The War in Ukraine Could Bring Crisis to Uzbekistan

The War in Ukraine Could Bring Crisis to Uzbekistan

As the impact of the war in Ukraine and Western economic sanctions continues to reverberate across Central Asia, Uzbekistan must consider new alternatives to support its economic development.

 

Since the dissolution of the Soviet Union, political, socio-economic, and cultural linkages have grown between Russia and Central Asian countries, including Uzbekistan. As one of Russia’s priority partners in the economic, finance, and trade spheres, numerous Central Asian states have worked with Moscow to keep relations close. In 2021, Russia superseded China as the main trading partner of Central Asian states for the first time since 2014. Since President Shavkat Mirziyoyev took power in 2016, relations between Russia and Uzbekistan have increased considerably as trade volume reached $7.5 billion in 2021, which is fairly more than Uzbekistan’s bilateral trade with China. After the annexation of Crimea in 2014, due to the economic sanctions imposed by the United States and European Union (EU), Russia focused on strengthening its relations with Central Asian states. To further deepen economic relations, Russia forgave $865 million worth of debt owed by Uzbekistan. Expanding cooperation between Russia and Uzbekistan even allowed the latter to hold observer status in the Eurasian Economic Union (EEU).

In the aftermath of Russia’s invasion of Ukraine, the United States and the EU issued an unprecedented package of sanctions designed to hurt Russia’s economy and castigate Russian elites. Many Western companies in sectors ranging from food to finance voluntarily left Russia while others, such as technology and car firms, cut ties completely. These companies created a wide range of employment opportunities for the local labor force. However, now Western analysts and the International Monetary Fund (IMF) forecast that Russia will experience a decline in economic growth and development. The Russian Ministry of Economic Development reported this month that gross domestic product (GDP) declined by 5 percent in September year-over-year while inflation stood at 12.9 percent in October. 

 

Due to low birth rates and demographic decline, Russia’s economy has increasingly relied on migrant workers since 2000. The migrant labor force consists of about 14 million workers from various countries, though many are from neighboring states in Central Asia. However, Western sanctions could contribute to an increase in Russia’s unemployment rate and weaken the demand for migrant workers. Additionally, because of the depreciation of the ruble and a high rate of inflation, the income and remittances of migrant workers will decline considerably.

Russia is the principal destination for Uzbek labor migrants because of historical ties, a common language, and visa-free access for Uzbek passport holders. Approximately 70 percent of Uzbek migrant workers immigrated to Russia, specifically to Moscow and Saint Petersburg. According to the Ministry of Internal Affairs of Russia, 4.5 million registered migrant workers were from Uzbekistan in 2021. Moreover, $7.6 billion worth of remittances that came to Uzbekistan from Russia in 2021 represented 11.6 percent of its GDP and 55 percent of the country’s total remittances

Uzbekistan’s dependence on the Russian labor market and the sanctions imposed by Western countries will negatively affect its employment, social security, and economic growth policies. The IMF forecasted that there is expected to be a 3 to 4 percent decline in projected GDP growth for Uzbekistan due to lower levels of remittances and financing from Russia. A World Bank analysis concluded that remittances to Uzbekistan from Russia are expected to decline by 21 percent in 2022. Fitch Ratings also studied the impact of the Russo-Ukrainian War from a monetary standpoint and concluded that Uzbekistan’s inflation rate and current account deficit will increase in the following years.

The outbreak of the war in Ukraine quickly upended the lives of Uzbek labor migrants in Russia. In the first quarter of 2022, 133,000 Uzbek citizens left Russia. A survey of 15,000 Uzbeks conducted by Uzbekistan’s Agency for External Labor Migration found that a combined 40 percent expressed their willingness to return to Uzbekistan due to job losses (15 percent) and exchange rate instability (25 percent). Similarly, another 24 percent of respondents stated that they were not interested in returning to Uzbekistan since they were currently working but could consider it if they lost their jobs. 

The impact of Western sanctions against Russia on the Uzbek economy has both economic and social effects. Due to financial and economic sanctions, the value of the ruble against the U.S. dollar weakened and therefore lowered the nominal U.S. dollar value of remittances sent in rubles. Taking into consideration that the majority of Uzbek migrants send their money home in U.S. dollars, a weaker ruble will decrease the value of remittances. The slowdown in remittances will drag on future economic growth, increase the current account deficit, (let alone risk decreasing the value of the Uzbek soum), and propel inflation. These developments will obviously harm Uzbekistan’s macroeconomic health.

But the ruble’s devaluation will be particularly harmful to low-skilled Uzbek laborers and temporarily increase unemployment. Remittances stimulate demand in the Uzbek economy by encouraging spending for consumption, health services, cars, real estate, weddings, and home improvements, especially in the regions of Khorezm, Surkhandaryo, and Andijan. Roughly 80 percent of Uzbek migrant workers in Russia are men. Families with low average incomes in regions of Uzbekistan dependent on remittances will reduce their aggregate demand for goods and services as they become poorer. In turn, lower aggregate demand and higher rates of unemployment, especially in remittance-dependent regions, will disrupt macroeconomic stability and place price stability and unemployment at the center of the political agenda.

To address these challenges, the Uzbek government should first investigate households in remittance-dependent regions and look for ways to help these families. Of course, it is not possible to provide employment for migrant workers in the short term, so creating and supporting opportunities for self-employment by the state can alleviate this problem. Recently, the Uzbek government introduced a new system called “mahallabay ishlash tizimi,” or neighborhood working system. The system considers familial sources of income, including land use and their needs for gainful employment. Then, based on a family’s circumstances, the government will provide practical assistance to find work opportunities, especially for unemployed youth and women, by directing them to vocational and entrepreneurship training courses.

Another essential measure that the Uzbek government should take is to find new labor migration channels to prevent an unemployment crisis. Cooperation with Turkey, South Korea, Poland, Hungary, the Czech Republic, and Finland could help tighten labor markets temporarily. For instance, negotiating with the Hungarian government to send migrant laborers from Uzbekistan could be advantageous for both countries. Uzbekistan could lower its unemployment rate while Hungary fills labor shortages in sectors such as construction, industry, and services. 

As the impact of the war in Ukraine and Western economic sanctions continues to reverberate across Central Asia, Uzbekistan must consider new alternatives to support its economic development.

Sardor Allayarov is a Research Assistance at Centre for Analysis, Reporting and Monitoring, Bratislava, Slovakia, and a former Research Intern at the Institute for Foreign Affairs and Trade, Budapest, Hungary. 

Image: Reuters.