Positive Spillovers: A Closer Look at Kyrgyzstan's External Balance amid the Russian war in Ukraine


March 6, 2024

The Russian war in Ukraine has not only altered the global political stage but has also significantly impacted the economic landscape, particularly in the CIS region. This impact is especially pronounced in countries like Kyrgyzstan and Tajikistan, historically heavily reliant on the Russian economy. In Kyrgyzstan, a large share (20-30%) of imports originated from Russia before the war, and remittance inflows from Russia equaled over 25% of the country's GDP. Consequently, both Kyrgyzstan's growth and external balance are heavily tied to the developments in Russia.

The war has resulted in changes in these interconnections, but analyzing these changes is harder than ever due to deteriorating data provision and increased misreporting. 

On the first look, one might perceive significant pressure on the country's external balance and currency. Officially reported current account balance stands at historical lows of negative 40% of GDP, compared to the historical average of 10% of GDP. Country’s foreign reserves, expressed in the usual metric of months of import coverage, are historically low at two months of imports. These facts would, under usual circumstances, point to a significant imbalance in the economy.

However, our analysis reveals that these figures are heavily biased by hidden external inflows, and in reality, the country is doing far better.

Source: NBKR, OGR calculation

Due to sanctions imposed by Western countries, some of Russia's trade has reportedly been relocated to regional neighbors to evade sanctions. Kyrgyzstan emerges as one of the primary beneficiaries of this relocation, with imports—especially from China—rising from a historical average of 50% of GDP to 80% recently.

Source: IMF, OGR calculation

This additional imports are likely to be re-exported to Russia. Although official statistics do not acknowledge the export leg of this trade, the exceptionally high ”Errors and omissions” term in the Balance of Payments, currently exceeding 40% of GDP, strongly suggest misreporting and potential hidden exports.

Source: NBKR, OGR calculation

We therefore believe the true current account deficit is much smaller than reported. Additionally, two positive effects from the relocation are benefiting the country:

  1. The Kyrgyz government is experiencing an increase in fiscal revenue thanks to the import surge. In the first eleven months of 2023, VAT increased by 40% compared to the same period in 2022 and 130% compared to 2021. The rise in customs tax revenue is similarly substantial, leading to a budget surplus by the end of 2023 despite elevated government spending.
  2. Relocation can boost transportation and other services, although this effect remains less visible in official statistics and may be obscured by errors and omissions.

Adjusting the current account with errors and omissions suggests that the deficit is close to historical average. The FX reserves expressed in months of import are also misleading, heavily influenced by the re-export-related increase in imports.

Source: NBKR, OGR calculation