Ukraine war knocks its neighbours off balance economically

This dramatic appreciation in the local currencies of the South Caucasus coincided with an influx of Russians escaping military service.

In many cases, these migrants were young or mid-career professionals earning a living online, so they could move seamlessly from Russia to Armenia or Georgia, without any disruptions in work.

Their clients are companies abroad, who pay them in dollars or euros, resulting in an oversupply of these currencies in the markets and then higher demand for laris or drams, sending the local currencies higher.

Speaking in in April 2022, Vahan Kerobyan, who was then Armenia's economy minister, said: "Since the start of the conflict in Ukraine and to this day, around 30,000 accounts have been opened for non-citizens. This is roughly the number of people who will remain in Armenia, grow their business, and see Armenia as the focal centre for their future economic growth".

The number he cited was greater than 1% of the whole population of Armenia, indicating that migration on this scale would inevitably have a macro-level impact on the country.

Data from Georgia in the autumn of 2022 suggested that around 120,000 Russian citizens had remained in the country by then, buying thousands of apartments.

Speaking to Radio Liberty in June 2023 about the trend, Roman Gotsiridze, the former president of the National Bank, said: "They bought about 10,000 apartments. This means that if a 2-bedroom apartment costs $50,000, about half a billion dollars was invested in apartments alone, to say nothing of other real estate. In a word, a large amount of money was 'supplied' to the market and this led to strengthening of the national currency".

Exporters suffer

Stronger currencies make exports from the nations involved more expensive. Companies in Armenia and Georgia have suffered greatly from this appreciation.

It was particularly hard for Armenia's information technology sector. Armen Kocharian, chief executive of VOLO, a software company, issued a warning in November 2022.

"Companies that have for decades developed in a natural environment and created teams performing complex tasks are now on the brink of collapse", he said.

In an attempt to contain the damage for this sector, the Armenian Government announced a tax rebate that would cost the state around $25m dollars.

In Georgia, the strong lari is also a concern. Vakhtang Bezhitashvili, head of the Georgian Fruit Exporters Association, said in 2023: "A decline in exports is evident, apple exports have almost halved and are further declining. We can say that if the products are not sold on the local market, selling them will be difficult".

Georgia has had more success in stabilising the exchange rate, in contrast with Armenia. A single dollar was worth 2.72 Georgian laris in July 2024, not too far from its pre-war value of 2.98 in February 2022.

At a meeting of the Georgian cabinet in July 2024, Prime Minister Irakli Kobakhidze said: "Thanks to the rapid economic growth and effective management policy, the exchange rate of the lari returned to its original value very soon".

Weaker rouble hits remittances

As well as strengthening against the dollar, the currencies of Russia's near abroad have appreciated significantly against the rouble. This trend has been clear in Armenia and Georgia as well as in Kazakhstan, another common destination for Russian emigres fleeing the war.

This has the same impact as the relative weakness of the dollar, in making exports more expensive into Russia's market, which is a major destination for goods produced by its neighbours.

Then there is another factor of significant concern, especially to poorer families in Armenia, Georgia, and Kazakhstan, where money sent home by relatives working in Russia are eroded in value, as roubles buy less currency back over the border.

These remittances are a major source of income for many families in these countries, who rely on them.

In 2023, the Central Bank of Armenia estimated personal remittances to the country at approximately $1.7bn, around 7% of the country's gross domestic product. Much of this money comes from Russia. It has declined considerably since the 2000s and 2010s.

Economist Aghasi Tavadyan said Armenian citizens "would now prefer to work in Armenia than to go for labour migration to Russia", but employment opportunities in the country remained limited.

For the last two years, labour market migrants from Armenia have been hesitant about seeking work in Russia. In the early days of the crisis, Kostan Kostanyan, from the Armenia village of Panik, summed up the mood speaking to Radio Liberty in the early days of the crisis: "Going is not a good option, but neither is staying. We're all in the same boat. We're different people, but we face the same problems".

World Bank analysis

According to World Bank experts, Russia is having a double negative impact on its neighbours.

A report from Dilip Ratha, lead economist for migration and remittances, and financial analyst Eung Ju Kim said a weakening of economic activity in Russia "would dampen the employment and incomes of migrant workers and their ability to send remittances. The second channel of impact would be through a weakening of the rouble against the dollar, which would reduce the nominal dollar value of remittances sent in roubles."

Kazakhstan's currency, the tenge, seems to be on shakier ground in terms of its exchange rate with western currencies. Having strengthened, like the lari and the dram, it turned around in May 2024, when it started to collapse. It weakened from around 440 tenge per dollar to 476 in July.

Analysts in the country are struggling to explain why. Many consider it a short-term consequence of seasonality or temporary changes in the oil market and most expect the currency to stabalise. But one financial analyst, Anna Bodrova, warned that the tenge could drop further.

"The pressure factors are still the same – these consist of the new sanctions against Russia introduced by the West in June as well as the lowered level of dollar liquidity introduced by the National Bank."

The war in Ukraine has plunged the currencies of other countries in the region into an era of uncertainty.

The Eurasian Development Bank, based in Kazakhstan, released its Macroeconomic Outlook 2024-2026 halfway through this year.

So far, the forecast of a US dollar-Armenian dram exchange rate of 396 seems too optimistic – the average rate for the year is already lower and seems to be decreasing. The forecast for the tenge also seems off the mark at 447.6 given the current situation in Kazakhstan.

This unpredictability makes life very hard for businesses and individuals who seek to export, or those depending on remittances sent from relatives abroad.

 And with no end yet in sight to the war in Ukraine or the sanctions on Russia, this unpredictability will continue for some time to come.