Regional : Reinvigorating Regional Cooperation in South Caucasus and Central Asia Amidst External Shocks

Industry and trade / Industry and trade sector development

Public sector management / Economic affairs management

The Russian invasion of Ukraine as well as other regional conflicts in 2022 produced multiple political, economic, and social spillovers on the CCA economies. The effects for CCA include high inflation, supply chain disruptions, reorientation of trade flows, the emergence/increase of re-exports to Russia, changing patterns in labor, and other international migration. Some of these spillovers were positive for the CCA economies, e.g., large scale re-exports of goods to Russia, inflow of Russian migrants and associated growth in exports of travel, hotel, rental, financial and other services to this economy, relocation of businesses from Russia to some of these economies (for example, Armenia and Kazakhstan). Contrary to initial expectations, most countries of the region appeared to become net beneficiaries of these changes demonstrating good economic growth rates in 2022. However, many negative effects (e.g., supply chain disruptions, increased trade costs, high inflation, damage to investment climate due to general level of uncertainty and increased risk perceptions) have significant chances to be lasting while some positive effects (inflow of skilled Russian migrants and their capital, part of re-exports) may be fading away. In the long-term, the CCA economies may face many challenges for their social and economic development.

The response to these challenges would imply finding new trade partners and investment sources, reducing trade costs, restructuring value chains, and many other actions by the governments, societies, and companies in the region. Most CCA countries are members of the Central Asia Regional Economic Cooperation (CAREC) program, which serves as a flexible and effective platform for regional cooperation in the region. Strengthening and reinvigorating regional cooperation under CAREC is crucial to address the above-mentioned challenges in the new regional context. Based on this assessment, CAREC and other regional stakeholders may then review and adjust the existing and new channels of cooperation to meet the new challenges.

The above-mentioned assessment requires the systematic collection of additional information on the Russian invasion of Ukraine-related developments which are not sufficiently reflected in official statistics and existing studies and receive only fragmented coverage in the media. The impacts of the Russian invasion of Ukraine include, but are not limited to: (i) changes in the population's welfare attributable to this crisis (consumer prices, wages/employment on the domestic labor market, gender, regional and other inequality, labor and other migration patterns, and remittances); (ii) changes in production, trade, and transit systems (supply chain disruptions, new supply chain development, creation, diversion and destruction of exports and imports of goods and services including tourism and financial ones, changes in product and partner composition of trade, emergence/increase of re-exports to Russia, exploration and development of new transit routes, relocation of businesses to/from the region); (iii) changes in sanctions regime and compliance, anti-money laundering review and reporting duties; (iv) changes in financial systems (currency exchange arrangements, demand for banking services, acceptance/issuance of different types of banking cards, changes in the currency composition of trade and other international financial flows); (v) governments' economic and social policy responses to the crisis (including trade, fiscal, monetary, labor market and other policies); and (vi) changes in incentives and barriers for and adjustments in the ongoing and planned regional cooperation and integration initiatives. Many of these changes are still ongoing, so this makes it necessary to track them over time starting as soon as possible to ensure that the policy advice based on available evidence remains relevant.

The TA is aligned with ADB Strategy 2030 operational priority (OP) 6 on Strengthening Governance and Institutional Capacity, and OP7 on Fostering Regional Cooperation and Integration. It is also aligned with CAREC 2030 strategy's operational clusters 2 (trade, tourism, and economic corridor), and 3 (infrastructure and economic connectivity). The TA will bring regional benefits to CCA countries through jointly addressing new challenges inflicted by the Russian invasion of Ukraine and other conflicts in the region, by invigorating regional cooperation to maintain sustainable trade and growth in the region.

Economic resilience of the CCA economies enhanced.

Socioeconomic, trade and transit policy response options for new forms or directions of regional cooperation accepted for consideration by the CCA governments

Data on the socioeconomic impact on CCA economies of the Russian invasion of Ukraine systematically collected and analyzed

Regional trade (including energy trade) flow analysis conducted and effects of trade reorientation and/or supply chain disruption quantified

Existing and alternative transit options for the regional economies assessed