Russia-Ukraine Conflict: Implications for Remittance flows to Ukraine and Central Asia

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Impacts on Ukraine

According to the UN High Commissioner for Refugees, as of March 3, 2022, just seven days into the war, more than a million Ukrainians were believed to have fled the country. In the coming months, millions more are expected to migrate to or seek asylum in Poland and other European countries. Since 2015, there has been a shift in the destination of Ukrainian migrants: In the past, Russia used to be the largest destination country. In recent years, migration to Poland and other countries in Europe has increased. Data on the stock of migrants are scarce, but available data indicate that Russia hosts between 2 and 3 million Ukrainian migrants, equivalent to around 5-7 percent of Ukraine’s population.   

According to new data from the National Bank of Ukraine, remittance flows to Ukraine surpassed $19 billion in 2021.  These flows have proved to be resilient during the COVID-19 crisis. After a moderate decline of 3.6 percent in 2020, the flows grew by a higher-than-expected rate of 28.3 percent in 2021. Remittances were around 12 percent of GDP in Ukraine, nearly three times the size of foreign direct investment (FDI) in 2021. 

We estimate that remittances to Ukraine will increase by 8 percent in 2022, with a significant probability of an even stronger rate of increase. The share of remittances received by Ukraine from Russia has steadily declined in recent years, from 27 percent in 2015 to only 5 percent in 2021 (see KNOMAD Policy Brief 17). Remittance flows from Russia are expected to be disrupted due to sanctions and the exclusion of Russian payment systems from the SWIFT network. Any decrease in remittance flows from Russia to Ukraine, however, is likely to be more than offset by an increase in remittances from Ukrainians in Poland and other countries. During 2015–2021, the share of remittances to Ukraine from Poland rose from 19 percent to 39 percent. Existing migrants are likely to send home more money to support families during the war. Additionally, new Ukrainian migrants in Europe and other countries may also send money to support family members back home.

Impacts on Central Asia

Unlike Ukraine, many countries in Central Asia are highly dependent on remittances from Russia. For example, in the Kyrgyz Republic, the share of remittances from Russia was 83 percent of the total remittance receipts during Q1-Q3 of 2021 (table 1). During the same period, Azerbaijan, Armenia, Tajikistan, and Uzbekistan received more than 50 percent of their remittance inflows from Russia. Remittances provide a financial lifeline to many of these countries. For example, in the Kyrgyz Republic and Tajikistan, remittances in 2020 were respectively 31 percent and 27 percent of GDP and were comparable to or even larger than the countries’ exports of goods and services.

Remittance flows to many Central Asian countries are likely to be affected adversely. Based on an initial assessment of the first-round effects of a decline in economic activity in Russia and a weakening of the ruble against the US dollar, the revised projected growth rates of remittances in this region in 2022 are expected to average around -25 percentage points (table 1). For example, in the Kyrgyz Republic where 83 percent of remittances originated in Russia in 2021, remittances in 2022 are likely to decline by 33 percent instead of an originally projected growth rate of 3 percent. Azerbaijan, Armenia, Tajikistan, and Uzbekistan are also likely to experience a major decline in remittance flows in 2022.  


Table 1. Impact of Russia-Ukraine conflict on remittances—Flows to Ukraine are likely to increase while those to other countries in Central Asia are likely to decline

Impact of Russia-Ukraine conflict on remittances
Sources: Bank of Russia and KNOMAD-World Bank
Note: * Assuming decline of 40% in remittances from Russia. Projected growth rates for other source countries are assumed to remain unchanged from those reported in the Migration and Development Brief 35 (KNOMAD–World Bank, November 2021) 
**Data for Georgia are taken from the National Bank of Georgia. Remittance inflows from Russia to Georgia are available for all 4 quarters of 2021 (annex table 3)

There will be a two-fold impact on remittance flows to Central Asia. 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 ruble against the US dollar, which would reduce the nominal US dollar value of remittances sent in rubles. As of March 3, 2022, the ruble had depreciated by nearly 25 percent against the US dollar. It is likely that the weakness of the ruble will continue in 2022 despite the recent sharp increase in oil prices. Unlike in the past, the ruble and oil prices seem to have decoupled since late 2020.

The sanctions on the Russian banking system in the form of exclusion from the SWIFT network for fund transfers is likely to directly disrupt remittances through formal channels, which could lead to a partial shift to indirect and informal channels. Also, the sanctions can affect remittance flows indirectly if they lower employment and incomes for migrant workers in Russia. 

These short-term projections have a high degree of uncertainty around them, dependent on the scale of the military conflict in Ukraine and the effectiveness of the sanctions on outward payments from Russia. 

More details and policy recommendations are provided in the latest KNOMAD Policy Brief.
 

Authors

Eung Ju Kim

Financial Analyst

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