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 "My husband says they haven't started a new building yet. He had
wanted his younger brother to join him in Moscow...but recently he
called and said: 'The master says he won't take any new workers and
there will be lay-offs'", said Islomova, a 36 year-old mother of
three, whose family relies on the money her husband sends from
Russia.
She says another brother-in-law, a supermarket worker in Moscow,
recently had his salary cut, as Russia's deepening economic gloom
bites into consumer and housing demand.
Islomova is not the only one worried. To paraphrase the adage: when
Russia sneezes, the rest of the ex-Soviet Union catches a cold.
Storm clouds were also gathering over the Russian economy well
before the Ukraine crisis took hold late last year, with long-range
official projections weakening alarmingly.
But Western sanctions over its role in Ukraine's conflict have
undermined it further. Russia now faces recession this year and
countries with post-Soviet economic ties face the fallout as Kiev
breaks away to the West.
Across the Commonwealth of Independent States (CIS) bloc, memories
linger of 2008, when Russia's economic slump played out across the
region of 300 million people, causing recession, triggering housing
crashes and bank debt defaults.
"There is a very strong transmission channel from Russian economic
weakness to surrounding areas," said Christopher Granville, managing
director at consultancy Trusted Sources, who describes Russia's
economy as being in a state of "slow strangulation".
"Russia's recession in 2009 was a major blow to the CIS..all in all,
it's a bleak outlook for the whole region."
In many ways, the economic weakness in most of these countries, run
by unpopular authoritarian governments, is structural, due to lack
of reform, reliance on commodity exports and weak institutions. Some
countries, including Armenia and Azerbaijan, also have their own
geopolitical disputes.
In desperately poor Tajikistan, remittances from Russia fell more
than 13 percent in the first three months of 2014 from year-ago
levels, the country's central bank says.
Given that remittances make up 40 percent of Tajik gross domestic
product (GDP), falling receipts from Russia are likely to hit growth
as well as the somoni currency, which has already weakened 5 percent
versus the dollar this year <TJS=>.
Such fears are spreading across the CIS, whose citizens sent home
$25 billion from Russia last year. Just over $4 billion was sent in
the first quarter of 2014.
Then there is trade. Armenia for instance, sends a fifth of its
exports to Russia. This revenue is crucial for its balance of
payments deficit, a huge 10 percent of GDP. Its other mainstay is
remittances, of which 80 percent flow from Russia.
Of the other CIS states, a quarter of Uzbek exports go to Russia,
the Asian Development Bank says. Russia also takes 15 percent of
Kyrgyz and almost a tenth of Kazakh exports.
"Russia's economy hasn't gone from 4 percent growth to 0.8 percent
because of the Ukraine crisis, the deceleration began a while ago,"
said Commerzbank analyst Tatha Ghose.
"But if the crisis doesn't de-escalate soon, we will see the
multiplier effects becoming more evident across the region."
CUSTOMS UNION
Russia's economy will barely grow in 2014, its worst performance
since 2009. Interest rates, up 250 basis points this year, may rise
further as food import bans push up inflation.
Unsurprisingly, consumer demand, which has underpinned Russia's
economy, is cooling as real wages grow at the slowest pace in years.
The rouble is down 8 percent against the dollar so far this year.
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Rouble depreciation creates its own headaches for regional
governments, especially for Kazakhstan and Belarus which earlier
this year entered a free trade zone with Russia.
To protect its trade in the face of the rouble's sharp slide,
Kazakhstan devalued the tenge by 19 percent in February,
replicating steps it took after the 2008 crisis. But the benefits
are already eroding - since end-June the tenge has strengthened 9
percent against the fast-weakening rouble.
Kazakhstan's trade turnover with the bloc has already fallen by a
quarter in the first half of 2014 from year-ago levels, a
consequence of the Russian slowdown, said Alikhan Smailov, the head
of the country's state statistics agency.
"Kazakhstan is feeling the consequences of Russia's slowdown,"
Smailov said, noting that the Kazakh economy had grown 4 percent in
the first seven months of 2014, compared with 6 percent full-year
levels last year.
While Russia has not asked Kazakhstan and Belarus to comply with the
food bans, Granville says Moscow's plans to expand the customs union
into a big single market have suffered a setback.
"Not only is Ukraine now lost, the resulting economic blow has
weakened the attractions of the union to members," he added.
GEO-POLITICS
Russia's standoff with Ukraine and the West also carries broader
geo-political risks if the region's mostly authoritarian governments
are faced with popular discontent due to falling incomes, returning
migrant workers and potential bank runs.
The tensions, including Moscow's annexation of Crimea from Ukraine,
are reviving long-standing territorial conflicts such as
Transdniestria in Moldova and the breakaway Georgian regions of
Abkhazia and South Ossetia, ratings agency Moody's noted.
Armenia and Azerbaijan have also recently clashed over the
Nagorno-Karabakh enclave, claimed by both countries.
"Given that most CIS countries have large ethnic Russian
populations, we now consider domestic political stability to be more
at risk than prior to the crisis," Moody's added.
There could be some short-term benefits - Belarus and Uzbekistan for
instance are expecting to grow their food exports to Russia while
Moscow will allow neighbouring countries to re-export items
processed from Western raw materials.
Belarusian firms may also be able to cash in by re-routing food
imports across the border as suppliers try and sidestep Moscow's
ban.
The picture is also less dire than five years ago. Russia's economy
will either flatline this year or contract by 1 percent, while in
2008-2009 it suffered an 8 percent slump. Oil prices are also around
$100 a barrel and are unlikely to crash to $45 a barrel as they did
in 2008.
That at least may help Russia and fellow energy exporters,
Kazakhstan, Uzbekistan and Azerbaijan, to weather the storm.
(Additional reporting by Roman Kozhevnikov in Dushanbe; editing by
Anna Willard)
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