The combination of plummeting oil prices and international sanctions imposed after Russia’s invasion of Ukraine over the summer has done significant damage to the Russian economy in recent months. Now, it looks as though the problems in Moscow are migrating across national borders.
The Russian ruble has lost a third of its value against international benchmark currencies this year, and the Russian central bank has found it difficult or impossible to access international capital markets at rates it finds acceptable. Indeed, the central bank is forecasting a recession next year.
Until recently, though, Russia’s economic troubles have, at least, not had an obvious impact on its neighbors. Unfortunately for a handful of former Soviet states that border Russia, things are starting to change.
Georgia’s national currency, the lari, tumbled 10 percent last week to 2.04 per U.S. dollar, the lowest it has been for more than a decade. The country’s central bank said that it is prepared to intervene in the currency markets if necessary, though experts suggest that its ability to do so to any great effect is limited.
In neighboring Armenia, the national currency, known as the dram, has fallen in value against global benchmarks for six straight weeks and is now trading near an eight-year low.
According to analyst Timothy Ash of Standard Bank, while both countries are in a relatively good position in terms of their internal fiscal situation, a dependence on the continued strength of the Russian economy is punishing both right now.
“Russia is an important trading partner for both, as they have both benefitted from worker remittances, which are likely stalling now with weak growth in Russia, and lower oil prices,” Ash wrote in a research note last week. “Exports to Russia have also been quite significant for both - Georgia has tried to refocus on Russian markets as relations warmed a bit following the departure of President Saakashvilli. Russian tourism has been a new 'boon' for Georgia in recent years - a rediscovery for many Russians from the Soviet era. These are obviously lagging now.”
Ash observed that both countries’ economies rely on “significant” agricultural exports to Russia. At first, the imposition of sanctions by many Western European countries had appeared to hold promise for the former Soviet satellites increasing their trade with their larger neighbor. However, Ash said, “Massive Russian devaluation is clearly threatening this trade. So these managed currency weakenings are only to be expected.”
Across the Caspian Sea, Kazakhstan has been more protective of its national currency, but international securities markets are demanding higher premiums for the nation’s debt offerings. The Kazakhs also depend on the Russian economy, both for income from exports and for remittances by workers who have crossed the border to find work.
The big question facing the rest of Eastern Europe right now is just how quickly, and how far, the contagion from the Russian economy will spread. In a speech to the legislature last week, Russian President Vladimir Putin described the ruble’s slide as the result of a U.S.-led conspiracy aimed at “containment” of his nation. He also pledged to take “harsh” measures against the currency speculators who, he said, are contributing to the devaluation of the ruble.
In the same speech, Putin appealed to Russians with assets overseas to bring them home, making clear that his government would be willing to overlook such things as the source of the assets in question or the methods by which they were obtained. He specifically promised, more than once, that criminal prosecution was out of the question.
The country’s desperation when it comes to retaining capital has caused increasing concern among international investors. Although the Russian government has repeatedly denied it, analysts are concerned that Moscow might institute capital controls, measure that prevent individuals and companies from moving assets out of the national currency. Some have suggested that recent pressure on major exporters to convert income to rubles amounts to a kind of shadow capital control regime.
Again, the Russian government has consistently promised that capital controls are not on the horizon. But that said, by their very nature, they aren’t the sort of thing you want to advertise in advance.
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