“For these countries, lower oil and other commodity prices, marked reductions in workers’ remittances and investment inflows, and difficulties in the banking sector have undermined growth. But hydrocarbon-exporting countries with relatively closed economies and capital markets (i.e., Turkmenistan and Uzbekistan) have been more insulated from the deterioration in the global economy, the report said.

Monetary authorities in many countries in the subregion have allowed their currencies to depreciate because their major trading partners— externally the Russian Federation and internally Kazakhstan—devalued their currencies early in 2009. Economic circumstances faced by the subregion in 2009 are bleaker than anticipated in the Asian Development Outlook 2009 (ADO 2009) of March, and the Update revises down the earlier projections. In 2009 growth is now expected to be only 0.5%, from 3.9% earlier, and in 2010 a 3.6% expansion is now forecast, from 4.8%.

Through trade and financial linkages, the Russian Federation’s deep recession this year has severely crimped trade, investment, and workers’ remittances to countries in the subregion, often with a substantial depressing impact. According to that country’s central bank, remittances to the eight countries fell by about 25.5% year on year during the first half of 2009. Since remittances are a major source of income for some subregional countries, lower flows adversely affect domestic demand and are deteriorating current account balances.

Furthermore, even though no official statistics are available, many of the migrant workers from Kyrgyz Republic, Tajikistan, and Uzbekistan who are employed in the Russian Federation (and in Kazakhstan) have started to return home. This will likely force the governments concerned to increase social expenditure on social safety nets.

The sharp drop in domestic demand, together with lower energy and commodity prices, has helped curb inflation pressures in the subregion.

The Update takes down the inflation forecasts for all countries for this year, and revises down the subregional projection to 7.6%, from 10.6% in ADO 2009. For 2010 the forecast is adjusted only slightly to 7.3%, from 7.8%, to reflect reduced domestic demand pressures, as revised gross domestic product (GDP) growth was edged lower.

Despite its economic recession, the Russian Federation has continued to provide significant official assistance to many countries. A notable example is official assistance to the Kyrgyz Republic, which received a US$300 million loan for budgetary support that the Government has stated will be used to finance infrastructure projects and support small and medium-sized enterprises through a newly established development fund. In addition, the Russian Federation is to provide a US$1.7 billion concessional loan for a hydropower project and a US$94 million debt-for-equity swap. In May 2009, Armenia signed a US$500 million loan from the Russian Federation. This loan will have a substantial impact on the economy since it equals about 20% of the state budget for 2009.

The People’s Republic of China (PRC) is also having an impact on the subregion through official assistance as well as investment. It is, for example, Tajikistan’s second-largest source country for imports, mainly related to its funding of infrastructure projects. Likewise, its investment in a gas pipeline project from Turkmenistan through Uzbekistan and Kazakhstan to the PRC will increase foreign direct investment (FDI) in those countries during the construction stage and provide gas sales and transit fees in the future. The China National Petroleum Corporation
has set up a joint venture with petroleum corporations in Uzbekistan and Kazakhstan for the pipeline’s construction. Most of the foreign investment in Turkmenistan, too, is from the PRC.

Compared with ADO 2009, the current account surplus for the subregion is revised to 1.9% of GDP from 3.8%. This reflects lower surpluses for two major hydrocarbon producers—Azerbaijan and Turkmenistan—and a widening in Armenia’s deficit. For 2010, the surplus is edged down to 2.7% of GDP, from 3.4%.