzstan) show that remittance inflows can play a
significant role in poverty reduction (Figure 6). However, preliminary data from the Central Bank of Russia
indicate that, following four years of growth (Figure 7), remittance outflows from Russia to other FSU countries
(and Georgia) dropped during the first three quarters of 2014 (Figure 8). Further declines in the fourth quarter
(and probably in 2015) can be expected as well.
Falling remittances in turn suggest declining numbers of migrants from other FSU countries working in
Russia (and Kazakhstan). Returning or disappointed migrant labourers can be expected to boost the jobless
numbers in at least some of the poorer FSU countries—aggravating problems of labour market exclusion,
poverty, food insecurity, and vulnerability associated with the export shock.2
1
Armenia and Moldova also score within the world’s largest 7-10 remittance-receiving countries (judging by this indicator). Significant
inflows are also reported for Georgia and Uzbekistan (as well as for a number of economies in the Western Balkans). However, except
for Uzbekistan, countries other than Russia and Kazakhstan account for significant shares of these remittances. As such, the inflows they
receive are less vulnerable to developments in Russia and Kazakhstan.
2 Press reports indicate that displaced Central Asian migrant workers are increasingly sought as recruits by ISIS and similar military
organizations.
3
Figure 7—Change in remittance
outflows from Russia (2010-2014)
Figure 8—Changes in remittance inflows from Russia,
2014:Q1-Q3 (relative to same period in 2013)
36%
13%
9%
28%
7%
5%
20%
3%
-1%
14%
KAZ AZB MOL BEL KYR TAJ ARM GEO UZB UKR
-3%
-6% -6%
-3%
2010
2011
2012
2013
-17%
2014
Central Bank of Russia data. 2014 data are
for the first three quarters.
Central Bank of Russia data.
Exchange rates. In order to limit the impact of the export shock, central banks in many FSU economies
can be expected to devalue (or permit the depreciation of) their national currencies.3 This is particularly the case
since most of these currencies appreciated significantly (in real effective terms) against the ruble in 2014.4 As
Figure 9 shows, only the Ukrainian hryvnia did not strengthen much (against the ruble) last year.
Figure 9—Changes in real effective exchange rates
(vis-à-vis the Russian ruble) in 2014
93%
87% 87% 84%
Figure 10—Global commodity price trends (20122015)
110
78%
72%
69%
100
63%
Crude oil
90
48%
Gas
Aluminium
80
9%
Uranium
Cotton
70
Cereals
Gold
60
50
2012
UNDP calculations, based on end-year IMF, CISStat, and
OANDA data for movements in consumer prices and
nominal exchange rates.
2013
2014
2015
2012 = 100. UNDP calculations, based on IMF, OANDA
data. 2014-2015 data points are IMF projections.
3
Despite possessing very large foreign-exchange reserves, the Government and National Bank of Kazakhstan in February 2014 devalued
the Kazakhstani tenge by some 25% against the dollar. The desire to support the competitiveness of Kazakhstan’s manufactured exports
on the Russian market may have been the best explanation for this move, which surprised foreign exchange markets both at home and
abroad.
4 Trends in a country’s real effective exchange rate can be defined in reference to movements in nominal exchange rates vis-à-vis key
trading partners, and in inflation rates (both domestically in trading partners). A country whose currency appreciates in real effective
terms vis-à-vis the ruble means that it will experience reductions in competitiveness on Russian markets.
4
The sustainability of these large real effective appreciations differs across FSU countries. Much depends
on the extent of external financing needs and access to external finance on concessionary terms (e.g., via the
Bretton Woods institutions).5 Much may also depend on the willingness of governments and national banks to
permit parallel (black-market) exchange-rate systems to emerge, or deepen. Still, it is difficult to imagine how
external balance can be maintained in most FSU economies if national currencies do not follow the ruble’s
downward course (vis-à-vis the dollar and the Euro). This could be a particular concern for Belarus—which since
2011 has been living with a razor-thin cushion of official foreign-exchange reserves, and whose external position
is not (at present) supported by an IMF programme. These circumstances may explain the tax and administrative
measures introduced in late December by the Belarusian government, which inter alia limit access to the foreign
exchange market. Whether these measures will be able to stave off an official devaluation—or the appearance
or deepening of black-market currency trading, particularly for households and small businesses—remains to be
seen.
While a weaker exchange rate can boost export competitiveness, it can also mean higher inflation and
increased stresses on the financial system. In Ukraine, for example, the hryvnia’s sharp depreciation (against the
dollar) in 2014 caused food prices to rise by about 25% over the course of the year. A similar surge in food prices
in Tajikistan or Kyrgyzstan could have major income-poverty and food-security implications. Also in Ukraine, the
financial system has frozen up due to “currency mismatches” between bank assets (which are largely
denominated in hryvnia) and liabilities (which are largely denominated in euros and dollars). The resulting sharp
contraction in bank lending is one of the drivers of Ukraine’s socio-economic crisis. In Belarus, the administrative
measures mentioned above have also expanded the extent of price controls, due to inflationary concerns.
Commodity prices. A number of FSU energy producers have succeeded in diversifying their exports away
from the Russian market, either to Europe and Turkey (e.g., Azerbaijan), or to China (e.g., Kazakhstan,
Turkmenistan, and Uzbekistan). Minerals and metals exporters in Tajikistan (aluminium, cotton), Kyrgyzstan
(gold), as well as in Uzbekistan (cotton and gold) and Kazakhstan (uranium) have likewise been able to boost
sales on non-FSU markets. So have cereals exporters in Ukraine and Moldova.
But while these countries may have broadened the geographic direction of their exports, the commodity
composition of their exports remains heavily concentrated in energy and primary products. As a result, they are
vulnerable to actual and projected declines in global commodity prices (Figure 10). The potential impact of such
“terms-of-trade shocks” is apparent in the role that falling commodity prices have played in Russia’s ruble crisis
of late 2014.
The combination of shrinking Russian demand for manufactured exports on the one hand and falling
global commodity prices on the other does not bode well for most FSU economies in 2015. On the other hand,
falling prices for imported energy and foodstuffs could be a plus for countries like Armenia and Tajikistan (which
could also benefit from the pick-up in global aluminium prices).
Country vulnerabilities
Assessments of the various FSU economies’ vulnerabilities to these developments would require deeper,
country-specific analysis. (This could be provided, on request.) However, in broad brush strokes, the above
suggests a presentation of risk country factors as shown in Table 1 below. Inspection of this table suggests that
Kyrgyzstan could be the RBEC country whose short-run (i.e., during the first half of 2015) development prospects
5
A closer look at these risks could begin with a review of the IMF debt sustainability analyses for select FSU countries.
5
are most vulnerable to the impact of the ruble crisis. Armenia, Belarus, Georgia, Uzbekistan, and Ukraine6 would
also seem to be relatively vulnerable.7
Country
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Exports
XX
X
X
X
Table 1—Country vulnerabilities
Remittances
Exchange-rates
X
XX
X
XX
X
XX
XX
X
X
X
X
X
Commodity prices
X
XX
X
XX
X
XX
X
X
X
X
XX
X—moderate risk
XX—significant risk
The value of this table may lie not in its accuracy, but rather in its ability to help us think systematically
about the nature and extent of the various development threats posed by the ruble crisis.
Possible programmatic responses
In some ways, the circumstances that are now unfolding in the region are similar to those of 2008-2009,
when the global financial crisis depressed commodity prices, reduced exports and remittances, pushed the
Russian economy into recession, and caused most FSU currencies to depreciate against the Euro and (especially)
the dollar. As a consequence, rates of poverty, inequality, and unemployment rose in most RBEC programme
countries.
However, in contrast to the events of 2008-2009, the emerging risks to development prospects
associated with the ruble crisis are not global in nature. They will instead be concentrated in the RBEC region—
particularly in the FSU economies. As such, it is not clear how much attention the UN, and the international
community more broadly, will devote to these risks—particularly given the crises/tensions in other parts of the
world (e.g., Ebola, ISIS, etc.). This could place a premium on regional approaches—in terms of analysis, advocacy,
awareness raising, and partnership building. Cooperation at the RDT-RCM level around these issues could be
particularly important.
The experience from 2008-2009 suggests that the ruble crisis could have a number of programming
implications for UNDP (and UNCTs more broadly) in the region. These include the following:
(1) The big macro picture matters. Macroeconomic stabilization (fiscal, monetary, exchange-rate
management) issues will move closer to the top of (possibly dominating) policy agendas in many FSU countries.
6
Economic developments during 2014—particularly the large reductions in trade with Russia and the hryvnia’s stark depreciation—may
have reduced Ukraine’s vulnerabilities in 2015, vis-à-vis the risks explored in this paper. However, other crises (associated inter alia with
the unresolved Donbas conflict, sharp fiscal austerity, and the spectre of sovereign default and financial collapse) seem likely to remain
quite pressing in 2015.
7 The ruble crisis could also affect RBEC programme countries in Southeast Europe, as well as the Baltic states and other new EU
member states. (Analyses of these economies’ vulnerabilities could also be prepared, upon request.) However, given their much deeper
integration with/into the EU, these countries’ vulnerabilities are much less extensive than for the FSU economies.
6
This will increase the importance of CO/UNCT abilities to link macro policy issues (on which the BWIs will be
governments’ key interlocutors) to narratives about poverty, vulnerability, inequalities, sustainable
development, crisis prevention, and the post-2015 agenda—particularly in the context of the UNDAF/CPD
exercises now occurring in many FSU countries.
(2) New opportunities may emerge for sub-national programming in poverty reduction, social
inclusion, and local development—especially when the employment-generation effects of such programming
can be demonstrated. The Bretton Woods institutions and regional development banks typically do not go into
these areas (except for large infrastructure lending), while the EU and other bilaterals are often willing to fund
UNDP local- and area-based development programming. This underscores the importance of CO/UNCT
preparation of pipeline projects/activities in these areas.
(3) Early warning/real-time monitoring of socio-economic risks will become more important. Most FSU
governments and central banks possess good macroeconomic monitoring and early warning mechanisms.
However, these mechanisms are often imperfect when it comes to for real-time monitoring of the impact of
macroeconomic crises on vulnerable groups. With support from the Istanbul Regional Hub (IRH), COs/UNCTs in
Kyrgyzstan and Ukraine monitor and analyse high-frequency (monthly, quarterly) trends in employment,
remittances, wages, food and energy prices, electricity and gas supplies, as reported in these countries’ official
statistics. In addition to helping to keep UNCTs and the international community abreast of current
developments, this monitoring and analysis helps to position UNDP as a provider of data and analysis on socioeconomic (as well as political and natural disaster-related) risks and vulnerabilities. This IRH service/support
could be expanded to other countries, upon request.
(4) With IRH support, COs in FSU countries are helping governments to strengthen institutional capacity
for better indicators, measurement, and monitoring of poverty, inequality, and vulnerability. Efforts in this
direction include the updating of poverty thresholds (e.g., Uzbekistan), and the expanded use of multidimensional poverty indicators (e.g., Tajikistan). The IRH has also piloted indicators that can measure
quantitative trends in social exclusion, as well in the social and environmental sustainability of national
development patterns. The expanded use of such indicators can help national partners to better measure and
monitor vulnerability criteria linked to gender, ethnicity, age, and location (rural versus urban versus capital
cities). IRH support in this area could likewise be expanded, upon request.
(5) Country diagnostics. At CO/UNCT request, the IRH could provide (or support the provision of) more
in-depth national assessments of the possible impact of the ruble crisis, as well as help to appropriately tailor
national programming responses to the specific impact of the crisis.
7