Asia Small and Medium-Sized Enterprise Monitor 2022: Volume II—The Russian Invasion of Ukraine and Its Impact on Small Firms in Central and West Asia

This thematic chapter shows how the Russian invasion of Ukraine and related sanctions are affecting micro, small, and medium-sized enterprises (MSMEs) in Central and West Asia and suggests policy responses to mitigate the impact. It draws on the results of business surveys in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan carried out six months after the start of the invasion. It assesses the invasion’s macroeconomic impact, outlines its effect on global supply chains, and explores MSME responses. Highlighting how countries are converting risks into opportunities, it notes that strengthening domestic commodity markets and increasing digitalization and available capital could help make MSMEs more resilient.

pandemic seriously affected most economies in Central and West Asia. gross domestic product (GDP) fell sharply, leading to an overall 2.0% contraction in 2020. The recovery came quickly, however, with GDP growing by 5.7% in 2021, in part due to large government assistance packages. But the Russian invasion of Ukraine that started in February 2022 sapped their growth momentum and increased inflationary pressures. The region is forecast to grow by 3.9% in 2022 with inflation rising from 8.9% in 2021 to 11.5%. 1 Based on the Russian Federation's trade data, exports of goods to Central and West Asia-the region's imports from the Russian Federation-reached $32.7 billion in 2021. The Russian Federation's imports from the region-Central Asia's goods exports to the Russian Federation-amounted to $11.7 billion. All economies in the region, especially Kazakhstan, rely on international trade with the Russian Federation. Thus, the invasion and associated global sanctions against the Russian Federation seriously affected the region and its businesses, including micro, small, and medium-sized enterprises (MSMEs)-about one-third are exporters.
In Central and West Asia, MSMEs contribute significantly to national economies. The Asia Small and Medium-Sized Enterprise Monitor (ASM) 2022 Volume I of the Asian Development Bank (ADB) showed that they accounted for an average 98.9% of all enterprises, absorbed 46.1% of the labor force, and generated 40.7% of a country's GDP, based on available data through 2021. They also contributed on average 32.4% of export values during 2015-2021, higher than the Southeast Asia average (19.2%). Thus, it is critical to strengthen MSME dynamism to help create resilient, inclusive growth amid current global uncertainty. It is thus crucial to monitor the macroeconomic and firm-level impact from crises-including the Russian invasion of Ukraine-so governments can design the best workable MSME development policies. This volume first reviews the initial macroeconomic impact of the invasion on the region, and the Russian Federation's role in global value chains. It then simulates the potential impact on the region based using the ADB Multiregional Input-Output Table for 2021 (Section 2), followed by a review of Central and West Asian country responses to the invasion (Section 3). It then discusses the firm-level impact of the invasion on microenterprises and small firms, based on findings from a series of rapid surveys conducted during July 2022-August 2022 in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan (Section 4). Section 5 concludes.

Macroeconomic Impact
T he Russian invasion of Ukraine strained the global economy further just when it was recovering from the effects of the COVID-19 pandemic. The invasion is having significant economic impact among the developing economies of Central and West Asia-due to their geographic proximity, historical ties, and economic links with the Russian Federation. This chapter analyzes the impact of the Russian invasion of Ukraine on these economies from a macroeconomic perspective. After 9 months-at the time of this writing-the outcome of the invasion remains uncertain, which makes it difficult to fully assess its impact. Nonetheless, this section uses historical trends and latest available information to gauge the extent of its macroeconomic consequences.
First, we investigate the economic growth and inflation rates in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan based on the forecasts provided in ADB's Asian Development Outlook (ADO) 2022 and its July and September updates. Second, we investigate the region's trade dependence with the Russian Federation-trade in goods and services. Third, we examine the role the Russian Federation plays in global value chains (GVCs) by looking at value-added trade flows and GVC participation in key sectors-mining and quarrying, and manufacturing of coke, refined petroleum, and nuclear fuel. It includes a discussion of the Russian Federation's relative position in global supply chains. Fourth, we examine how the Russian invasion of Ukraine and the sanctions imposed by different countries can affect global trade. Simulations are applied to the ADB Multiregional Input-Output Table (MRIOT) for 2021 to estimate the invasion's potential impact under certain scenarios. Input-output simulations suggest the imposed sanctions can lead to production chain disruptions, not just within the borders of the Russian Federation but also worldwide.

Macroeconomic Statistics
This section highlights the macroeconomic situation in Central and West Asia, particularly how the COVID-19 pandemic hurt the region's economies, their V-shaped recovery, and how the economic situation was upended by Russian invasion of Ukraine.
Most economies in the region were growing steadily prior to the pandemic-Armenia's growth decelerated from 7.5% in 2017 to 5.2% in 2018, yet grew by 7.6% in 2019. As in other regions, Central and West Asia also suffered due to the COVID-19 pandemic, with several economies contracting in 2020. Tajikistan and Uzbekistan continued to grow, although muted, while the others suffered GDP losses. The region bounced back a year later-with Georgia, Kazakhstan, Tajikistan, and Uzbekistan accelerating fast enough to compensate for their pandemic losses.
The Russian invasion, however, severely disrupted the outlook for developing Asia (ADO 2022), with forecast growth rates for 2022 adjusted downward. Next to East Asia, the Caucasus and Central Asia is expected to have the largest decline in growth for 2022 ( Figure 1). In ADB's ADO release in April 2022, the region's growth rate was to slow to 3.6%, largely driven by the invasion. Updated forecasts in September show slight improvement in the region's economic growth prospects, with the region's economy now forecast to grow by 3.9%.
Despite the region faring better than initially expected, economies can expect decelerated growth in 2022 ( Figure 2). The effects of the Russian invasion of Ukraine transcend borders, and these are aggravated among neighboring economies, particularly those dependent on the Russian Federation and Ukraine as major trading partners.
Armenia's outlook for 2022 is adjusted upwards in the latest ADO release, with its strong first quarter growth of 8.6% and 13.0% in the second quarter. As the economy began to ease border restrictions, money transfers and an influx of foreign visitors contributed to the economy's strong growth. Armenia is forecast to reach a growth of 7.0% for 2022. Similarly, Azerbaijan also posted strong first quarter growth of 6.8%, yet the economy is forecast to grow at a more moderate growth rate of 4.2% for 2022. Georgia's growth rate in 2021 was a high 10.6%. It also posted a first quarter growth rate of 14.9% in 2022. However, its economic growth is currently forecast at 7.0%. The same is true for Tajikistan, with its 9.2% growth in 2021 forecast to slow to 4.0% in 2022.
The Kazakhstan economy grew by 4.0% in 2021, and accelerated to 4.6% in the first quarter of 2022. However, growth weakened in the first half of 2022 to 3.4%. Among the economies in the region, Kazakhstan has been significantly affected by the crisis as high inflation and high interest rates led to a contraction in domestic consumption and slowed business activity. The growth forecast for 2022 remains at 3.0% as high oil and gas prices will likely cushion the effects of the crisis, as the Russian Federation remains the prime destination for Kazakhstan exports.
The Kyrgyz Republic's economy expanded modestly by 3.6% in 2021, unable to counter the 8.4% GDP contraction in 2020. Looking ahead, the Kyrgyz Republic is still expected to slowly recover with its economy forecast to grow by 3.0% in 2022, due to factors such as constrained domestic demand, high inflation, and restricted trade. The economy grew by 5.4% as of the first quarter of 2022, and primarily driven by improvements in agriculture, construction, industry, and services. Turkmenistan is forecast to grow by 5.8% in 2022, slightly higher than its growth rate in 2021. As with the other economies in the region, Turkmenistan saw a strong first quarter 2022 growth rate of 6.2%. For Uzbekistan, first quarter growth (5.8%) was higher than its 2.6% growth rate for the same quarter in 2021. Uzbekistan's economy is currently expected to grow by 4.0% in 2022, down from 7.4% growth in 2021. -. -. -.
-. Despite the region's geographic proximity to both the Russian Federation and Ukraine, most economies in Central and West Asia showed some resilience or even performed stronger than earlier forecasts. One possible explanation is that the economic consequences of Russian invasion of Ukraine have yet to play out fully, so the effects may only be seen later on. Proper economic management and good foresight are needed to counter geopolitical uncertainty. If uncertainties persist, the region will likely see moderate growth in 2022.
Higher inflation rates are forecast for 2022 for all regions in Asia, most pronounced in Central and West Asia. Because the Russian Federation is a major global oil exporter, trade sanctions could also significantly affect commodity prices across much of the world, including in Asia and the Pacific (Figure 3). -. -. -. -.
-.  Year-on-year inflation across Central and West Asia has been fluctuating ( Figure 4). Even before the pandemic, some economies already had double-digit inflation rates. Uzbekistan, for example, had an inflation rate as high as 17.5% in 2018, followed by persistent double-digit inflation in succeeding years (its lowest in 2021). Turkmenistan inflation has also been high recently. Armenia had the most stable prices. In 2021, all economies in the region saw prices rise, from 6.7% in Azerbaijan to 12.5% in Turkmenistan.
Monthly inflation statistics to June 2022 show that high inflation rate persists, exceeding the figures in 2021 ( Figure 5). Latest available data show all economies at double-digit rates. This reflects the global supply chain disruptions primarily driven by the impact of Russian invasion of Ukraine. In particular, the dependence of several economies on the Russian Federation's oil product exports makes them highly vulnerable to cost-push pressures.
To understand the macroeconomic implications, it is important to look at the bilateral trade flows of goods and services to and from the Russian Federation with respect to Caucasus and Central Asian economies.

Trade in Goods and Services
Russian invasion of Ukraine continues to seriously affect trade across economies in the region. The greater the bilateral trade flows, the greater vulnerability to external shocks like the invasion. This subsection examines the extent of bilateral trade of Central and West Asian economies with the Russian Federation. While the invasion also affects those countries that trade with Ukraine, only trade in goods and services with the Russian Federation are examined here, as it has more impact on the region-the region accounts for just 2% of goods and services traded by Ukraine; bilateral trade statistics with Ukraine are included in the annexes.

Trade in goods
The Russian Federation has a merchandise trade surplus with Central and West Asia. In 2021, its exports of goods to the region reached $32.8 billion, while its imports of goods from the region totaled $11.7 billion. Central and West Asia was the destination for 6.7% of merchandise exported by the Russian Federation, with the region the source of 4.0% of goods imported by the latter.
Within the region, the Russian Federation exports the largest amount of goods by value to Kazakhstan ($18.5 billion), followed by Uzbekistan ($5.2 billion), Azerbaijan ($2.3 billion), and the Kyrgyz Republic ($2.2 billion). It imports the most goods from Kazakhstan ($7.1 billion), Uzbekistan ($1.7 billion), and Azerbaijan ($1.0 billion) (Table 1).  Among the top commodities exported by the Russian Federation to the Caucasus and Central Asia are mineral and fuels ($3.1 billion), iron and steel ($2.8 billion), nuclear reactors and boilers ($2.6 billion), vehicles ($1.9 billion), along with electrical machinery and equipment ($1.7 billion). Its top commodity imports from the region are iron and steel ($2.0 billion); ores, slag, and ash ($1.9 billion); fruit and nuts ($0.7 billion); mineral fuels ($0.5 billion); and beverages, spirits, and vinegar ($0.5 billion). The top 10 commodities exported to Central and West Asia account for 57% of its total merchandise exports to the region. Similarly, the top 10 commodities imported from the region account for 67% of its total merchandise imports. Kazakhstan dominates both the top commodities exported to and imported from the region, as it accounts for the bulk of goods traded with the Russian Federation (Table 2).  Armenia  254  23  103  102  72  50  30  47  59  62  Azerbaijan  74  110  104  103  226  87  254  51  105  305  Georgia  188  26  31  5  71  18  26  22  63  53  Kazakhstan  1,207  1,619  1,826  1,288  1,100  963  481  970  238  246  Kyrgyz Republic  768  193  79  34  54  69  108  62  58  59  Tajikistan  347  86  19  21  22  21  119  21  91  1  Turkmenistan  4  29  38  30  12  61  21  10  56  0  Uzbekistan  306  724  448  290  192  464  580  169  365  3  Total Exports  212,418 28,889 10,778  3,740  6,139  3,970  11,749  6,178  5,351  9,174   Table 1 continued continued on next page A heat map on the import dependence of Central and West Asian economies on the Russian Federation by commodity follows the World Customs Organization's Harmonized System (HS) Classification ( Figure 6). Import dependence is calculated as the percentage share of imports of commodity i sourced from the Russian Federation to the total imports of commodity i reported by each economy in the region. Among the seven economies covered, Kazakhstan has the highest commodity import dependence on the Russian Federation. Some 35% of Kazakhstan goods imports are sourced from the Russian Federation, followed by Armenia (34%), the Kyrgyz Republic (33%), and Tajikistan (30%). The least import-dependent economies are Georgia (10%), Azerbaijan (18%), and Uzbekistan (22%).
Mineral fuels is the top commodity imported from the Russian Federation by Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Tajikistan. Among these economies, import dependence ranges from 20% (Georgia) to as high as 86% (Kazakhstan). There is also high import dependence for agricultural commodities such as cereals, animal or vegetable fats, meat, fish, and crustaceans, and cocoa. Likewise, the region also has significant import dependence on chemical-related products such as fertilizers, soap and organic surface-active agents, and explosives and pyrotechnic products. Wood products and metal products (such as iron and steel, aluminum, lead, and tin) are also imported by Central and West Asia.  Note: Imports dependence on the Russian Federation is calculated as the percentage share of imports of commodity i from the Russian Federation to the total imports of commodity i by the reporting economy. Imports dependence is derived using the most recent available Comtrade data for Central West Asian economies: Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Uzbekistan reflect 2021 data, while Kazakhstan and Tajikistan reflect 2020 data. There is no data available merchandise imports data for Turkmenistan (as the reporting economy). Trade value for imports by two-digit HS classification codes were used as reported by economies of interest.

Trade in services
The Russian Federation exports more services to Central and West Asia than it imports (Table 3). According to the latest available data (2019), it exported $4.8 billion worth of services to the region, with imports amounting to $3.2 billion.
Exports of services to the region is about 8.8% of its total services exports, while its imports from the region equal 3.8% of its total imports of services. A substantial proportion of the Russian Federation's trade in services is with Kazakhstan, which makes up about half of services exports to Central and West Asia, and two-fifths of services imports from the region.

The Russian Federation's Role in Global Value Chains
Cross-border fragmentation of production-or global value chains (GVCs)-made producing goods and services much more efficient, by offshoring production processes to economies holding comparative advantage. However, it also increased vulnerabilities to external shocks such as Russian invasion of Ukraine. Given the level of globalization, production shocks in one region can have repercussions worldwide. In this subsection, we use ADB's Multiregional Input Output tables and database to quantify the extent of potential impact of Russian invasion of Ukraine on GVCs.
Value-added trade flows between the Russian Federation and other regions are measured for mining and quarrying, and for manufacturing of coke, refined petroleum, and nuclear fuel ( Figure 7). These are the top two sectors generating substantial export value added. The share of value-added flows from the manufacturing of coke, refined petroleum, and nuclear fuel exceeds the share of value-added flows from mining and quarrying.
The Russian Federation exports more value added than it imports, suggesting that, for these sectors, it is more of a supplier than purchaser globally. Value-added flows from the Russian Federation to other parts of the world even exceeds the value-added trade flows from some regions. Value added from the "Rest of the World" is also substantial as it includes other major oil-exporting economies from the Middle East and North Africa.
For mining and quarrying, a substantial portion of value-added exports from the Russian Federation is absorbed by Europe and Central Asia; the People's Republic of China (PRC); and other economies in East Asia, Southeast Asia and the Pacific. A huge portion of value added generated by the manufacturing of coke, refined petroleum, and nuclear fuel go to Europe and Central Asia, the Americas, and Rest of the World. Source: Authors' calculations using ADB Multiregional Input-Output Table 2021.
The Russian Federation's forward and a backward GVC participation can also be compared against economies including the United States (US), Australia, the PRC, Germany, Canada, and Kazakhstan ( Figure 8). It is one of the most forwardly integrated economies for mining and quarrying, closely followed by Kazakhstan. Since 2018, forward GVC integration has generally declined, with a slight uptick in 2021.
By contrast, the Russian Federation has the lowest backward GVC participation rate in terms of mining and quarrying. The high domestic value-added content of its exports of coke, refined petroleum, and nuclear fuel is clear from its high forward GVC participation. Similar to mining and quarrying, the manufacturing of coke, refined petroleum, and nuclear fuel also has low backward linkages. This is indicative of then relatively small share of foreign value-added in the Russian Federation's exports in these sectors. The Russian Federation's position in GVCs is more upstream than most other economies ( Figure 9). The "upstreamness index" is defined as the average distance of output to final use. This measures the relative position of an economy in terms of GVCs-represented by the distance from the center. On average, the Russian Federation's production is 2.5 stages away from final consumption. This is also indicative of its role in GVCs-a supplier of production inputs for most economies. As expected, mining and quarrying is generally farther away from final consumption than the manufacturing of coke, refined petroleum, and nuclear fuel. The Russian Federation is a significant supplier of intermediate inputs, also evident in its relatively upstream position in GVCs. Hence, trade disruptions are expected to have sizable impact on GVCs.   Source: Authors' calculations using ADB Multiregional Input-Output Table 2021.

Simulation Results from Input-Output Analysis
The potential economic impacts of the invasion can be quantified using an approach that deals with how sectors within and across borders are connected. The effects echo outside the Russian Federation and Ukraine because of global trade-the dependence cross-country intermediate demand and supply in the production of goods and services. This reliance was challenged when trade sanctions were imposed on the Russian Federation following its invasion of Ukraine with the aim of crippling the former's economy and discouraging any aggression due to limited supplies. Global trade, as a series of bilateral transactions, would mean that sanctions imposed on the Russian Federation could potentially harm its partner's economy, and their partner economies as well. This also suggests new demand for countries with available substitutes in case the Russian Federation's goods and services are restricted through the trade sanctions.
According to the dashboard that tracks sanctions on the Russian Federation in real time, there are a total of 9,202 additional sanctions since 22 February 2022. 2, 3 The nature and degree of sanctions imposed against the Russian Federation vary by economy. Those imposing major sanctions include the 27 member European Union (EU) countries, the US, United Kingdom (UK), Switzerland, Canada, Japan, and Australia. Other economies imposing sanctions include Norway; Iceland; Singapore; Finland; the Republic of Korea; and Taipei,China. Sanctions imposed against the Russian Federation involve freezing assets and travel privileges of targeted Russians, businesses, and state-owned enterprises. They also include prohibitions of financial instruments; removal from the SWIFT international payment system; and trade prohibitions of high-end technical equipment and components from electronics, telecommunications, oil refineries, and aerospace sectors. There are also trade prohibitions among dual-use goods (items with civilian and military purposes).
There is a ban on oil imports by these economies, with Germany also freezing plans for the opening of the Nord Stream 2 gas pipeline from the Russian Federation. Russian Federation flights are banned in economies such as the US, the UK, the EU, and in Canadian airspace. Logistics are also affected by restrictions on ships and trains to and from the Russian Federation. In response, the Russian Federation has banned exports of more than 200 products, including telecommunications, medical, vehicles, agricultural, electrical equipment, and timber. All these sanctions and disruptions are expected to affect GVCs and thus can slow the post-pandemic trade recovery.
The potential impact to these economies, after imposing trade sanctions on the Russian Federation, is estimated using input-output analysis. Using ADB's Multiregional Input-Output Table (MRIOT) 2021, simulations for two cases were conducted (Box 2.1). The first explores the extreme case in which the Russian Federation becomes autarkic with the entire world cutting off trade. This is the upper-bound of the estimated impact, suggesting a worst case scenario for the global economy. The second is more realistic, considering only sanctions imposed by respective economies to specific sectors. This is the lower-bound of the estimated impact.
Two models were also considered regarding input substitution across economies. One is a model that does not consider any redirection by applying 100% restriction on Russian Federation exports and imports without any replacement or substitution of lost inputs. Without redirection, various sectors face a reduction in foreign inputs and would reduce production, not just in the Russian Federation. However, production technology is fixed in the short run implying the same number of necessary inputs would be available for the sector to continue production. Thus, another model examines the possibility of redirection where restricting 100% of the Russian Federation's exports and imports requires the replacement of lost inputs by redirection.
This subsection presents the economic impact of the crisis on the world and to different regions, particularly Kazakhstan and the Kyrgyz Republic as part of Central and West Asia. Only two economies from the region are included among the 62 economies (plus the Rest of the World) covered by the ADB MRIOT 2021.

Box: Methodology (Input-Output Analysis)
The ADB Multiregional Input-Output Table 2021 covers final demand, intermediate consumption, value added, and gross output, along with imports and exports of each economic sector. Trade sanctions, when restrictive, implies limits on imports and exports of goods and services to and from the Russian Federation.
For the first case where the Russian Federation is autarkic, assuming no redirection, all imports and exports are zeroed out. In the table, the rows and columns pertaining to the Russian Federation are assumed to be zero except for domestic transactions. After defining the new table, gross output and value added are estimated using the Leontief output model. It is an input-output methodology that makes use of the technological requirements of each sector of an economy and their dependence on one another to allow the researcher to capture the direct and indirect components of production.
The Leontief output model is defined as X = (I -A) -1 Y where X is the gross output, I is the identity matrix (or a diagonal matrix of 1s), A is the technical coefficients matrix, and Y is final demand. The technical coefficients matrix is the share of sector j's intermediate consumption of sector i to the gross output of sector j. With redirection, the additional imported inputs of an economy's sector j would depend on the share of imported inputs of sector j from every economy sector i to the total imported inputs of sector i goods and services excluding the Russian Federation. It is important to highlight that redirection is not likely to happen in the short term, as this involves huge investments (in logistics, infrastructure, machinery and equipment) and well-established networks of firms involved in global production sharing; and may require long-term structural changes across economies.
For the second case, the restriction of imports and exports to and from the Russian Federation would only be assumed on economies which imposed sanctions a -the United States; the United Kingdom; economies in the European Union; Switzerland; Norway; Japan; Canada; the Republic of Korea; Taipei,China; Singapore; and Australia. There are 37 ADB MRIOT economies with restricted trade with the Russian Federation. Specific sectors were considered for each economy. For example, Singapore would not export goods and services to the Russian Federation from other machinery, electricals, telecommunications, and finance. On the other hand, Australia would have zero exports to the Russian Federation from mining and finance and would not import goods and services from the latter's refined fuels, electricals, and utilities sectors. The same methodology is used for the "no redirection" and "with redirection" scenarios.
a Trade sanctions as of 7 September 2022..

Results
The maximum impact the Russian Federation could expect under trade sanctions would be a 35.4% loss of its GDP with the economy closed to the world. This is close to the findings of Langot et. al. (2022) which used a model developed by Baqaee and Fahri (2021)-which suggested the Russian Federation's total cut-off from the world would lead to a 33.01% drop in GDP. Of the gross value added loss incurred by the Russian Federation, 44% came from mining and quarrying; basic metals and fabricated metal; and coke, refined petroleum, and nuclear fuel. These would not be affected by redirection as they are a closed economy under case 1. For a more realistic impact, economy-specific sanctions would reduce the Russian Federation's GDP by 7.5% with redirection and 9.3% without. Its GDP for 2022 was forecast to grow by 8.5% according to the International Monetary Fund's April assessment. This was adjusted down to a -6% contraction. Studies conducted by the Economist Intelligence Unit (EIU 2022) projected a real GDP contraction for the Russian Federation in 2022 of -7.5%.
A policy brief from a semigovernmental institute from Japan, authored by Kumagai et. al (2022), used a Geographical Simulation Model, where GDP changes through changes in the supply and demand of goods and prices, among other factors. They find that economies significantly affected-aside from the Russian Federation-included Central Asian economies, the PRC, and Mongolia. Using the input-output analysis, the Caucasus and Central Asian economies incurred the highest loss in GDP in both cases among Asia and Pacific economies. Mongolia ranked fifth among economies in terms of GDP losses. The PRC had the highest GDP loss in nominal terms.
Kazakhstan and the Kyrgyz Republic have the most to lose-and the most to gain-depending on the degree of redirection. According to ADB's Asian Development Outlook 2022, the effects of the crisis will be large for the Caucasus and Central Asia (particularly the Kyrgyz Republic and Kazakhstan) as well as for Mongolia-all having close trade and financial links with the Russian Federation. Kazakhstan would lose the most among Asia and Pacific economies. Without redirection, it could lose as much as -4.6% of GDP. Considering only sector-specific sanctions would still hit Kazakhstan most, with a GDP loss of -0.4%. Sectors most affected include electrical, transport equipment, chemicals, machinery, and mining.
The economy, however, could also benefit if other economies redirect their imports of crude petroleum and other related products from the Russian Federation to Kazakhstan. The economy could expect a boost of between 2.1% and 3.7% of GDP-the highest among Asia and Pacific economies. With redirection, mining and quarrying could gain as much as 19% in gross value added (GVA) ( Figure 10). Also, refined fuels would gain a maximum 3.3% in GVA if the Russian Federation closes off its trading ties with the world-thereby increasing the demand for Kazakhstan's crude petroleum. Even if the Russian Federation does not entirely close its economy, GVA in refined fuels would still gain 2.4%.
Redirection to the Kyrgyz Republic could raise GDP by 0.1% to 2.4% ( Figure 11). In case 1, it would offer a cushion from the maximum impact without redirection. Manufacturing could gain by 3.5% of GVA given the additional demand. In the more realistic case 2 scenario, sectors that would benefit are mining, metals and minerals, rubber and plastics, and refined fuels. However, as redirection is not a short-run solution, these sectors could expect a loss of -0.2% to -4.2%. The textiles sector and transport equipment would incur immense losses as more than half of their GVA would be lost. Nevertheless, if the crisis persists, long-term investments in labor and capital to accommodate additional demand could bring national GDP gains of from 0.1% to 2.4%.
The world would expect a maximum loss of -1.0% in global GDP in case 1, but the case 2 close-to-reality scenariowithout redirection-suggests a loss of -0.2%. Kumagai et al. (2022) find that in the case where 100% of the Russian Federation's exports and imports are cut off, global GDP will decline by -0.7%. Even if other economies offer substitute intermediate inputs, the world economy would still suffer losses to as much as -0.5%. This implies that losses from sanctions remain higher than the value added from redirection. Nevertheless, many regions gain more than they lose, which means new trade with other economies-redirection-adds to economic growth (Table 4).
A policy brief from the Bank of Finland by Simola (2022) found that medium-high and high-technology industries will be hurt most. The results of the estimation using MRIOT are similar ( Figure 12). As expected, targeted sectors-mining, refined fuels, and chemicals-are most adversely affected. Production in sectors heavily reliant on sanctioned products will also be affected-such as machinery, inland transport, metals, and electrical. Even with redirection, these are still significantly affected, suggesting effective sanctions could cripple the Russian Federation's supply of these products. In the extreme case 1, mining, refined fuels, and metals would face the most supply chain disruption.   -. -. -. -. -. -. -. -. -. -. -. -. -. -. . -. . -. -.

Mining
Refined Fuels Metals Transport Equipment Textiles Leather Machinery, NEC

Conclusion
Macroeconomic conditions in the Caucasus and Central Asian region have yet to fully reflect the economic impact from Russian invasion of Ukraine. Most economies in the region have done better than initially forecast. The region is close to both the Russian Federation and Ukraine, but despite the geographic proximity, it has shown some resilience. However, disruptions to GVCs due to trade sanctions against the Russian Federation could affect the region in the future.
Despite the modest share of Ukraine and the Russian Federation in global GDP and trade, the invasion could have consequences for global production, particularly in Central and West Asia. Trade statistics suggest that the region's economies have significant trade ties with the Russian Federation. In general, the Russian Federation exports more goods and services than it imports from individual Central and West Asian economies. Mineral fuels are the top commodity exported by the Russian Federation. There is high import dependence on the Russian Federation generally for some agricultural commodities, chemical products, and for wood and metal products. Disruptions to production are magnified because of the Russian Federation's significant role in GVCs, primarily as supplier of intermediate goods produced in sectors such as mining and quarrying, and manufacturing of refined fuels.
An input-output analysis simulated the macroeconomic impact of the invasion on the region, considering the various trade sanctions against the Russian Federation. The methodology allows an estimation of the potential impact on the region following two scenarios: (i) when 100% of imports and exports to and from the Russian Federation are restricted and (ii) only sanctions on specific sectors are considered. The methodology also allows for a possibility of import substitution ("redirection") when an economy loses foreign inputs.
The results suggest that the region's economies will lose some GDP in both cases. Kazakhstan and the Kyrgyz Republic have the most to lose and yet the most to gain, depending on the degree of redirection. With no import substitution, Kazakhstan could lose as much as -4.6% of GDP. With sector-specific sanctions, the worst impact would again affect Kazakhstan with an estimated GDP loss of -0.4%. The most-affected sectors include electrical, transport equipment, chemicals, machinery, and mining. With trade redirection, substituting inputs previously imported from the Russian Federation, Kazakhstan could expect a GDP gain between 2.1%-3.7%. The Kyrgyz Republic could see a loss in GDP of -0.2% to -4.2%. Textiles and transport equipment would suffer most. With redirection, the Kyrgyz Republic's GDP would gain by 0.1% to 2.4%.
With the geopolitical situation evolving rapidly, understanding the full macroeconomic impact remains difficult. However, ADB's Multiregional Input Output Table allows researchers to gauge potential economic effects of Russian invasion of Ukraine. The input-output methodology also allows the flexibility to incorporate latest events as they occur.   Note: Import dependence is calculated as the percentage share of imports of the commodity from Ukraine to the total imports of commodity by the reporting economy. Import dependence is derived using the most recent available Comtrade data for Central and West Asian economies-Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Uzbekistan reflect 2021 data, while Kazakhstan and Tajikistan reflect 2020 data. There is no data available on merchandise imports for Turkmenistan (as reporting economy). Trade value for imports by two-digit Harmonized System classification codes were used as reported by the economies.

country Responses
T he magnitude of external shocks triggered by the Russian invasion of Ukraine differs by country across Central and West Asia. For the South Caucasus countries of Armenia and Georgia, the initial downside risks have morphed into opportunities-from higher remittances, and inflows of tourists and skilled laborfueling double-digit growth during the first half of 2022. Azerbaijan, an oil-exporting country, benefited from high prices of hydrocarbons, partially balanced by inflation from the global surge in food prices.
In Central Asia, Kazakhstan and Uzbekistan maintained moderate economic growth, while the Kyrgyz Republic and Tajikistan economies grew much stronger. Given the private sector's dominant share of GDP (from 40% to 70%), the impact on private businesses was mitigated by timely policy response measures in the Kyrgyz Republic, Tajikistan, and Uzbekistan. However, without sufficient fiscal buffers or sovereign wealth funds, these countries approached their development partners for emergency financing support to implement policy measures tailored to affected businesses, vulnerable groups, and those providing food security, among others.

Armenia
Armenia continued its robust growth during the first half of 2022 despite close links with a contracting Russian Federation economy. However, higher commodity prices affected the local cost for food, boosting household costs. Other than that, several opportunities for human resources and capital inflows appeared. As large companies left the Russian Federation market, several were attracted to start business activities in Armenia. Also, the supply deficits in the Russian Federation could be filled by Armenian companies exporting Armenian products. Armenia has sufficient production potential to increase its exports to the Russian Federation.

Azerbaijan
Azerbaijan has no comprehensive anti-crisis plan related to Russian invasion of Ukraine. Revenues grew from higher oil prices, its external position remains solid, and slowing remittances did not create significant risk to the current account balance. However, Azerbaijan was hit by a disruption in food supply and higher inflation, which required some ad hoc policy initiatives.
The impact was mainly felt in Azerbaijan's food sector, especially the production of wheat. In response, a presidential decree was issued in July 2022 "On number of measures to increase level of self-sufficiency with food wheat." Based on this, the government is using additional subsidies to increase domestic wheat production. Farmers, including micro, small and medium-sized farms, will be able to benefit from these over the coming 5 years.

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The Russian Federation and Ukraine are major producers of agricultural commodities. Supply disruptions created a shortfall in food supplies, however. To stimulate more crop production for import substitution, the government provides stimulus via financial support per cultivated hectare on crops such as wheat, barley, and cotton-25% in cash and 75% in fertilizer. A concessional leasing program for agriculture machinery (government pays 50% of the cost) helps reduce the cost of crop production. Farmers also receive subsidies on fuel-after diesel prices increased in 2021-depending on the type of crop grown.

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The government increased civil service wages by 20% in response to rising inflation and adjusted minimum salaries from AZN250 to AZN300. This somewhat offset higher inflation and helped protect the vulnerable population. A stable exchange rate reduced inflationary pressure on imports, while the government set price controls on utilities. Agriculture is tax exempt, except land taxes, which are very low.
However, while remittances from the Russian Federation hold just a marginal share of GDP, they account for a significant part of disposable income for many rural families. High global food prices and increased costs for fuel and utilities in 2021 boosted inflation in services. The central bank raised its policy rate by 50 basis points (bps) in two steps to 7.75% in March 2022, maintaining it through July 2022 as inflation moderated.

Georgia
Georgia has not taken any direct measures related to Russian invasion of Ukraine. The economy has remained remarkably resilient to the crisis and in fact has been a large positive shock-double-digit growth in 2022 on top of a double-digit V-shaped recovery in 2021-the country did not need any anti-crisis program.
The COVID-19 pandemic and the Russian invasion of Ukraine reduced foreign trade and created export problems for entrepreneurs. To promote export growth of small and medium-sized businesses, Enterprise Georgia launched an Export Assistance Program that helps eliminate barriers and introduces incentives to aid in diversifying markets, products, and services; identify products with high export potential; and promote international sales. The program has several components: (i) introducing international auditing standards to obtain an international quality certificate and product license (up to GEL20,000); (ii) developing a brand formation and development strategy, rebranding and product packaging based on a "brandbook" (GEL20,000); and (iii) promoting foreign sales by joining international trade networks in the Middle East, the EU, the UK, the US, Canada, and Japan (up to EUR10,000 in national currency). The Export Assistance Program will be available nationwide, specifically in Imereti, Kakheti, Guria, Racha-Lechkhumi and Kvemo Svaneti as pilot regions.
With double-digit consumer price inflation, the central bank raised its policy rate by 50 bps to 11.0% in March 2022 to help manage inflationary expectations. After some volatility following Russian invasion of Ukraine, the currency appreciated, which helped contain imported inflation.

Kazakhstan
Following Russian invasion of Ukraine, a National Action Plan was approved by presidential decree on 29 March 2022, consisting of 36 measures under 10 categories. One is "Priority Anti-Crisis Measures." The Ministry of National Economy, together with relevant state agencies, developed an Anti-Crisis Action Plan for 2022 to mitigate emerging risks to socioeconomic development. The plan deals with ensuring stability of the financial system, controlling and reducing inflation, supporting and promoting foreign trade, support for specific sectors, and attracting investments. The plan is expected to cost the National Fund KZT1 trillion in 2023 and KZT400 billion in 2024.

Kyrgyz Republic
The government was quick to respond to the crisis, adopting several resolutions in March 2022-June 2022 to relieve some of the impact on the poor and vulnerable. The support will cost $213.7 million (or 2.6% of GDP). 4 The government anti-crisis action plan includes measures covering three support areas: (i) Support for food security and price stability ($53.6 million). This includes building a stable supply of staple food and energy products, expanding agricultural crop cultivation, providing seeds and fertilizer to vulnerable groups of farmers, and supporting agricultural producers and encouraging cooperation. The government will focus on (a) importing seeds of different crops, diesel fuel, and nitrogenous fertilizers ($25.2 million); and (b) purchasing essential food and nonfood items (including grains, flour, sugar, and vegetable oil) to stabilize domestic prices ($28.4 million). These resources will be managed by the Fund of State Material Reserves under the Ministry of Emergencies, the agency in charge of the state revolving fund for food and agricultural inputs. (ii) Support for social protection and safety net programs ($45.6 million). To help people withstand the impact of the crisis on household incomes, the government will continue with planned increases in allowances, pensions, and safety net programs-(a) the size of monthly social benefits for people with disabilities will increase by 33%-120%; 5 and (b) starting 1 October 2022, provide $22 million to the social fund to increase pensions and social allowances for pensioners (almost 10% of the population receive pensions). (iii) Support for jobs and SMEs ($114.4 million). Measures include supporting and finding alternative destinations for migrant workers and offering public sector work. For businesses, the government plans to ease reporting requirements and defer penalties for entrepreneurs; support domestic producers; and promote investments, exports, and tourism. Measures include (a) improving access of Kyrgyz workers to information on job opportunities within and outside the country, and negotiate with governments of migrant-destination countries to increase quotas for Kyrgyz workers; (b) allocate $114.1 million by capital injection to two state-owned banks (Aiyl Bank and RSK Bank) to support refinancing and financing of loans to agricultural producers for developing value-chain agriculture and processing clusters to help provide food security, reduce losses, and promote export capacity; and (c) provide $1.4 million in currency risk to cover potential losses from export-oriented firms and to shift loans from foreign to local currency. This increase raises these benefits above the poverty line and provides beneficiaries with additional cash, important for the mostly rural recipients, where income is predominantly in kind.
Social assistance transfers will provide additional social protection to crisis-affected poor households through the government's targeted social assistance (TSA) program, a cash transfer mechanism for eligible poor households of TJS440 per household per year (in quarterly payments). The TSA started in 2014 with support from the World Bank, and is administered by the Ministry of Health and Social Protection (MOHSP). It currently covers about 224,000 poor households in all 68 districts, of which about 115,000 are women led. As a countercyclical response, the TSA will permanently add 26,000 households to the 250,000 total (of which at least 55% are headed by women) to benefit from a one-off additional transfer of TJS600 during September2022-October 2022. The eligible beneficiaries come from the MOHSP household database and income levels.
Food security measures ($70 million) include supply-side activities to boost domestic production and distribution of staple foods-including government imports and stockpiles of agricultural produce (potato, wheat, and oil crops). Agricultural inputs, including seeds and fertilizer, will be provided in kind to poor and vulnerable farmers during September 2022-October 2022 so they can grow agricultural crops in the next season. It aims to increase food supply and generate surpluses for restocking.
The stabilization measures ($100 million) support MSME operations and safeguard employment. MSMEs contribute about 15% of GDP and are disproportionately affected by external shocks. The measures include vocational training to returning migrants for reskilling and targeted concessional loans to MSMEs in need of urgent financing-primarily MSMEs engaged in agriculture or trade and services. The concessional loans for agricultural MSMEs will be provided through Amonatbank, a state bank with a very large branch network and access to rural and non-urban areas. The loans for MSMEs in trade and services will be provided through the State Unitary Enterprise Industrial and Export Bank of Tajikistan (Sanoatsodirotbank), which focuses on financing for production and exports.

Uzbekistan
As Uzbekistan was still struggling to recover from the COVID-19 pandemic, Russian invasion of Ukraine triggered another socioeconomic shock. The government was quick to respond to the crisis. During March 2022-May 2022, the government's approved countercyclical measures worth more than $1.2 billion. The measures prioritize (i) food security, price stability, and business support ($472 million); (ii) direct social assistance ($641 million); and (iii) entrepreneurship and employment support ($115 million). The measures predominantly target the poor and vulnerable, with at least 40% targeted for women.
In March 2022, the President signed a decree to support families receiving remittances. The government decided to import additional wheat from Kazakhstan to stabilize domestic prices. In April 2022, it established a Republican Special Commission to weekly monitor mitigation results. Another decree increased social protection payments to the vulnerable population. In May 2022, another decree set one-off social assistance payments to 8.9 million vulnerable people.
Several measures were taken to ensure adequate supply of essential household goods at stable prices: (i) Importing wheat ($240 million). The state-owned Uzdonmaxsulot (Uzbekistan grain products company) purchased 100,000 tons of wheat during April 2022-July 2022 and plans to purchase an additional 500,000 tons from Kazakhstan as needed from July 2022 to end-2022. (ii) Exempting value-added tax on essential food products ($125.8 million). To help stabilize prices, the government extended its value-added tax exemption (October 2021-April 2022) on the import and sale of vegetable oil, sunflower and flax seeds, soya pits, potatoes, meat and meat products, and livestock through end-2022. In addition, the production, processing, and the sale of these essential products are exempt from turnover tax until December 2022. (iii) Exempting customs duties for essential food products ($64.8 million). Imports in 22 product categoriesincluding meat, fish, milk products, fruits, and vegetable oil-are exempt from customs duties from May 2022 to January 2023. (iv) Maintaining public transport fees ($17.4 million). An additional direct subsidy will be provided to the Tashkent city public transport network to maintain existing tariffs and mitigate the burden of rising fuel prices during 2022. The subsidy will benefit nearly 3 million people, including more than 200,000 university students. (v) Subsidizing the increased transportation costs for exporters ($23.5 million). Since the onset of the pandemic, the government provided a 50% subsidy to cover transport costs for exporters, particularly to the EU. To cushion the higher cost of using alternative routes after regional supply chain disruptions, the government expanded its subsidy to cover 70% of transport costs.
Other measures will ease rising food and energy prices on the vulnerable, low-income families with children, and pensioners: (i) Increase in pension payments for the vulnerable ($63.6 million). In May 2022, the government raised monthly pension payments by 12% to support the livelihood of more than 4 million vulnerable pensioners, about a half of them women, amid rising food and energy prices. (ii) Additional one-time social assistance payments to the vulnerable ($577.8 million). In May 2022, the government started multiphase one-time social assistance, which will continue until December 2022. The initial assistance amounted to $194 million covering 8.9 million people, including pensioners, lowincome families, and recipients of child allowances.
Measures that target the self-employed and provide opportunities for entrepreneurs (for the unemployed and returning migrant workers) include the following: (i) Providing additional resources for entrepreneurship and improving local infrastructure ($70.6 million). These will be used for infrastructure such as agriculture storage, connecting roads, water supply and sanitation; and for credits to entrepreneurs local provincial communities. (ii) Supporting entrepreneurship with additional financing ($44.2 million). In May 2022, the government introduced new instruments to boost entrepreneurship and provided additional financing through its State Fund for Entrepreneurship Support.
Authorities are continuing structural reforms in affected sectors. These include liberalizing domestic prices and reducing crop placement requirements for cotton and wheat, making public procurement more transparent, doubling the size of the social safety net, and improving corporate governance in state-owned enterprises.
The government raised the state purchase price of wheat from domestic farmers from SUM1.5 million to SUM3.0 million per ton in June 2022 to promote wheat production and reduce dependence on imported wheat. Prices for bread and bread products rose nearly 75%. While tax administration reforms are yielding results in maintaining revenues at the precrisis forecast of 31.8% of GDP for 2022, higher outlays for countercyclical measures will increase projected expenditures in 2022 from 33.3% before the crisis to 37.1% of GDP. Consequently, the fiscal deficit will increase from 3.0% (precrisis estimate) to 5.3% of GDP, equivalent to nearly $3.9 billion. The fiscal pressure is compounded by the fact that the government had to cancel its planned $1.2 billion Eurobond issuance because the average spread peaked at 500 bps in March before falling to 380 bps in May 2022, still above the average 265 bps spread at the beginning of the year.

Impact on small firms
T his section examines how the Russian invasion of Ukraine affected business operations in Central and West Asia, especially small firms, around 6 months after it started in February 2022. Rapid MSME surveys were conducted from 25 July to 24 August 2022 in seven Central and West Asian countries-Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan. 6

Methodology and Data
The urgency to get a snapshot of MSME conditions in Central and West Asia amid the ongoing invasion of Ukraine and sanctions against the Russian Federation led to the online survey approach. The survey questionnaire was sent online to firms in the target countries using networks of survey partners (see the list in Acknowledgments). The questionnaire has four parts: (i) company profile, (ii) business conditions after the Russian invasion of Ukraine began in February 2022, (iii) how firms responded, and (iv) the policy measures businesses would like to see. The survey data was reclassified into broad categories for analysis: by (i) firm size-two categories of micro/small firms and medium-sized/large firms; (ii) sector-three categories of agriculture, manufacturing, and services; and (iii) two country groups-West Asia (Armenia, Azerbaijan, and Georgia) and Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan).
In general, West Asian countries coped with the impact of the invasion and related sanctions; hence, they had no comprehensive anti-crisis plans at the time of the survey. They could even benefit from the sanctions, for instance, an increase in tourists from the Russian Federation and Belarus, increase of new bank accounts as Russian Federation-based firms relocated to the region, and an increase in national revenue from higher-priced oil and oil products. By contrast, Central Asian countries were generally hurt from the invasion and sanctions; thus, they initiated anti-crisis plans covering the three pillars of food security, social protection, and support for businesses and jobs, especially for MSMEs. Firms in this group faced a sharp drop of foreign trade with the Russian Federation, supply disruptions for imported foods and commodities, and a sharp drop in inward remittances, for instance. Thus, the analysis includes the comparison of the two country groups to see the extent of the different impacts. MSME definitions vary by country (Table 5). But by reclassifying the survey data into two broad categories based on employment under national definitions, it makes groups more homogeneous for analysis. Three industrial classifications also help. 7 6 The surveys focused on the seven Central and West Asian countries covered in the Asia SME Monitor 2022. Turkmenistan did not participate. 7 The three broad sectors include (i) agriculture-agriculture, forestry, and fisheries; (ii) manufacture-manufacturing and construction; and (iii) services-mining and quarrying; electricity, gas, steam, and air-conditioning supply; Water supply (sewerage, waste management, and remediation work); wholesale and retail trade (repair of motor vehicles and motorcycles); transport and storage; accommodation and food service; information and communication; finance and insurance; real estate; professional, scientific, and technical work; administrative and support services; public administration and defense (compulsory social security); education; human health and social work; arts, entertainment, and recreation; and other services.
Pooling data were used for analysis due to countries' different sample sizes (see Company Profiles). The study followed descriptive analysis based on unweighted data, given that the pooling data could not use weighting adjustments to correct for bias. Given the online survey approach, samples were not randomly selected. We prioritized urgency and followed nonstandard sampling procedures. However, online surveys have an issue with self-selection and non-response bias. To understand the extent of the bias, the distribution of the unweighted survey data was compared with existing frameworks of national statistics (Table 6). By firm size, micro and small firms were underrepresented by 8.4 percentage points compared with national statistics distribution in Central and West Asia (combined average). By sector, agriculture was 26.6% overrepresented, with services 28.2% underrepresented and manufacturing 1.6% overrepresented. By region, there was 11.2% overrepresentation of firms outside the capital city. These over-and underrepresentations should be considered when interpreting the results.

Business Environment
The Russian Invasion of Ukraine disrupted the pandemic recovery in Central and West Asia. Firms struggled with cost management to survive, while some felt there was a better business environment. Six months after the invasion, 44.7% of micro and small firms reported no change in business environment, higher than medium-sized and large firms (26.2%). But 28.9% felt there were worse business conditions before the invasion, reporting surging production costs (28.0%), operating costs (11.8%), delayed product delivery (12.5%), supply chain disruptions (6.6%), and contract cancellations (4.8%) (Figure 13).  To cover rising costs, firms increased their sales prices (13.2%), given their perception of the limited drop in domestic (9.8%) and foreign demand (5.7%). Some micro and small firms (5.9%) reported a better business environment. By sector, 36.9% of manufacturing firms (including construction) reported a worse environment while 10.7% reported it was better. The majority of agricultural firms (67.3%) reported no change in business environment.
By country group, while many firms started feeling worse about the business environment, some felt it was better ( Figure 14). The difference of the impact by country group was calculated as the share of firm responses in Central Asia minus those in West Asia, meaning a positive value indicates a relatively higher impact on firms in Central Asia (upper side from zero in figure 14), while a negative value shows a higher impact on those in West Asia (lower side from zero). Thus, for business environment by country group, firms in West Asia were more likely to be split into two groups-those reporting a worse or better business environment, compared with those in Central Asia. For micro and small firms, the gap for those reporting a worse environment was -10.2 percentage points, while for those reporting a better environment was -8.8; both higher in West Asia. By sector, the gap for those reporting worse was -30.3 in agriculture and -13.8 in manufacturing (but it was positive 2.6 for services, a higher share in Central Asia); while for those reporting better was -2.8 in agriculture and -11.1 in services (but positive 2.1 for manufacturing). The share of those reporting unchanged was higher for micro and small firms (+18.8) and agricultural firms (+40. 3) in Central Asia.
-. Notes: The gap is calculated as the share of firms' response in Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan) minus that in West Asia (Armenia, Azerbaijan, and Georgia). Positive value indicates a relatively higher impact on firms in Central Asia, while negative value shows the same in West Asia. 903 valid samples (pooling data) from the MSME surveys conducted in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan during 25 July-24 August 2022.
Source: Calculated based on the survey data.

Impact on Revenue
Compared to January 2022, sales revenues of the firms surveyed were mostly unchanged during the first 6 months after the invasion. But they were categorized into profitable and unprofitable firms, especially in manufacturing and services, though the share of profitable businesses was just a small fraction of those surveyed ( Figure 15). For micro and small firms, 43.3% said revenues had not changed. But 40.0% reported their sales revenues fell more than 11% or simply did not have revenue as they were temporarily closed. This was higher than medium-sized and large firms (27.4%). The share of micro and small firms reporting increased revenue (8.8%) was smaller than medium-large firms (21.4%).
The share of firms reporting a sharp revenue drop (more than 11%) was highest (50.0%) in manufacturing, followed by services (45.1%) and agriculture (23.8%). For those whose revenues increased, manufacturing was again highest (17.3%), followed by services (11.6%) and agriculture (3.6%). The majority (65.7%) of agricultural firms reported no change in revenue.
By country group, unprofitable and profitable micro and small firms were more likely found in West Asia (-5.0 percentage points for those with a more than 50% revenue drop, and -3.1 for those with revenues increasing 21%-30%). By sector, unprofitable firms (31%-50% revenue drop) appeared more in agriculture (-7.0) and manufacturing (-5.2) in West Asia, with services up in Central Asia (+5.2). Profitable firms in West Asia were more likely in manufacturing (-2.8 for those with a 31%-50% revenue increase) and services (-4.2 for those with 21%-30% revenue increase). The share of agricultural firms with no change in revenue was higher in Central Asia (+28.0).  . -. -.
More than increase ( ) Agr = agriculture, Man = manufacturing, ML = medium-sized and large firms, MS = micro and small firms, Ser = services.
Notes: The gap is calculated as the share of firms' response in Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan) minus that in West Asia (Armenia, Azerbaijan, and Georgia). Positive value indicates relatively higher impact on firms in Central Asia, while negative value shows the same in West Asia. 903 valid samples (pooling data) from the MSME surveys conducted in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan during 25 July-24 August 2022.
Source: Calculated based on the survey data.

Impact on Employment and Wages
Employment, based on the number of full-time regular workers, was also mostly unchanged (69.0% for both micro and small firms as well as medium-sized and large firms-67.7% for agriculture, 65.5% for manufacturing, and 71.3% for services) (Figure 17). But firms began decreasing the size of their workforce to save internal costs or increasing the size to handle greater demand, especially in medium-sized and large firms (14.3% reduced employees with 15.5% increasing the number of workers) and in manufacturing (16.1% reduced employees and 14.3% increased).
For micro and small firms, 9.2% reported fewer employees and 6.0% reported more. In services, 11.1% reported fewer employees and 7.4% hired more.
By country group, although the shares were small, the change in the number of employees was more pronounced in micro and small firms in West Asia (-8.0 percentage points for a decreasing workforce and -9.2 for those hiring more) (Figure 18). By sector, the increase in workers was more evident in services (-8.9) and manufacturing (-6.2) in West Asia, with a greater decrease in agriculture (-23.5).  Notes: Data for full-time regular employees. The gap is calculated as the share of firms' response in Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan) minus that in West Asia (Armenia, Azerbaijan, and Georgia). Positive value indicates relatively higher impact on firms in Central Asia, while negative value shows the same in West Asia. 903 valid samples (pooling data) from the MSME surveys conducted in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan during 25 July-24 August 2022.
Source: Calculated based on the survey data.
The working environment was almost unchanged for both micro and small firms (82.9%) as well as medium-sized and large firms (86.9%), and for all sectors (94.1% for agriculture, 84.5% for manufacturing, and 75.2% for services) ( Figure 19). But firms surveyed initiated some internal cost controls as the invasion continued, including reduced working hours (4.5% for micro and small firms), a shift to remote working (5.9%), and layoffs (6.2%). By sector, 8.9% of manufacturing laid off workers, followed by services (7.6%) and agriculture (2.6%).
Although shares were small, internal cost controls were used more in medium-sized and large firms (+1.8 percentage points for remote working, +3.6 for unpaid sick leave, +3.6 for layoffs); in manufacturing (+2.5 for reduced working hours, +1.8 for unpaid sick leave, and +2.2 for layoffs); and services (+1.5 for reduced working hours, +6.3 for remote working, and +3.3 for layoffs) in Central Asia (Figure 20). Most medium-sized and large firms in West Asia reduced working hours (-98.2). The change in working environment was limited among micro and small firms. Wage payments remained mostly unchanged (69.7% for micro and small firms, 88.1% for agriculture, 61.3% for manufacturing, and 59.3% for services) ( Figure 21). Similarly, some firms cut wages while others increased wage payments. These decisions-wage cuts or increases-likely corresponded to profitability.
By country group, wage payments were more likely to fluctuate in West Asia, while many reported "no change" for firms in Central Asia (+21.4 percentage points for micro and small firms, +49.6 for agriculture, +5.8 for manufacturing, and +5.9 for services) ( Figure 22). The gap for firms increasing wages was negative for all firm sizes and across all sectors; with higher shares in West Asia. . -. -. -. -. -.

Financial Conditions and Funding
More than one-third (36.3%) of micro and small firms surveyed said they had enough cash and savings to operate, but it was lower than in medium-sized and large firms (51.2%) (Figure 23). Firms without funds or running out in 6 months were more micro and small firms (19.0% reporting already no cash or savings, 20.5% running out in 1-3 months, and 22.3% running out in 3-6 months), in manufacturing (25.0% with already no cash or savings and 26.8% out in 1-3 months), and services (25.2% running out in 3-6 months). Half (50.2%) of the agricultural firms surveyed had enough cash or savings to continue their business.
By country group, financial shortages were more evident in Central Asia (+13.2 percentage points for micro and small firms with funds running out in 3-6 months, +7.1 in agriculture, +9.9 in manufacturing, and +18.6 in services) ( Figure 24). Firms with sufficient cash were more in West Asia (-25.0 percentage points for medium-sized and large firms, -8.0 for manufacturing, and -13.1 for services). However, those with no cash or savings also appeared more in West Asia (-12.5 percentage points for micro and small firms, -25.5 in agriculture, -6.8 in manufacturing, and -1.7 in services).  . -. -.
-. In terms of access to finance, about one-fifth (19.9%) of micro and small firms could obtain bank loans, with 12.1% already applied ( Figure 25). But the share of firms receiving bank credit was higher among medium-sized and large firms (33.3%). Aside from bank credit, micro and small firms still relied on informal financing (16.2% borrowing from family, relatives, and friends; and 7.3% borrowing from informal moneylenders), with those using their own funds or retained profits highest (46.9%). Nonbank finance institution (NBFI) loans (from microfinance institutions, credit unions/cooperatives, finance companies, and pawnshops) also helped fund micro and small firms (10.4%).
More than one-fourth (29.2%) of firms in manufacturing could obtain bank credit, followed by services (21.5%) and agriculture (16.2%). Access to NBFI loans was highest in agriculture (17.2%). Borrowing from family, relatives, and friends was used frequently in services (18.1%), followed by agriculture (13.5%) and manufacturing (9.5%). Using digital finance platforms like peer-to-peer lending and crowdfunding was rare (1.6% for micro and small firms).
Micro and small firms were more likely to rely on NBFIs (+9.8 percentage points), and in agriculture (+12.2) and services (+6.7) in Central Asia, and using their own funds to operate (+14.4, +8.8, and +21.1, respectively) ( Figure 26). Firms in West Asia (-11.9 percentage points for micro/small and -19.6 for medium/large firms), with manufacturing (-22.5) followed by agriculture (-16.9) and services (-7.0), were more likely to receive bank credit than in Central Asia.
Central Asian countries either offered or planned financial assistance to MSMEs under their respective anti-crisis action plans; so firms could access bank credit with concessional interest rates through subsidized loans and/or credit guarantees. Nevertheless, much of this financial assistance has yet to happen or was not used by firms in Central Asia.   -. -. -.

MSME Perceptions of the Impact
The MSME surveys also asked about what concerns they had and obstacles they faced during the invasion. For micro and small firms, their major concerns were high production costs (38.7%) and shipping costs (29.4%), payment and settlement issues due to the sanctions on Russian Federation banks (14.8% for micro and small firms with 26.2% for medium-sized and large firms), and a reduction in consumer purchasing power (20.3% for micro and small firms)-meaning a possible drop in sales over the near term ( Figure 27).
High production costs were the top concern for agricultural (53.1%) and manufacturing (35.1%) firms, while high/ logistics/transportation costs were the top concern for services (31.5%). Although not top-ranked, around 10% of agricultural and services firms and around 7% of those in manufacturing were concerned over additional sanctions on their countries, probably due to the recent increase of Russian Federation-based firms relocating to their countries. This concern was higher among medium-sized and large firms (11.9%) than micro and small firms (9.6%). Concerns were mixed by country group (Figure 28). In Central Asia, micro and small firms were more concerned over high production costs (+5.1 percentage points) and how to manage sales prices or product price control (increase or maintain sales prices due to rising operating costs) (+4.9), while medium-sized and large firms were more concerned about delayed product delivery (+17.9), market expansion (+8.9), and the product price control (+8.9). By sector, additional sanction risks (+8.3) were the top concern for agricultural firms. Manufacturing firms cited greater concern over delayed product delivery (+11.2) and payments due to sanctions on Russian Federation banks (+8.8), while services worried more about product price control (+10.6).
In West Asia, micro and small firms had more concerns over high operating costs (-6.6 percentage points) and loan repayments (-6.6), while medium-sized and large firms were concerned more about high logistics and transportation costs (-16.1), employment management (-14.3), and additional sanctions risk (-14.3). By sector, declining purchasing power (-22.4) was the top concern for agricultural firms, followed by a lack of working capital (-14.7) and decline in domestic/foreign demand for their products (-13.4). Manufacturing firms had more concerns over high production costs (-21.9), high transportation costs (-16.3), loan repayments (-13.5), and a lack of working capital (-11.4). Those in services were more worried about payments and settlement (-6.8) and loan repayments (-6.0). Overall, firms in West Asia took working capital shortages more seriously, while those in agriculture were concerned more about a decline in demand. -. -. -.
-. Notes: The gap is calculated as the share of firms' response in Central Asia (Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan) minus that in West Asia (Armenia, Azerbaijan, and Georgia). Positive value indicates relatively higher impact on firms in Central Asia, while negative value shows the same in West Asia. 903 valid samples (pooling data) from the MSME surveys conducted in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan during 25 July-24 August 2022.
Source: Calculated based on the survey data.
Based on these concerns, micro and small firms were more likely to consider increasing their selling prices (47.0%), finding new domestic suppliers (18.4%), and seeking concessional loans (17.9%), given the ongoing invasion ( Figure  29). All sectors followed a similar trend; firms in agriculture (48.5%), manufacturing (37.5%), and services (48.6%) considered increasing product prices indispensable. Increasing export volumes (24.4%) and finding new domestic suppliers (19.6%) were second and third priorities for manufacturers.
How to react was also mixed by country group (Figure 30). In Central Asia, micro and small firms (+12.1 percentage points), and those in agriculture (+8.8) and services (+18.5), were more likely to view increasing product prices as inevitable, while medium-sized and large firms (+16.1) and manufacturing firms (+19.6) were more likely to try to increase export volumes. In West Asia, micro and small firms (-10.2 percentage points), medium/large firms (-16.1), and agriculture (-30.7) were more likely to look for new domestic suppliers, with manufacturing (-18.6) and services (-7.8) confronting possible bankruptcy.

Policy Interventions Desired by Firms
Firms were hoping for an array of policy measures ( Figure 31). Tax relief (including deferred tax payments and reduced corporate tax) was the top policy measure for firms in both Central Asia (47.0%) and West Asia (46.4%). It was followed by subsidies for business recovery and cash transfer/grants in Central Asia (36.6%) and deregulation on foreign investments in domestic MSMEs in West Asia (44.0%). Subsidies ranked third in West Asia (42.7%).
Tax relief and subsidies, without any exit strategy, would risk reducing national revenues and bloating national budgets. Governments should consider more sustainable support measures, for instance, by making the best use of public-private partnerships for more technical and business advisory services and training.
In both Central and West Asia, concessional loans (special refinancing facilities, low-interest or subsidized loans) were in high demand (49.3% of firms in Central Asia and 59.3% in West Asia), followed by zero-interest/collateral free loans (47.5% and 58.5%) and faster bank loan approvals (45.5% and 48.4%) (Figure 32). Support for access to alternative finance was frequently cited (development of equity and bond markets for MSMEs-25.2% for Central Asia and 33.9% for West Asia) as was digital financial services (easing access to, for example, peer-to-peer lending and equity crowdfunding-31.8% and 41.1%). These were not top-ranked, but popular among firms surveyed. -. -. -. -. . -. . -. . -. .
Source: Calculated based on the survey data.

Policy Implications
The Russian invasion of Ukraine had differing effects on Central and West Asian economies and businesses. At the time of the surveys, most firms said they had yet to see any major effects. But the invasion and related sanctions against the Russian Federation began to create two business groups in the region-firms hit hard and those that benefited. The survey findings showed that sales revenues were mostly unchanged 6 months into the invasion, but both those that lost and those that gained were mostly in manufacturing and services. However, the share of more profitable businesses remained a small fraction of firms surveyed. By country group, firms with sharp losses in revenue were more in services in Central Asia, while profitable micro and small firms came from West Asia.
Employment was also largely unchanged, but firms began to adjust the size of their workforce by cutting employees to save on internal costs or hiring new workers to satisfy new demand, especially for medium-sized and large firms and manufacturers in West Asia. Firms also began internal cost controls such as remote working arrangements, unpaid sick leave, layoffs, and wage cuts. This was more pronounced in Central Asia.
Working capital shortages hit micro and small firms, those in manufacturing and services, especially in Central Asia. Firms with enough cash were mostly medium-sized and large firms along with agriculture in West Asia. Funding conditions differed by country group. Firms in West Asia could more easily access bank credit, while micro and small firms, along with those in agriculture and services in Central Asia had to relay more on nonbank finance and using their own funds.
High production and shipping costs, payments and settlement issues (due to sanctions on Russian Federation banks), and worries over a decline in demand were the top concerns for firms surveyed. Micro and small firms considered increasing product prices, tried looking for new domestic suppliers, and sought concessional loans. Tax relief and subsidies were among the top policy measures firms hoped to see.
Some important policy implications can be extracted from the survey findings. First, given the high reliance on imports of goods from the Russian Federation, it is critical to strengthen domestic commodity markets through business clustering to strengthen national production networks and to create a base of growth-oriented firms, especially MSMEs and entrepreneurships (youth-and women-led firms). It would be ideal to link the national branding strategies of MSME products so they can expand exports to more diversified markets. Also, returning migrant workers can help the national labor market or new jobs if provided with more training and skills development, especially entrepreneurial skills. Digitalization of MSME businesses would help in cost management and business expansion.
Given the large number of Russian Federation-based firms relocating to Central and West Asia, it is critical to strengthen the banking sector with risk-based supervision to ensure financial stability nationally and regionally. An example would be developing credit risk databases to enable financial institutions provide more appropriate finance to qualified MSMEs. Lastly, it is crucial to develop alternative financing options for MSMEs to access growth capital, shift from subsidy-based finance to market-based finance (capital markets) and better use digital finance platforms.

conclusion
T his report examined how the region's economies were affected by Russia's ongoing invasion of Ukraine and related sanctions against the Russian Federation. It analyzes how private businesses in the region, especially small firms, survived after the invasion began in February 2022. The report reviews the initial macroeconomic impact across Central and West Asia, how countries responded to the invasion, and its impact on small firms. The analysis was based on the findings from rapid surveys conducted in July 2022-August 2022 in Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan.
The macroeconomic situation in the region did not yet fully reflect the economic impact from the invasion by the time this report was written. The region is close to both the Russian Federation and Ukraine. But despite geographic proximity, the region still showed a degree of resilience. Nonetheless, disruptions to global supply chains due to the sanctions against the Russian Federation could affect the region more over the medium to long term.
The macroeconomic impact of the invasion was simulated using input-output analysis, testing the impact of the various trade sanctions against the Russian Federation under two scenarios. The results suggest that Central and West Asian economies incur the highest GDP losses in both cases. Kazakhstan and the Kyrgyz Republic have the most to lose yet also have the most to gain, depending on the degree of import substitution ("redirection").
In addition, two country groups were identified: (i) West Asian countries with no anti-crisis plans-Armenia, Azerbaijan, and Georgia; and (ii) Central Asian countries with a need for action plans-Kazakhstan, the Kyrgyz Republic, Tajikistan, and Uzbekistan. In general, West Asian countries dealt relatively well with the invasion impact and sanctions against the Russian Federation (so they had little need for an anti-crisis plan at the time of the survey). They in fact partly benefited from the sanctions-for example, an increase of tourists from the Russian Federation and Belarus, the rise in new bank accounts as Russian Federation-based firms began to relocate to the region, and benefited from an increase of national revenue due to high oil prices. By contrast, Central Asian countries were hit by the adverse effects of the invasion and sanctions. They thus initiated anti-crisis plans, addressing food security, social protection, and providing business and employment support, especially to MSMEs. Firms in this Central Asian country group saw a sharp drop in foreign trade with the Russian Federation, supply disruptions of imported food and commodities, and a sharp decrease in inward remittances.
The rapid surveys in seven Central and West Asian countries showed the real impact on small firms 6 months after the invasion. Although there was no dramatic impact on these firms at the time of the survey, the invasion and sanctions began to create two business types in the region: firms hit hardest and those that benefited. Sales revenues were mostly unchanged 6 months into the invasion, but both those unprofitable and those that profited appeared, especially in manufacturing and services. However, the share of profitable firms remained a small fraction of the firms surveyed. In general, firms with a sharp revenue drop were in services in Central Asia, while profitable small firms were more likely in West Asia.
There are roughly six policy implications from the survey findings. First, given the high reliance on imports of goods from or through the Russian Federation, it is critical to strengthen domestic commodity markets through business clustering to strengthen national production networks and to create a base of growth-oriented firms, especially MSMEs and entrepreneurships (youth-and women-led firms). Second, it would be ideal to link national branding strategies for MSME products so they can increase exports to more diversified markets. Third, returning migrant workers can bolster the national labor market or create new jobs if provided with continuous training and skills development, especially entrepreneurial skills. Fourth, digitalization of MSMEs would better their cost management and business growth. Fifth, in finance, with the increased number of Russian Federation-based firms relocating to Central and West Asia, it is critical to strengthen the banking sector with risk-based supervision to ensure financial stability, nationally and regionally-for example, developing credit risk databases to make it easier for qualified MSMEs to access finance. And finally, it is crucial to develop alternative financing options so MSMEs can access growth capital, shift from subsidy-based finance to market-based finance (capital markets), and take advantage of digital finance platforms.
Given the evolving geopolitical uncertainty, it can be difficult to assess the full macroeconomic impact of the invasion and its firm-level impact. ADB will continue to monitor the macroeconomic and firm-level impact in Central and West Asia of the evolving impact of the Russian invasion of Ukraine.