Second, Russia is also an important source of export demand for many countries (see Chart M.6), and weaker growth in Russia affects those countries through the trade channel, as well as through reductions in inward foreign direct investment.

Third, a number of countries in the EEC region and Central Asia are vulnerable to a slow-down in remittances from Russia. In the case of Tajikistan annual remittances account for over 45 per cent of GDP, with the vast majority coming from Russia. Growth in remittances from Russia to Central Asia and the EEC region turned negative in the first quarter of 2014, the first time this had been observed since 2009 (see Chart M.7). However, the reduced volumes of US dollar-denominated remittances have been partly offset by the rising purchasing power of remitted US dollars, following the weakening of the currencies of several recipient countries.

In contrast, early data suggest that growth in remittances to SEE countries returned to positive territory in 2013, following a contraction in the previous year. This probably reflects both the recovery seen in the eurozone in the second half of the year and the increased use of formal channels for remittances owing to reductions in the cost of international transfers.2

Fourth, the depreciation of the Russian rouble may also be adding to pressures on EEC and Central Asian currencies. The weakening of the rouble in early 2014 led to expectations that neighbouring countries would adjust their currencies’ exchange rates downwards, and purchases of foreign currency by residents of those countries increased. In early February the National Bank of Kazakhstan made a one-off adjustment to the exchange rate of the tenge, resulting in a devaluation of close to 20 per cent. The Kyrgyz som then also weakened against the US dollar.

Chart M.8 summarises selected transition countries’ overall exposure to a slow-down in Russia through various channels, including trade, investment and remittances. The composite index plotted in the chart is similar to the index of economic exposure to the eurozone presented in the Transition Report 2012.3 The chart shows that Belarus and Tajikistan have the highest overall economic exposure to Russia. In the case of Tajikistan this is driven primarily by large remittance flows.