Journal Issue

3. Channels of Spillovers to Neighboring Countries

Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Dragana Ostojic, and Natan Epstein
Published Date:
November 2015
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Trade and remittances are the main channels of outward spillovers from Russia on neighboring countries (see Figure 1). Trade channel is particularly prominent in CIS and Baltic countries, given their historical links and geographic proximity, while remittances channel is important mainly for CIS countries. Trade links with Russia are generally weaker in Central and eastern Europe (CEE), though for some countries trade exposure is still considerable. In addition, indirect spillovers through confidence effects and common investor linkages could be substantial, which is difficult to quantify. FDI is another important channel of spillovers from Russia, which is mainly important for CIS and Baltic and some eastern European countries. Other financial links are relevant only for a few countries.

Figure 1.Europe and CCA Links with Russia, 2014

(or the latest available)

Trade Channel

  • Export of goods and services to Russia: Russia is an important export destination for a number of CIS and Baltic countries. Belarus, Lithuania, and Turkmenistan have the largest exposure with exports to Russia exceeding 10 percent of GDP. However, it should be noted that a sizable share of exports from the Baltics to Russia is re-exports of goods produced elsewhere, thus domestic economies in Baltic countries are not as sensitive to the developments in Russia as total export numbers may suggest. CEE countries with export to Russia between 2 to 5 percent of GDP include the Czech Republic, Hungary, Serbia, the Slovak Republic, and Slovenia. For most other eastern European countries, exports to Russia are below 1 percent of GDP. While direct trade links between CEE and Russia are limited, indirect spillovers through confidence effects could be substantial.1 For a number of Caucasus and Central Asia (CCA) countries,2 Russia is an important niche market. For example, exports to Russia account for about half of non-oil exports for Azerbaijan; for Armenia, exports of food products to Russia have been a source of dynamism in the economy; and about a quarter of Moldova’s agricultural exports are destined to Russia. Turkmenistan and Uzbekistan export gas to Russia but have been increasingly diversifying toward other markets, primarily China. Russia accounts for about a quarter of Turkmenistan’s gas exports (down from around 70 percent during the global financial crisis). Traditional trade links and preferential agreements (for example, the Eurasian Economic Union) with Russia may limit the capacity of some countries to diversify export destinations away from Russia.
  • Imports from Russia: Imports from Russia, including energy imports, constitute more than 5 percent of GDP for most CIS and some CEE countries. For a number of countries (Armenia, Belarus, Hungary, Latvia, Lithuania, Moldova, the Slovak Republic, and Ukraine), energy imports from Russia exceed 20 percent of their total energy consumption. At the same time, some countries may not benefit from lower energy prices in the near term, since contracts on gas supply are usually long term, in some cases prices being fixed for several years.

Remittances Channel

Remittances are a key channel of transmission of shocks from Russia to CIS oil importers. CIS oil importers are among the most remittance dependent economies in the world. Remittances constitute about 45 percent of GDP in Tajikistan, 30 percent in the Kyrgyz Republic, 24 percent in Moldova, and 20 percent of GDP in Armenia as of 2014, with the bulk of these remittances originating from Russia. Remittances from Russia have grown substantially over the past decade and appear to be closely correlated with the activity in Russia’s non-tradable sector, where most of the migrant workers tend to work.

The non-tradable sector activity is, in turn, highly correlated with oil prices, very volatile, and is characterized by flexible labor-market arrangements. The large presence of migrant workers in Russia makes these countries vulnerable to risks of surges in unemployment and social tensions in case migrants are forced to return. While returning migrants can bring new skills and contacts back to their countries, they create additional pressures on labor markets by increasing unemployment, putting downward pressures on wage levels, and increasing the need for social assistance.

CCA: Remittances from Russia


Sources: WEO, NBR, and IMF staff estimates.

Financial Channel

Spillovers via the financial system appear more limited. The direct spillovers would be mainly via changes in flows of FDI, and to a smaller degree via the banking system. Spillovers via asset markets and debt and equity flows are less pronounced and contained to a few countries.3

  • Foreign Direct Investment from Russia: The stock of FDI from Russia exceeds 2 percent of GDP in many CIS and Baltic and some CEE countries, with Armenia, Bulgaria, Moldova, Montenegro, and Tajikistan receiving more than 5 percent of GDP in Russian FDI. FDI is an important vehicle for technology transfer and can be a driver of growth and domestic investment. The slowdown in Russia could decrease FDI flows, affecting long-term investment and growth prospects for these countries.
  • Banking linkages: Direct cross-border lending from Russia is relatively small, though asset share of Russian banks is about 10 percent of banking system assets in a number of countries.4 Latvia is the recipient of large non-resident deposits, equivalent to about 50 percent of total deposits, the lion’s share of which is presumed of Russian origin. While there have been no disruptions so far, a possible reversal of these flows could be a source of risk. Bank claims on Russian residents are somewhat noticeable for Hungarian banks (more than 3.5 percent of GDP).5 Furthermore, Azerbaijani and Kazakh banks have subsidiaries in Russia, but their assets are relatively small (about 2 percent of home country’s GDP). However, second-round effects of spillovers on the banking sector—propagated by other channels in particular exchange rate and remittances, could be significant. Exchange rate movements in highly dollarized banking systems, and declining remittance income that is used to service loans, could undermine the debt repayment capacity of banking clients, and potentially, lead to an increase in nonperforming loans (NPLs), and thus cause problems in the banking sector. In addition, currency depreciation could give rise to a credit risk stemming from unhedged foreign currency borrowing.

For a discussion of the impact of geopolitical tensions on CESEE countries’ confidence, see the October 2014 Central, Eastern, and Southeastern Europe Regional Economic Issues Update (IMF 2014a); “Europe’s Russian Connections,” a blog by IMF staff members (Husain, Ilyina, and Zeng 2014); and IMF staff reports for Article IV consultations for the Russian Federation (IMF 2014c), Poland (IMF 2014b), Hungary (IMF 2015b), and the Czech Republic (IMF 2015a).


CCA countries comprise Armenia, Azerbaijan, Georgia, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.


Bilateral portfolio flows between Russia and CESEE countries are limited to about 0.1 percent of GDP.


Sberbank has subsidiaries in Belarus, Bosnia and Herzegovina, Hungary, Kazakhstan, Turkey, and Ukraine; VTB bank has subsidiaries in Armenia, Azerbaijan, Georgia, Kazakhstan, Belarus, and Ukraine, and Gazprombank in Armenia and Belarus.


This is driven by the subsidiary of Hungarian OTP bank in Russia.

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