Asia’s leaders are braced for the impact from the mounting crisis in Ukraine and the threat of fresh sanctions against Russia that could trigger a global economic slowdown.
So far the immediate fallout has only hit countries in Central Asia that are dependent on the health of the Russian economy and are exposed to Russia mainly through exports and remittances.
But analysts are nervous about the impact of rising energy prices and the risk that China would be drawn into
political issues.
“The main transmission mechanism for other Asian countries is energy prices,” the ADB’s deputy chief economist Juzhong Zhuang told Emerging Markets.
“If oil prices shoot up then this would affect oil importing countries. But if the crisis escalates and affects the global financial markets then it’s also a different story. Then there are other channels — worried investors in Asia could start to look for safer havens.”
Xiang Songzuo, chief economist at Agricultural Bank of China, said Central Asia was a “very complicated issue” for China. “On the one hand, we need Kazakhstan and other countries in the region in terms of our energy security, but on the other, we don’t want to anger Russia by appearing to be in any sort of alliance with them,” he said.
“China has absolutely no intention of imposing itself between Russia and
Central Asia. If we become too deeply involved, it would be very dangerous.”
Russia is the main export destination for states like Armenia, Kazakhstan and Uzbekistan. In Uzbekistan 24% of exports go to Russia, in Armenia the figure is 20%, while Kazakhstan is less exposed with only 7% of exports going into Russia, Zhuang said.
Vladimir Putin’s Russia is also the main destination for migrants from the region, and a sharp slowdown in Russia’s economy — whether prompted by an escalation in the Ukraine crisis or simply further stagnation — would hit these countries hard.
In Tajikistan remittances are an “exceptionally high” 40% of GDP, according to Zhuang. The figures are 29% and 15% for the Kyrgyz Republic and Armenia respectively.
“Remittances are very important for these counties in terms of supporting consumption and investment,” said Zhuang. “So if these are effected it could have a real impact.”
“The growth slowdown will inevitably affect these countries,” Zhuang said. “But if the Ukraine crises does not escalate, then the fallout and the slowdown in the Russian economy are manageable for Central Asia.”
In the ADB’s base case scenario the crisis does not escalate and sanctions against Russia are not ramped up. However US Senator John McCain announced on Wednesday that he was introducing a bill that would have far harsher sanctions on Russia — including specific actions against banks and corporations. Whether the crisis does escalate is also a key determinant of how far the fallout spreads.
James McCormack, Fitch Ratings’ global head of sovereign and supranational group said the further away investors were from the central Asian region the less they understand the differences between countries.
International investors may approach the whole region with more caution, he said. “We might see reductions in foreign direct investment in the key sectors.”
But for now the potential fallout is consigned to the economic rather than political sphere, he added.
“One of the things we don’t expect to see is political contagion,” he said. “We can’t think of a transmission mechanism where what is happening in Ukraine affects political stability in other countries.”