The Uzbek soum has started to lose value in the last few days and the country’s international reserves have fallen for the fourth straight month as it appears the National Bank of Uzbekistan has tried to protect the currency, which is being dragged down by the collapse of the Russian ruble.

Uzbekistan's official international reserves as of August 1 amounted to $33.64bn, slightly down by $71.8mn since July 1, according to central bank data. The reserves have dropped for the fourth straight month in a row. The budget is also under pressure, as the state budget deficit neared UZS30 trillion ($2.6bn) in 1H23, Deputy Prime Minister and Minister of Economy and Finance Jamshid Kuchkarov said on August 4. The NBU could hike rates to support the soum, but with inflation falling it has been reluctant to curtail growth, and left the rates on hold at the last meeting on July 27.

Uzbekistan is stuck between a rock and hard place as it tries to manage its own economic recovery from the polycrisis of recent years, but at the same time deal with the external shock of Russia’s currency woes.

The Russian ruble has lost a quarter of its value since the start of this year and half its value since its last peak of RUB53 to the dollar last March. As the economies of the Commonwealth of Independent States (CIS) are so interlinked, how exposed is Uzbekistan’s soum to the collapse of the ruble?  

All of the CIS currencies reacted quickly to the dramatic fall in the value of the Russian currency immediately after the invasion of Ukraine at the end of February 2022, but both the ruble and the CIS currencies quickly recovered after the Central Bank of Russia (CBR) put through an emergency 10% rate hike in the first week of the war.

Now the ruble has been sliding since June 2022, with the decline in its value accelerating since January this year, about the same time as the twin Western oil sanctions came into effect on December 5 and February 5.

Uzbekistan is exposed to the Russian economy in several ways, according to consulting firm Macro Advisory. First of all, it is a significant recipient of migrant remittances from Russia, where over a million Uzbeks work, constituting the largest inflow of funds in monetary terms. In the first half of 2023 these remittances were estimated to comprise around 21% of Uzbekistan's GDP.

Secondly, Russia stands as Uzbekistan's second-largest trading partner and a vital market for its vegetable exports, says Macro Advisory.

The Uzbekistani government is faced with a delicate balance concerning its currency, the soum, against the Russian ruble. A stronger soum could potentially erode the country's trade competitiveness and negatively affect the economy by reducing the value of remittances when converted to local currency.

The Central Bank reports highlight that the influx of remittances demonstrated a positive trend in the first quarter, with monthly transfers exceeding the previous year's figures. From January to April remittance inflow surged by 21% to reach $3.1bn. An overwhelming 87% of this total amount originated from Russia. This upswing can be attributed to a substantial 72% increase in the number of migrant workers relocating to Russia, resulting in a compensatory rise in ruble volumes despite currency weaknesses.

However, the second quarter painted a different picture, with remittance volumes nearly halving in comparison to the previous year. Between April and June remittances dwindled from $5.06bn to $2.85bn. The situation exacerbated in June, with transfers plummeting by a staggering 2.26 times compared to the same month in 2022.

Russia remains the primary source of remittances, contributing around 80% of the total revenue during the first six months of the year. The head of the Central Bank, Mamarizo Nurmuratov, anticipates a continuation of this downward trajectory. He forecasts remittance volumes to hover around $11-11.5bn by year-end, reflecting a substantial decline of 32-35% compared to 2022. Nurmuratov attributes the anticipated drop in revenues from Russia to the devaluation of the ruble, further exacerbating the economic challenges for Uzbekistan.

Starting to feel the pinch

After the violent swings of last spring, central banks across the region are taking a little more time to wait and see whether the collapse of the ruble is a longer-term trend or simply a short-term reaction to the oil sanctions that will wear off in the second half of this year.

However, the soum has started to slide in recent days as a reaction to the ruble devaluation. The country is the largest recipient of remittances from Russia, in monetary terms, and, according to latest data, the value of remittances accounted for 21% of GDP in 2022, up from 13% in 2021.

The issue is expected to become an even bigger consideration, as the number of Uzbek workers moving to Russia is growing fast, up 72% year on year in Q1, as Russia tries to attract more Central Asian workers, thanks to the extremely tight Russian labour market, and has made the procedure easier and localised.

The government has been reluctant to devalue the currency too much this year (until recently) because it has steadily devalued since the ending of the dual-currency system in 2017 and because of reforms to make the economy more competitive.

The problem is that the currency devaluation is one of the main drivers of the persistently high inflation rate (since 2017) and part of the government’s programme to cut the rate to below 10% is (or was) to maintain a stable currency. Now the monetary authorities have to reflect on the reality of the impact on remittances and because Russia is the country’s second-largest trade partner, to which it sells food and textile products.

 

Cross-border remittances transferred to Uzbekistan grew 2.1 times y/y to $16.9bn in 2022, according to the World Bank. Remittances as a percentage of GDP grew from 13% to 21%. Around 87% of that total came from Russia, Macro Advisory said.