The dramatic decline in oil prices has altered the global investment landscape, posing new risks but also generating fresh opportunities for businesses operating internationally. The impact of lower oil prices on countries within the Commonwealth of Independent States (CIS) provides a case in point.
Understanding the differential impact of energy market developments across countries is crucial for successfully adapting to the new lower oil price environment. To make the blanket assumption that all oil-importing economies will be better off given the reduction in energy costs, while oil-exporting nations will be the hardest hit, could result in missed opportunities and ignored risks.
Assessing the effects of the commodity price slump on the economies of the CIS helps to illustrate this point. Indeed, perhaps counterintuitively, it is the region’s energy importers (including Armenia, Belarus, Kyrgyzstan, and Tajikistan) that are suffering the most as a result of the oil price slide. This reflects the severe impact of Russia’s recession (of which the tumble in oil prices has been a key driver) on these particular countries.
While many CIS states have strong economic ties with Russia, the region’s hydrocarbon importers are more highly exposed to the Russian economy than its oil exporters (such as Azerbaijan and Kazakhstan). This exposure can be highlighted through three key channels: remittances, foreign direct investment (FDI), and trade.
Russia is a major destination for migrant workers from Central Asia, particularly from Tajikistan and Kyrgyzstan, where remittances were, respectively, equivalent to 42% and 30% of GDP in 2014 (compared to less than 3% in both Azerbaijan and Kazakhstan). The shares of these remittances coming from Russia were 90% and 97%, respectively. However, in the first quarter of 2015, remittances from Tajik and Kyrgyz migrants working in Russia fell by an average of 59% from Q3 2013.
Russia is also a key source of FDI in a number of CIS countries — particularly Tajikistan, Armenia, and Belarus — where its share of the total FDI stock accounts for between 26% and 44%. In Azerbaijan and Kazakhstan, the equivalent shares are just 0.6% and 2%.
The total stock of Russian FDI in the CIS region as a whole fell by 8% on the year in 2014. Given their strong dependence on Russia as a source of foreign investment, it is the net oil importers that are suffering more as a result.
Lastly, many economies in the region rely on Russia as a key export market. In Belarus, where total exports accounted for over half of of GDP in 2014, more than 42% of these were sent to Russia. However, Belarusian exports to Russia have declined sharply over the past year as the Russian recession has curtailed import demand. Meanwhile, oil exporters such as Azerbaijan and Kazakhstan send less than 10% of their exports to Russia and are thus less affected by the drop in demand from this market.
Overall, while the oil price plunge is undoubtedly a negative development for the CIS’s oil exporters, they are less exposed to the recession in Russia than the region’s oil importers, for whom cheaper energy bills have not been enough to offset the spillover effects of the Russian slowdown.
So what are the implications in terms of risks and opportunities for businesses? Declines in remittances, FDI, and export revenue from Russia have a number of negative repercussions for the region’s oil-importing economies. Lower earnings, rising unemployment, and depressed tax revenues will weigh on both business and government spending as well as consumer demand (particularly for nonessential goods).
Any resulting increase in social unrest could pose a threat to business continuity. In addition, the drop in remittances and export demand is fueling depreciation pressures, in turn stoking imported inflation and increasing production costs (but also helping to boost export competitiveness and narrow current account deficits). However, there are also opportunities to be had. Firstly, the growing need to attract new sources of FDI could lead to improved incentives and better operating conditions for foreign investors. Moreover, the aspiration to reduce dependence on Russia as an export market is spurring a drive to diversify the export base by promoting the development of underdeveloped sectors such as agriculture and tourism.
In summary, investors and businesses seeking to capitalize on what is potentially a “new normal” of lower oil prices should be mindful that the risks and opportunities are not necessarily as obvious as they may first appear.
Jaspreet Sehmi is a Senior Economist in Dun & Bradstreet’s Macro Market Insight team. Based in the Marlow/United Kingdom, she covers Eastern Europe and Central Asia. She has an MSc in Economics from University College London.