Saving Central Asia from Putin’s Embrace

In the closing days of February, Russian President Vladimir Putin was busy ordering tanks to Kyiv and planning premature victory celebrations. He found time, though, to phone the leaders of the former Soviet states in the Caucasus and Central Asia, the so-called “southern tier,” to seek their support. Putin wanted their recognition of the two breakaway regions of Ukraine he engineered, the Donetsk People’s Republic and the Luhansk People’s Republic. He also wanted their explicit endorsement for his plan to occupy one of their former Soviet neighbors.

Putin’s phone calls were noted in the official Kremlin online record, Kremlin.ru. Putin spoke with presidents Ilham Aliev in Azerbaijan, Nikol Pashinyan in Armenia, Sadyr Saparov in Kyrgyzstan, and Shavkat Mirziyoyev in Uzbekistan. Somewhat later, Putin spoke with Kassym-Jomart Tokayev in Kazakhstan. No phone call was reported with Tajikistan’s Emomali Rahmon, but an official visit was made by Russian Senator Valentina Matviyeko to meet Tajikistan’s parliamentary president, who is also the president’s eldest son. Putin skipped Turkmenistan, perhaps because the country maintains a position it calls “positive neutrality” in all foreign policy matters and perhaps because the president was busy installing his own eldest son as the country’s new leader.

 

 

However, Putin’s phone calls did not land him the level of backing he was seeking. Kyrgyzstan’s Saparov expressed “support” for Russia and seemed to allude to justifications for Russia’s action, but he didn’t offer anything more specific. Uzbekistan’s Mirziyoyev was quoted as expressing an “understanding of the Russian position.” An Uzbek Ministry of Foreign Affairs spokesman quickly issued a clarifying statement, noting that Uzbekistan maintained neutrality regarding the war. Ultimately, both countries appeared evasive: no concurrence, no repudiation.

None of the political heads in the southern tier of the former Soviet space wanted to recognize Ukraine’s breakaway “national republics.”  Putin and Azerbaijan’s President Ilham Aliyev met on Feb. 22 to sign a strategic partnership agreement, which did not refer to the breakaway republics or mention Ukraine by name. Even Russia’s closest ally, Belarus, avoided explicitly announcing diplomatic recognition. The Belarus Ministry of Foreign Affairs only circulated a cryptic statement saying that it recognized Russia’s diplomatic recognition of Luhansk and Donetsk. Uzbek leaders subsequently explicitly rejected the idea of diplomatic recognition.

Neither endorsing nor condemning Russia’s invasion of Ukraine may not seem out of character for Russia’s neighboring post-Soviet states. Straddling diplomatic fences is one of the most salient features of what is often called a “multi-vector foreign policy.” But the sheer scale of the Western economic sanctions against Russia has produced several policy choices unlike anything experienced since the disintegration of the Soviet Union in 1991. Even if Russia’s war in Ukraine is one they cannot accept, they also may calculate that it is not one they can oppose — for now. That is why there are so many signs that leaders in the southern tier are looking for ways to skirt the sanctions while still keeping their distance from Moscow. Western policymakers should avoid punishing them for this in a way that drives them further into Russia’s arms.

Evading Sanctions

As Russian forces streamed into Ukraine, the West launched an unprecedented series of economic sanctions, hitting Russian banks, firms, oligarchs, and consumers swiftly and severely. On March 24, the G7 Leaders Statement further expressed Western determination to curb sanctions evasion as well. The full scale of economic disruption will become clear as the sanctions’ effects cascade through the Russian economy. But beyond Russia’s borders the sanctions are already having secondary, or collateral, effects. Russia’s neighbors in the Caucasus and Central Asia, whose banking and transport sectors are closely linked to Russia, face reverberating waves of disruption.

If the war drags on, the effects of the sanctions will mount. Even a ceasefire formula that results in a divided Ukraine is unlikely to yield any relief. After the annexation of Crimea in 2014, Moscow’s posture toward sanctions was basically to endure and absorb. Now the situation is very different and Moscow’s posture is pivoting toward eastern markets, reemphasizing Eurasian integration, and seeking to create a ruble–yuan trading sphere. If Moscow maintains this posture, the secondary economic consequences of sanctions for the countries of the Caucasus and Central Asia will be increasingly important. To understand how these consequences will play out, it helps to focus on five key factors:  foreign exchange; remittances; the constellation of central banks, corresponding banks, and payment systems; commercial bank trade financing; and the crypto-ruble.

Foreign exchange effects have been immediate. The commercial exchange rate for the ruble fell from less than 75 to the dollar on Feb. 17 to more than 150 to the dollar on March 11. However, the Russian Central Bank reported an official exchange rate much more advantageous for the ruble. Moreover, the Russian Central Bank intermittently stopped trading and intervened in other ways to prop up the ruble at great cost. The falling ruble had a direct effect on the southern tier countries because of their trade relations, and more importantly, because of the remittances sent home by seasonal and temporary workers.

Remittances from laborers working in Russia, which are denominated in rubles, play a significant role in the national economies of Armenia, Kyrgyzstan, Tajikistan, and Uzbekistan. The World Bank concluded in 2021 that remittances are the largest source of external financing in the region, exceeding foreign direct investment, official development assistance, and portfolio investment put together. In Kyrgyzstan and Tajikistan, remittances exceeded 25 percent of national gross domestic product. According to Russian Central Bank data, Uzbekistan was the leading remittance recipient in 2021 at $3.2 billion.

National central banks conduct currency transactions directly among themselves, but a large proportion of commercial and retail financial transactions are conducted through corresponding banks. A growing proportion of financial transactions are conducted through payment systems, which are banking institutions that offer cross-border transactions in the form of credit and debit cards, as well as electronic funds transfers, for the retail market. Azerbaijan and Kazakhstan have more developed banking systems than Kyrgyzstan and Tajikistan. But all the countries in the region are heavily dependent on Russian banking institutions and processes. While Uzbekistan’s banking system is integrated with Russian banking institutions, it is less dependent upon them and thus more capable of financing trade operations without reliance upon the ruble. Payment transfer systems can support both interbank transfers and peer-to-peer transfers. Except for a few recent start-ups, the commercial e-payment systems operating in these countries are based in Russia. Tajikistan, for example, has a number of payment systems capable of both bank transfers and retail business. A good example is Unistream. It is a payment company that is based in Russia but it is hard to locate and operates offshore.

Unistream  has positioned itself as a money transfer business capable of working under difficult conditions.

Finally, cryptocurrencies represent another potential “sanction-breaker.” In March, European Central Bank President Christine Lagarde warned that crypto assets “are certainly being used, as we speak, as a way to try to circumvent the sanctions that have been decided by many countries around the world against Russia.” Indeed, the Russian government has been working for years to develop digital sanction evasion techniques using cryptocurrency. The idea of settling interbank transfers through crypto transfers has been pushed by the Russian intelligence community but has not yet found support from the Russian banking community — or at least not publicly.

Taken together, these factors help indicate which countries offer Russia options for sanctions evasion.   Payment system such as Unistream may be functioning as financial backdoors in Armenia, Kyrgyzstan, and Tajikistan, providing customers channels for remittance transfers. But these systems have not functioned in the past on the scale necessary to provide alternative means of financing large-scale transactions for trade in primary commodities, especially minerals and fuel products. In contrast, the banking and investment institutions in Azerbaijan, Kazakhstan, and Uzbekistan are of the scale necessary for financing trade of commodities and fuels. As a result, these countries will play a crucial role in the fight for sanctions enforcement.

Evading Moscow

The specific borders of the countries in Central Asia and the Caucasus today are products of the Soviet Union. Their independence and national sovereignty was a consequence of its disintegration. As a result, the region’s leaders are aware that the Kremlin’s arguments about Ukraine could easily be applied to them.

Russia’s information war is just as determined in the Central Asian states as in Russia, but it is not exclusive. Russia’s government-led media provides the content circulated in the media sources in post-Soviet countries. For instance, Russia’s Izvestia circulates articles in Central Asian media speaking of U.N. investigations into the torture of Russian soldiers captured in Ukraine, while Uzbekistan’s Kun reports U.N. figures on civilian casualties — news coverage that is not shown in Russian media sources and could cost someone long imprisonment if circulated on social media platforms.

Kazakhstan, with its long and indefensible border with Russia, has sedulously avoided direct confrontation with Moscow. When Putin publicly claimed that Kazakhstan historically “never existed as a state,” Kazakh politicians swallowed the insult. In some cases, Kazakh diplomats have pushed back when Kazakh national sovereignty seemed challenged, but they have always done so discretely. Kazakh officials acknowledged their own vulnerability in January of this year when public disorder required them to call on mainly Russian Collective Security Treaty Organization forces to intervene to protect them. Kazakhstan’s President Tokayev now views “protecting national sovereignty and territorial integrity” as his most important responsibility. At the same, commitment to national sovereignty has driven Uzbekistan to seek closer relations with foreign partners outside the Eurasian region.

Washington should build on these concerns to help Russia’s southern neighbors evade not sanctions but subordination. This means allowing them to keep backdoors open to facilitate financial transactions. The subterfuge that Eurasian countries turn to may be seen as evading sanctions but, at the same time, they may also be self-protective ways of evading the Russian chauvinism of Putin’s Kremlin. As sanctions grow in importance in the damage they do to Russia, they will also grow in importance to the neighboring countries of the region.

Kazakhstan is taking the high road. in Brussels on March 28,Timur Suleimenov, the first deputy chief of staff to the president, explained his purpose was to “demonstrate to our European partners that Kazakhstan will not be a tool to circumvent the sanctions.” Kazakhstan is a member of the Eurasian Economic Union and the Collective Security Treaty Organization, the two principal, Russian-led, economic and military alliances in Eurasia, respectively. But Suleimenov underscored that Kazakhstan intends to remain a trading partner with Russia while making every effort to comply with sanctions in the process. As the sanctions’ effects bite deeper into the Russian economy, there is reason to expect the redirection of trade through transport and communication links to the benefit of Russia’s southern neighbors.

Western partners should encourage rather than fight this trend. Armenia, Kyrgyzstan, and Tajikistan are too dependent and too vulnerable to be expected to act independently. But their economic activity is so marginal that it will not weaken the sanctions. Turkmenistan can be expected to retain its “positive neutrality.” Georgia’s position regarding Russia is unambiguous. The states that matter are Azerbaijan, Kazakhstan, and Uzbekistan. The Kremlin is making a simple argument, in essence: “join us completely to help offset sanctions or your economy won’t survive.” But key people in these countries know the sanctions are “pro-Ukraine,” not “anti-Russian.” They know the sanctions are not against them, and they don’t want to be dragged into the Kremlin’s slipstream. That is exactly why they should be helped.

 

 

Gregory Gleason is professor of security studies at the George C. Marshall European Center for Security Studies. The Marshall Center is a partnership between the German Ministry of Defense and the U.S. Department of Defense. The views represented here are his personal views and do not necessarily represent the views of the Marshall Center.  

Image: Creative Commons, Flickr user Daniel Mennerich

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