The impact of Eurasian integration on personal remittances and labor migration in CIS countries

By Dmitriy Belyanin

Introduction

Many small economies of the Commonwealth of Independent States (CIS) depend highly on personal remittances from larger countries, particularly Russia.  Some industries, such as construction, have particularly high shares of migrant workers being employed.  With the accession of some of these countries into the Eurasian Union, the costs of migration have decreased. Nevertheless, depreciations of exchange rates, caused by plummeting oil prices, which can be attributed at least partially to the geopolitical turbulence, in which the expansion of the Eurasian Economic Union played a clear role, decrease their purchasing power over foreign products in the short run.  

Regional conflicts relating to the accession of countries into the Eurasian Economic Union -- most notably, the battles in Ukraine -- resulted in refugees who compete with migrant workers from other CIS countries for jobs. This article will assess the impact of Eurasian integration on migration and remittances in detail.

Reasons for labor migration

After the collapse of the Soviet Union, some former Soviet republics became heavily dependent on remittances from migrants.  Having the highest average nominal incomes in the CIS, Russia became their most popular destination. 

As of 2012, according to the migration service of the Russian Federation, there were 9.1 million guest workers from the former Soviet Union, China, Southeast Asia, and Europe, reports Peter Roudik of the Global Legal Research Directorate.  As of August 2013, migrant labor amounted to 7-8% of Russia’s gross domestic product (GDP), according to Vladimir Volokh, Chairman of the Public Council Under the Federal Migration Service of the Russian Federation, reports REGNUM.  According to Larisa Kalioma, of the Rossiyskaya Gazeta, in 2009 Russia ranked first in Europe and second in the world in terms of the number of immigrants, after the United States. 

Employers took advantage of cheap low-skill labor of migrants during the labor shortage of the oil boom.  Lower labor costs enabled construction firms to grow and hire more high-skill laborers.  However, free migration also led to tax evasion, large outflows, ethnic tensions and higher crime.   According to Konstantin Romodanovsky, Сhair of the Federal Migration Service of the Russian Federation, as of 2006 Russia was losing $8 billion annually due to tax evasion by illegal immigrants.  Over $10 billion were transferred out of Russia unreported, and about 10 million illegal immigrants, mostly from the former Soviet republics, resided in Russia, reports RBC.ru.   These problems, along with the similar and more pungent migrant crisis in Europe, induce Russia and Kazakhstan to restrict immigration.

In some remittance-dependent countries, such as Tajikistan, economies were torn by conflicts.  In others, protectionism and the lack of economic reforms led to stagnation; workers would have been better off had they emigrated.  Most remittance-dependent countries have had higher unemployment rates than Russia and Kazakhstan (Table 1). 

Country	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Armenia	33.6	27.8	28.6	28.4	16.4	18.7	19.0	18.4	17.3	16.2	17.1
Azerbaijan	8.0	7.3	6.6	6.3	5.9	5.7	5.6	5.4	5.2	5.0	5.2
Belarus	6.5	6.4	6.4	6.3	6.2	6.1	6.2	6.1	5.9	6.0	5.9
Georgia	12.6	13.8	13.6	13.3	16.5	16.9	16.3	15.1	15.0	14.6	13.4
Kazakhstan	8.4	8.1	7.8	7.3	6.6	6.6	5.8	5.4	5.3	5.2	4.1
Kyrgyzstan	8.5	8.1	8.3	8.2	8.2	8.4	8.6	8.5	8.4	8.3	8.1
Moldova	8.1	7.3	7.4	5.1	4.0	6.4	7.4	6.7	5.6	5.1	3.4
Russia	7.8	7.1	7.1	6.0	6.2	8.3	7.3	6.5	5.5	5.5	5.1
Tajikistan	12.1	11.8	11.8	11.7	11.3	11.5	11.6	11.4	11.1	11.2	10.9
Turkmenistan	11.1	11.1	11.0	11.0	11.1	10.8	10.9	11.0	10.8	10.7	10.5
Ukraine	8.6	7.0	6.0	6.0	6.4	8.8	8.1	7.9	7.5	7.2	7.7
Uzbekistan	11.0	10.9	11.0	11.0	11.0	11.0	10.9	10.9	10.8	10.8	10.6

Source: The World Bank World Development Indicators

Table 1: Unemployment in CIS countries as a % of the labor force (2004-2014)

The construction boom of the early and mid-2000s was rampant in countries that underwent financial liberalization, but it was weaker in repressed economies.  Under rising oil prices, the ruble appreciated rapidly, which increased the purchasing power of migrants' incomes in their home currency.  When the global financial crisis began, remittances decreased.   

Like Russia, Kazakhstan experienced a construction boom, but it did not attract nearly as many migrant workers, even from its southern neighbors.  This trend may be explained by lower nominal incomes, a less diversified economy (implying a narrower choice of jobs), and more frequent interventions in foreign exchange markets to keep the tenge from appreciating.  On the positive side, the relatively small share of migrants and the similarity of their culture to that of Kazakhs helped Kazakhstanis keep their jobs, and it prevented ethnic tensions.

History of Eurasian integration

The establishment of the Customs Union of Russia, Belarus, and Kazakhstan, which evolved into the Eurasian Economic Union, brought changes for migrants. We can identify three periods -- the establishment of a free trade zone (1994-2010), the creation of the Customs Union (2010-beginning of 2014) and the establishment of the common economic space and the Eurasian Economic Union.  During the third period, Kyrgyzstan and Armenia joined, and new tensions in relations between Russia and the West arose due to regional wars in Syria and Ukraine, which led to inflows of labor migrants to Europe and Russia respectively.

As stated on the Eurasian Commission website, between May 2001 and May 2014, the EuraSEC was active.  This was an interim organization for establishing the Customs Union and the Common Economic Space, which initially consisted of Russia, Kazakhstan, Belarus, Kyrgyzstan and Tajikistan.  On January 25, 2006, a protocol for the accession of Uzbekistan to the EuraSEC was signed.  Ukraine and Moldova have had observer status since May 2002, and Armenia since January 2003.  On October 6, 2007, Russia, Belarus and Kazakhstan agreed to form a customs union. Its customs code took effect on July 6, 2010.  Common tariffs towards non-members ensued. Trade restrictions among members are non-existent, except anti-dumping and compensatory measures.

During the next stage of integration, which created the Eurasian Economic Union, governments agreed on free movement of labor and capital, and they said they would coordinate monetary and tax policies.  On October 10, 2014, the EuraSEC ceased to exist, and the European Economic Union became effective January 1, 2015.  Unlike the EuraSEC, this union has been formally registered as a legal entity, reports Bullin from BBC. 

CIS countries that did not join the Union could still take part in the CIS free trade zone, the agreement for which was signed October 18, 2011.  The agreement replaced over 100 international pacts regulating free trade on CIS territory, reports RIA Novosti. Members of the agreement included Russia, Kazakhstan, Belarus, Kyrgyzstan, Tajikistan, Moldova, Armenia, and Ukraine.  The latter dropped out of the free trade zone in December 2015 and entered a free trade zone with the European Union.  Goods shipping from Ukraine to Kazakhstan can now pass only through special transit routes on the Russian-Belarussian border, reports Rudashevskaya.

Impact of free trade and the Customs Union on labor migration and remittances

Free trade in the CIS has been conducive to creation of domestic enterprises and subsidiaries of multinational corporations in Russia, which took advantage of scale economies.  The increased demand for Russian labor created jobs and raised wages in the early and mid-2000s. Goods assembled or manufactured in Russia were often cheaper than the same brands manufactured or assembled elsewhere, implying more purchasing power for the average customer in Russia and abroad -- especially in Kazakhstan, due to a relatively free trading regime and easy access to consumer loans.  This sparked demand for mortgages and services for construction workers and hence remittances.  Personal remittances as a percent of GDP increased considerably for Armenia, Moldova, Georgia, Tajikistan and Kyrgyzstan (Table 3).  While free trade with Russia contributed to employment in these countries, construction booms there were not as common.

Country	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
Armenia	12.15	18.68	18.31	17.86	16.33	16.65	18.03	17.73	18.03	19.71	17.85
Azerbaijan	2.62	4.71	3.77	3.84	3.11	2.83	2.67	2.87	2.90	2.36	2.46
Belarus	1.11	0.66	0.73	0.64	0.96	1.02	1.04	1.49	1.66	1.66	1.62
Georgia	5.92	6.96	8.10	8.68	8.32	10.32	10.17	10.72	11.17	12.05	12.02
Kazakhstan	0.38	0.11	0.10	0.14	0.09	0.17	0.15	0.10	0.09	0.09	0.10
Kyrgyzstan	8.53	12.73	16.69	18.51	23.80	20.94	26.41	27.57	30.75	31.06	30.29
Moldova	27.14	30.62	34.50	33.88	31.18	22.04	23.25	25.85	27.27	27.45	26.17
Russia	0.42	0.45	0.39	0.36	0.35	0.42	0.34	0.32	0.29	0.32	0.42
Tajikistan	12.14	20.18	36.00	45.46	49.29	35.11	40.87	46.91	47.50	49.59	41.70
Turkmen.	n/a
Ukraine	0.63	2.80	2.88	3.71	3.77	5.07	4.79	4.79	4.81	5.27	5.58
Uzbekistan	n/a*

*While Turkmenistan is a closed country, labor migration from Uzbekistan has been widely reported, even though remittances are not on the World Bank website.  So this article offers forecasts.

Source: The World Bank World Development Indicators

Table 2: Share of personal remittances of CIS Countries in GDP, % (2004-2014)

When the global financial crisis began, the volume of personal remittances fell.  In some industries, such as construction, there were massive layoffs.  The construction sector in Russia shrank about a fifth in terms of output, say Danzer and Ivashenko.  Often employers hired migrants because they were still willing to work for low wages. 

In 2009, the EuraSEC, on behalf of the Eurasian Development Bank, established an anti-crisis fund (now the Eurasian Fund for Stabilization and Development) of $8.5 billion.  On June 18, 2010, the fund loaned $70 million to Tajikistan for social expenditures.  This may have discouraged massive emigration.  The fund tries to “help member countries ensure their long-run economic stability and foster economic integration between them.”

Kyrgyzstan, where remittances decreased by 28-29%, received $150 million of aid from Russia.  The number of labor migrants from Kyrgyzstan working in Russia decreased from 139,200 in January-July 2008 to 85,900 in January-July 2010, a fall of 38%, according to the Institute of Economics of the Russian Academy of Sciences, as reported by the Sauran Information and Analytical Center.  This factor, plus the dependence of the Kyrgyz economy on Kazakh banks, contributed to the second color revolution in Kyrgyzstan in 2010, which eventually led to a pro-Russian government and the country's accession to the Eurasian Economic Union in 2015.

When the Customs Union formed, it eliminated tariffs between Russia, Kazakhstan and Belarus.  In 2011, visas between the three countries were abolished, too.  These measures might have increased migrant pay, but these economies do not depend on remittances. During that period, the economies of Russia and Kazakhstan were recovering, which stimulated remittances to countries outside the Union.  Belarus faced a financial crisis in 2011, but this did not lead to massive emigration.

The Ukrainian conflict, which began with the dispute over whether Ukraine should ally with the European Union or the Customs Union, resulted in refugees.  According to the Federal Migration Service, 2.6 million Ukrainians were in Russia in November 2015; of those, 1 million came from the war-torn southeastern regions, reports Liga Novosti.  Increased labor supply, plus the Russian recession that has resulted from low productivity, low oil prices, and anti-Russian sanctions, drive down their salaries.  Depreciation of the ruble further decreases remittances. Table 3 illustrates the exchange rate trends in CIS countries.

	2007	2008	2009	2010	2011	2012	2013	2014	2015
Kazakh. Tenge	119.12	118.28	145.55	145.25	144.57	146.87	150.03	177.21	220.47
Azerbaij. Manat	0.90	0.82	0.80	0.80	0.79	0.79	0.78	0.78	1.01
Armenian Dram	342.35	305.96	363.68	373.67	372.35	401.63	409.62	415.14	477.60
Belarus. Ruble	2150.5	2150.6	2794.1	2962.2	5103.1	8298.9	8852.0	10222	15918
Georgian Lari	1.77	1.65	1.67	1.78	1.69	1.65	1.66	1.77	2.27
Kyrgyz Som	39.82	36.58	42.98	45.95	46.11	46.97	48.40	53.17	64.40
Moldav. Leu	11.78	10.16	10.92	12.17	11.52	11.88	12.33	13.80	18.49
Russian Ruble	25.57	24.86	31.63	30.31	29.33	30.98	31.83	38.56	61.13
Tajikist. Somoni	3.30	3.42	4.15	4.38	4.61	4.76	4.76	4.93	6.15
Uzbekist. Soum	1286.1	1317.9	1464.2	1587.5	1716.2	1892.9	2101.9	2303.2	2549.1

Sources: Historical OANDA exchange rates and the World Bank

Table 3: Average exchange rates of the currencies of CIS countries to the US Dollar (2007-2015)

Thus, though the accession of Armenia and Kyrgyzstan into the Eurasian Union helps their migrants avoid legal barriers, their remittances will be low for a while.  The next section describes prospects for migrants from several countries.

Predictions for the future of migrants, remittances and remittance-dependent countries

CIS migrants differ in their circumstances.  In April 2014, Putin signed a law mandating migrants to pass an exam in Russian.  The migrant would then receive a five-year certificate, reports Lenta.ru. This requirement is likely to decrease migration from countries in which few are fluent in Russian, such as Uzbekistan and Tajikistan. 

Kazakhstan suffers from rapid depreciation of the tenge, which had been anticipated even while the National Bank tried to maintain a fixed exchange rate.  Another factor is the ban on mortgage loans for which monthly interest exceeds half of the borrower’s income, effective April 2014, stated profinance.kz.  This restriction averts another construction boom and thus reduces remittances. Starting February 1, only individuals will be able to hire migrants (who reportedly totaled 128,000 in 2013 in Almaty alone), and only up to five people.  These migrants must pay a monthly fee, reports Astana TV.  This will further decrease remittances.

The accession of Kyrgyzstan and Armenia into the Eurasian Union puts migrant workers and these countries at an advantage.  The migrants can now avoid paying unnecessary fees (or bribes) to stay in the country.  The threat of instability in Armenia -- in the form of both protests and possible resumption of the conflict with Azerbaijan -- will keep Armenian migrants in Russia, which is likely to side with Armenia in any dispute, due to Azerbaijan's close ties with Turkey.  More migrants from Armenia may be expected.

Kyrgyzstan may take advantage of the Russian embargo against Turkish-made agricultural products.  Through the multiplier effect, increased farm revenues would increase GDP and decrease migration. 

The controversy about Transnistria’s status is likely to preclude Moldova's accession to the Eurasian Economic Union.  Nevertheless, the current protests there suggest disappointment with pro-Western parties.  Political instability and, possibly, new arrangements regarding migration are likely to keep Moldovan migrants in Russia.

Georgia is the most successful country to survive a color revolution, as revealed by such indicators as the 2014 Transparency International Corruption Perceptions Index (50^th place), the 2015 Ease of Doing Business Index (24^th), and the 2015 Heritage Foundation Index of Economic Freedom (22^nd).  Georgia is likely to remain pro-western, though less so than under its former president Mikheil Saakashvili.  Over time, its dependence on remittance will decrease, since neither Russia nor Europe will employ many of its citizens.

For neighboring Azerbaijan, the recession and possibly a contretemps with Armenia might increase the number of citizens working abroad. In the latter case, the country is likely to receive aid, including loans, from Turkey, the EU, the United States and international organizations.  The aid can help prevent a massive outflow of migrants, which would add to Europe's migrant crisis.

Though the Kazakh tenge has been depreciating against the dollar, economic ties with Russia will prevent it from depreciating against the ruble enough to induce massive migration into Russia. 

Uzbekistan and Tajikistan are in a more difficult situation.  They don’t belong to the Eurasian Economic Union, and many of their citizens speak little Russian. So they are likely to suffer from increasing unemployment stemming from the return home of migrant workers.

Due to the old age of the current President and to growing economic problems, Uzbekistan is likely to face a change in power soon.   Most likely, Islam Karimov will appoint a successor, possibly among his relatives.  There may be a fight for power among Uzbek elites, which might spur protests.  However, in spite of Uzbekistan's ambiguous standpoint on geopolitical issues, none of the key geopolitical players in the region wants revolution there, since it establishes an undesirable precedent for them and threatens to spread extremism.  The new government of Uzbekistan will probably receive aid from Russia, Kazakhstan, China or Iran.  Uzbek farmers may receive easier access to the Russian and Kazakh markets, especially considering the need for inexpensive imported food there.

Seeking popular support, the new President of Uzbekistan will probably spend the money on jobs or social programs.  Unpopular market reforms, though necessary for sustainable economic development, will be avoided.  The country's relations with Russia will improve, but it probably will not join the Eurasian Economic Union.  This would be due to uneasy relations with Kyrgyzstan, unwillingness to join an organization similar to the USSR, and the fear of spreading information about higher standards of living in Belarus and especially Kazakhstan.

For Tajikistanis, the near-term outlook is pessimistic.  Tajikistan too is likely to receive loans and aid, but it is also likely to spend most of it on a crackdown on extremists (and perhaps on peaceful opposition), rather than on maintaining employment and social programs. Its history of civil war precludes a color revolution, since most citizens are probably content with peace in poverty, but small protests are likely.  The average Tajikistani can only hope for improvements in the economy, and particularly in exchange rates, in Russia or Kazakhstan. Growing use of alternative energy sources, the lifting of sanctions on Iran, and the lifting of the ban on oil from the United States are likely to keep oil prices low, even if they rebound.  Thus migrants must hope that Kazakhstan and Russia diversify their economies -- which would occur slowly and would not lead to volumes of remittances comparable to what existed during the construction boom.

Conclusion

When Eurasian integration began, trade liberalization increased immigration to and remittances from Russia and Kazakhstan, through scale economies.  This created jobs and demand for real estate. Many construction workers who benefited were migrants.  Russia attracted more Central Asian immigrants than did Kazakhstan, due to higher nominal incomes, larger cities (which offered more jobs), and longer periods of currency appreciation.

During the Great Recession of the late 2000s, remittances declined.  The EuraSEC Anti-crisis Fund was established to create jobs in remittance-dependent countries.  Tajikistan borrowed from the fund, and Kyrgyzstan received direct aid from Russia.

The elimination of visas for Customs Union members, when only Kazakhstan, Russia and Belarus were members, had comparatively little impact on migrants, since these countries are not remittance-dependent.  Very different was the case with the accession of Armenia and Kyrgyzstan.

The conflict in Ukraine resulted in competition of Ukrainian refugees with other migrants for jobs.  The accession of Armenia and Kyrgyzstan into the Eurasian Union eased the legal aspects of their migrants staying in Russia, but recession and exchange rate depreciation made their stay more difficult.  Nevertheless, staying for migrant workers from countries outside the Eurasian Economic Union is even harder.   The requirement for all foreigners working in Russia to pass an exam in Russian will further decrease their number and total remittances.

Among the remittances-dependent countries of the CIS, Armenia is the most likely to remain dependent on them and Uzbekistan and Tajikistan the least, with Tajikistan's prospects remaining bleak. Tajikistani citizens can only hope for economic recovery in Russia or Kazakhstan.

Dmitriy Belyanin has a Master’s degree of Business Administration in Finance and a Bachelor of Arts degree in Economics from KIMEP University.  Since 2007, he has been writing on issues in economics and finance ranging from stock markets to environmental economics. He is the associate editor of this blog.

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