Russia's Chill Felt in Former Soviet States

From the Baltics to Central Asia, nations still partly dependent on Russia feel the economic downturn.

The foundering of Russia's economy is radiating throughout the former Soviet Union, with a wave of devaluations, stockpiling of food, runs on banks, job losses, and general anxiety.

Seven years the collapse of the union, many former Soviet states are still tightly linked to Russia economically, with their currencies tied to the heretofore stable ruble.

Moscow's bank defaults and stricken ruble are reverberating from the Baltics to Central Asia.

"Russia's economic situation is extremely dangerous for all these countries, because they are still in Moscow's periphery," says Sergei Kazyenov, a regional specialist at the Institute of National Security and Strategic Research in Moscow. "There is not a single CIS or Baltic country that can gain from Russia's crisis." The Commonwealth of Independent States (CIS) consists of Russia and 12 neighboring countries that were once part of the Soviet Union.

Central Asian CIS countries are looking at reorienting trade toward China. The Baltic states, not CIS members, and Ukraine are more actively courting the West.

Former Soviet States Feel the Cold Wind of Russia's Economic Crisis

Those already hurting most financially are Ukraine, Armenia, and Belarus. Even the oil producers - Turkmenistan, Azerbaijan, and Kazakstan - are not completely buffered by their dealings with the West.

Latvia, Lithuania, and Estonia are in the best position, because they are not connected as tightly to Russia's economy as the other former Soviet republics. But a large portion of the Baltic countries' exports goes east to Russia, and their ports depend on transit business.

Nearly every CIS currency has lost value in recent weeks, directly linked to the ruble's fall. Economists say that some states will eventually suffer more than Russia, because they have weaker economies.

A big casualty may be integration moves inside the CIS itself, says Kazak President Nursultan Nazarbayev. A summit of five countries seeking greater integration - Russia, Kazakstan, Kyrgyzstan, Belarus, and Tajikistan - will be postponed.

Danger of instability

The impact of Russia's turmoil could be political as well as financial. With separatist tensions in Georgia and Azerbaijan and civil war in Tajikistan, there is a danger that economic instability will drive insurgents deeper into battle or the arms of Muslim radicals.

Here's how Russia's crisis has affected its close neighbors so far:

Ukraine is a leading victim. Nearly all its gas is imported from Russia, which accounts for roughly 40 percent of Ukraine's external trade. Ukrainians who work in Russia, especially in the construction market, now face unemployment.

On Sept. 4 Ukraine effectively devalued its hrvyna currency, widening the foreign-exchange corridor to 2.5-3.5 to the dollar from 1.8-2.25. Panicked Ukrainians have rushed to buy dollars and staple goods. Gasoline prices have soared 60 percent and food prices at least 20 percent.

Moody's rating agency has downgraded Ukraine's currency bonds, owing to a drop in gold and currency reserves.

The only good news is a $2.2 billion loan approved by the International Monetary Fund.

Belarus, Russia's closest partner in the CIS, is taking a major beating. The zaichik currency collapsed along with the ruble, and citizens are stockpiling food. Russia supplies all of Belarus's oil and gas and most of its electricity.

Moldova's agrarian economy looks to Russia as its main export market. It relies on imported energy from Russia, too. President Petru Lucinschi estimates that so far Russia's financial crisis has cost Moldova 5 percent of its gross domestic product (GDP last year was about $1.85 billion).

Lithuania's GDP growth may fall to 5 percent from 7 percent this year owing to the Russian crisis, says Gitanas Nauseda, head of policy at the Bank of Lithuania. Trade with Russia accounts for about 20 percent of exports and imports. Some ventures have stopped in the food, transport, and construction industries.

Latvia's banks suffered from investment in Russian GKOs (short-term debt that was restructured at a huge loss to investors). The Bank of Latvia calculates about $300 million, or 8 percent of local banks' assets, were put into GKOs.

Estonia is geared toward the European Union, which it is joining. But its trade with Russia still accounts for 10 percent of exports and imports. Producers of dairy, butter, meat, and fish are distressed.

Kyrgyzstan government spokesman Kurmanbek Ramatov hopes that the country's market, which is the cheapest and most open in Central Asia, will remain attractive to investors. Shuttle traders who operate in Russia, however, have been hit by lower proceeds and are orienting business elsewhere, such as China.

Tajikistan, beset by civil war, is dependent on Russian help . The prospect of less Russian support could weaken the regime.

Turkmenistan is a poor country that hasn't fully developed its substantial oil reserves. It is looking to other regions to increase economic ties.

Kazakstan is potentially Central Asia's richest country because of its huge mineral resources. Its liberalized economy attracts Western investment. Foreign Ministry official Akybai Smagulov says the economy is vulnerable because 36 percent of trade is with Russia.

Authorities are trying to cut spending, limit interbank contacts with Russia, and seek investors and trade elsewhere, such as in China. The national bank is considering restricting transactions in foreign currencies. Authorities are urging exporters not to accept rubles as payment.

Uzbekistan's agrarian economy is based on cotton production. President Islam Karimov estimates total annual trade with Russia at $1.3 billion, or 15 to 17 percent of Uzbekistan's overall trade. One positive development of the Russian crisis is increased demand for Uzbek cars, which are cheaper for Russia to import than Western European models.

Armenia has seen panic buying of hard currency. Banks connected with Russia halted withdrawals of money. Leana Tamrazyan, spokeswoman for the Finance Ministry, says the full impact will come later. Hundreds of thousands of Armenians depend on the wages of relatives working in Russia.

The political consequences may be greater, if Russia can no longer provide support to Armenia in its conflict with Azerbaijan over the disputed territory of Nagorno-Karabakh.

Azerbaijan authorities say they can ride out the storm because of the investment of Western companies involved in oil and gas on the Caspian Sea. But independent observers say currency exchanges are suspending sales of dollars and that black-market trading has returned.

Georgia presidential aide Timur Basilya says it will no longer be profitable for Georgian exporters of wine and mineral water - essential industries - to sell to Russia and other CIS countries.

Officials worry that Russia's political instability could feed conflict in Georgia, which is grappling with separatist tensions in Abkhazia and South Ossetia. The financial crisis is especially hurting these two regions, where the Russian ruble is in use.