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The ripples of the ruble How the collapse of Russia's currency could impact its neighbors and cause a damaging decline in labor migration

Source: Meduza

The ruble’s collapse this summer has had a noticeable effect on the economies of Russia’s neighbors. For example, the exchange rate of Kazakhstan’s tenge, which was recently at its highest level since 2016, sharply declined in mid-August. And even after the ruble recovered some of its value when Russia’s Central Bank hiked its key interest rate on August 15, the tenge continued to decline for several more days. Kazakhstan’s National Bank was frank about what it sees as the cause of the decline, calling it a “reaction to the weakening of the ruble.” Meduza looks at how directly the ruble’s exchange rate affects the currencies of other countries in the Commonwealth of Independent States (CIS) — and why this could lead to an outflux of labor migrants from Russia.

What factors influence the exchange rates of CIS currencies?

The economies of the CIS countries have many similarities but can be separated into three broad categories:

What's the relationship between the ruble and the currencies of Russia’s neighbors?

Russia has one of the largest economies in the region and is a key trade partner to the Eurasian Economic Union (EAEU) and many CIS countries. Moreover, the Russian ruble is the dominant currency used in trade between EAEU member states. Also, a significant portion of international settlements within the EAEU are conducted in Russia’s currency; the ruble still makes up more than 70 percent of the currency used in both imports and exports. This, in particular, suggests that companies from Kazakhstan, Kyrgyzstan, Armenia, and other countries purchase rubles in order to trade with Russia.

Additionally, many migrants from Central Asia and Armenia travel to Russia for work. They receive their salaries in rubles, which they often send back home. This, too, strengthens CIS countries’ reliance on the ruble (we’ll explain how below). An economist from a major financial firm told Meduza that remittances in Tajikistan, for example, make up about a third of GDP.

And rubles are brought into CIS countries not only by labor migrants but also by Russian emigrants. This increased significantly after the start of Russia’s full-scale invasion of Ukraine and had a considerable impact on exchange rates; other national currencies began to strengthen as newly arrived Russians sold their rubles and purchased local currencies, increasing the ruble supply on the market. As a result, in 2022, three non-Russia CIS member states entered the list of the top 10 currencies against the U.S. dollar: the Armenian dram, the Georgian lari, and the Tajikistani somoni.

The flow of Russians into Armenia and Georgia has persisted, and the dram and lari have remained strong in 2023 as a result. Tajikistan, however, has seen the opposite: since the start of the year, the exchange rate of the U.S. dollar to the somoni has risen by 8 percent. This can largely be attributed to the somoni’s strong dependence on the ruble, which is the currency many of the country’s labor migrants are sending back home.

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Is this dependence really strong enough to determine the exchange rates of CIS countries?

Undoubtedly, the ruble affects some of its neighbors’ currencies, but not all of them and not directly. Most dependent are the small economies with strong links to Russia. For other countries, the ruble’s fluctuations are just one of many factors that indirectly impact their currencies’ exchange rates, analysts from Freedom Finance Global told Meduza.

Tajikistan is the country whose currency exchange rate is most easily affected by the ruble due to the high flow of remittances coming into the country, according to an economist from a large financial company.

Additionally, the ruble affects the economies of Armenia and Georgia, but the exchange rates of these countries’ currencies are also vulnerable to numerous other factors. In Armenia, for example, the economy is greatly affected because the flow of cash from diaspora members increases significantly during difficult periods such as wars and pandemics. As a result, the dram is far from the stablest currency in the post-Soviet space; in the last five years, its exchange rate against the ruble has risen by 50 percent. In Georgia, meanwhile, the steady inflow of tourists is a powerful factor — one of many that serve as a counterweight against the ruble’s depreciation.

Kazakhstan’s position is more difficult. Like Russia, Kazakhstan is a major exporter of oil. As a result, the value of the Kazakhstani tenge depends heavily on changes in oil prices. The ruble’s exchange rate and the price of oil are the two fundamental factors affecting the tenge's exchange rate, Kazakhstani National Bank Deputy Chairwoman Aliya Moldabekova said in 2019.

At the same time, Kazakhstan exports more goods to Russia than it imports from it. As a result, the ruble’s fluctuations can have an inverse effect on the value of the tenge. For example, the ruble’s strong appreciation in 2022 led to the tenge’s weakening and caused prices in Kazakhstan to rise. In other words, the relationship between the ruble and the tenge is less straightforward than it might initially appear, an expert told Meduza.

The EAEU currency most dependent upon the Russian ruble is the Belarusian ruble, an economist from a Russian bank told Meduza. Another economist agreed: Russia is Belarus’s largest trading partner, and many citizens of Belarus go to Russia for work, so there is indeed a dependency.

At the same time, the two currencies’ values don’t always show a tight correlation, because the country’s Central Bank does not fix the Russian ruble’s exchange rate, while the Belarusian National Bank often interferes with its currency’s exchange rate, analysts from Freedom Finance Global told Meduza.

How does a weak ruble lead to an outflow of migrants from Russia?

The recent drop in the Russian ruble’s value directly impacts migrants’ desire to travel to the country for work. This is because it wasn’t only the ruble’s exchange rates against the U.S. dollar and the euro that fell but also its exchange rates against the currencies of other CIS countries.

Since the start of 2023, the ruble’s exchange rate against the Kyrgyzstani som has fallen by 22 percent; its exchange rate against the Uzbekistani som has fallen by 18 percent; and its exchange rates against the Armenian dram and the Kazakhstani tenge have each fallen by 25 percent.

This has caused the income of migrants who get paid in rubles to drop, making work in Russia a less attractive option for them.

According to Bakhrom Ismailov, the head of Moscow’s Uzbekistani diaspora, the ruble’s plummeting exchange rate could cause Russia to lose up to a third of its migrant workers. In a recent interview, Anton Glushkov, the head of Russia’s National Builders’ Association, said that the currency’s collapse will especially make Russia a less attractive market for migrant construction workers. He said most workers are sticking around for now, but this could change in 2–3 months.

In 2021, the average monthly salary for migrant workers in Russia was 47,100 rubles (about $640), according to data from Moscow State University and the organization Federation of Migrants of Russia. The most lucrative industry for migrant workers that year was construction and repair, with an average monthly salary of 54,000 rubles ($734).

In 2022, the number of labor migrants in Russia rose 33 percent (approximately 847,000 people) from the previous year.

There are two main factors behind this large increase:

An economist from one of Russia’s banks told Meduza that migrants working in Russia might indeed leave in response to the ruble’s falling exchange rate. According to him, the currency’s decline will exacerbate the already-dire shortage of workers in Russia.

But the ruble’s depreciation isn’t the only factor stopping potential migrant workers from coming to Russia, nor is it the most important one. Because of Russia’s full-scale war against Ukraine, many migrants are justifiably concerned that they could be mobilized and sent to the front, according to an economist at a large financial firm. While mobilizing a citizen of a foreign country is difficult, the risk is real — and migrants are taking it into account.

Would a decline in immigration be bad for Russia?

In a word, yes. Russia’s labor shortage is becoming a problem for the economy, and an outflow of migrants would only aggravate the situation.

Russia’s working population continues to decrease as opponents of the war leave the country and as hundreds of thousands of other people are drafted and sent to the front. Last year, the number of workers younger than 35 decreased by 1.3 million people — the largest decrease in Russia’s modern history (excluding 2020, when pandemic restrictions were in place).

In June 2023, unemployment reached a record low of 3.1 percent. In July, about 42 percent of Russian companies reported personnel shortages, although 35 percent of businesses were reporting shortages as early as April, according to data from the Gaidar Institute for Economic Policy.

In 2022, despite the influx of migrants, their numbers remained 15.3 percent lower than in 2019, the last year before the pandemic. And the potential outflow due to income reduction threatens to worsen the situation.

Migrant workers have several options to choose from, including a rapidly growing Turkey, as well as South Korea, according to an economist at a major financial company. Russia, he said, will have to start competing for migrants, including by raising their wages. It is unclear whether there will be anything to protect them from the risk of mobilization.