POLICY BRIEF 17 March 4, 2022 Russia-Ukraine Conflict: Implications for Remittance flows to Ukraine Schraven Asia and Central Eva Dick and Benjamin Dilip Ratha and Eung Ju Kimi Just seven days into the war, more than a million Ukrainians have left the country, and millions more are expected to migrate or seek asylum in other countries in the coming months. Remittances to Ukraine are likely to increase in 2022. However, remittance flows to Tajikistan, Uzbekistan, and the Kyrgyz Republic will likely decline sharply due to the twin effects of a decline in economic activity in Russia and a weakening of the ruble against the US dollar. These short- term projections have a high degree of uncertainty around them, dependent on the scale of the military conflict in Ukraine and the effectiveness of the sanctions on outward payments from Russia. The global community should support Ukrainian migrants and refugees by facilitating their journey and ensuring arrival in a safe environment. Supporting migrants, refugees and students stranded in Ukraine is also a priority for the global community. And even as the war is topmost on everyone’s mind, COVID-19 variants have still not gone away. All migrants and refugees—Ukrainians as well as those from other countries stranded in Ukraine—need access to healthcare during the pandemic. In the immediate future, there is a need to restore access to personal remittance services in Ukraine as well as in Russia. Reducing fees on remittances by even 2 percentage points could save Ukrainian migrants $400 million, and lowering remittance costs could be an effective complement to scaling up aid to the people of Ukraine. Impacts on Ukraine 1. According to the UN High Commissioner for Refugees, as of March 3, 2022, just seven days into the war, more than a million Ukrainians were believed to have fled the country. In the coming months, millions more are expected to migrate to or seek asylum in Poland and other European countries. Since 2015, there has been a shift in the destination of Ukrainian migrants: In the past, Russia used to be the largest destination country. In recent years, migration to Poland and other countries in Europe has increased. Data on the stock of migrants are scarce, but available data indicate that Russia hosts between 2 and 3 million Ukrainian migrants, equivalent to around 5-7 percent of Ukraine’s population.ii 2. According to new data from the National Bank of Ukraine, remittance flows to Ukraine surpassed $19 billion in 2021.iii These flows have proved to be resilient during the COVID-19 crisis. After a moderate decline of 3.6 percent in 2020, the flows grew by a higher-than- expected rate of 28.3 percent in 2021. Remittances were around 12 percent of GDP in Ukraine, nearly three times the size of foreign direct investment (FDI) in 2021 (figure 1). 3. We estimate that remittances to Ukraine will increase by 8 percent in 2022, with a significant probability of an even stronger rate of increase. The share of remittances received by Ukraine from Russia has steadily declined in recent years, from 27 percent in POLICY BRIEF 17 March 4, 2022 2015 to only 5 percent in 2021 (table 1 and annex table 1).iv Remittance flows from Russia are expected to be disrupted due to sanctions and the exclusion of Russian payment systems from the SWIFT network. Any decrease in remittance flows from Russia to Ukraine, however, is likely to be more than offset by an increase in remittances from Ukrainians in Poland and other countries. During 2015–2021, the share of remittances to Ukraine from Poland rose from 19 percent to 39 percent. Existing migrants are likely to send home more money to support families during the war. Additionally, new Ukrainian migrants in Europe and other countries may also send money to support family members back home. Figure 1. Remittance flows are significantly larger than FDI and ODA flows to Ukraine 21,000 $ million 19,523 19,000 17,000 Remittances 15,000 13,000 11,000 9,000 7,000 FDI 6,000 5,000 3,000 ODA 1,000 1,148 -1,000 2021e 2022f 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: IMF BOP Statistics, National Bank of Ukraine, and KNOMAD-World Bank Note: FDI = foreign direct investment; ODA = official development assistance. Figure 2: Sources of remittances to Ukraine, 2015 vs. 2021 2015 2021 Poland 19% Others Others 27% 30% Poland 39% USA 7% UK Italy 4% 3% Italy Germany 5% 4% Germany Czech USA 4% Czech Republic Russian Federation 10% Russian Federation 5% UK Republic 5% 27% 7% 4% Sources: National Bank of Ukraine and KNOMAD–World Bank Note: Data for the last quarter of 2021 not yet available. Both charts show data for the first three quarters of the year. POLICY BRIEF 17 March 4, 2022 Impacts on Central Asia 4. Unlike Ukraine, many countries in Central Asia are highly dependent on remittances from Russia (see table 1 and annex table 2). For example, in the Kyrgyz Republic, the share of remittances from Russia was 83 percent of the total remittance receipts during Q1-Q3 of 2021 (table 1). During the same period, Azerbaijan, Armenia, Tajikistan, and Uzbekistan received more than 50 percent of their remittance inflows from Russia. Remittances provide a financial lifeline to many of these countries. For example, in the Kyrgyz Republic and Tajikistan, remittances in 2020 were respectively 31 percent and 27 percent of GDP and were comparable to or even larger than the countries’ exports of goods and services. 5. Remittance flows to many Central Asian countries are likely to be affected adversely. Based on an initial assessment of the first-round effects of a decline in economic activity in Russia and a weakening of the ruble against the US dollar, the revised projected growth rates of remittances in this region in 2022 are expected to average around -25 percentage points (table 1). For example, in the Kyrgyz Republic where 83 percent of remittances originated in Russia in 2021, remittances in 2022 are likely to decline by 33 percent instead of an originally projected growth rate of 3 percent. Azerbaijan, Armenia, Tajikistan, and Uzbekistan are also likely to experience a major decline in remittance flows in 2022. Table 1. Impact of Russia-Ukraine conflict on remittances—Flows to Ukraine are likely to increase while those to other countries in Central Asia are likely to decline Remittance % of % of exports Share of Originally Revised inflows, GDP, and services, remittances projected projection of 2020 ($ mn) 2020 2020 from Russia, growth growth rate Country 2021 Q1-Q3 rate, 2022 for 2022* Armenia 1,327 10.5% 35.3% 59% 11% -19% Azerbaijan 1,403 3.3% 9.2% 62% 3% -23% Belarus 1,014 1.7% 2.7% 42% 15% -8% Georgia 2,110 13.3% 35.6% 18%** 2% -5% Kazakhstan 374 0.2% 0.7% 51% 7% -17% Kyrgyz Republic 2,423 31.3% 99.5% 83% 3% -33% Moldova 1,877 15.7% 58.2% 14% 6% 0% Tajikistan 2,187 26.7% 155.2% 58% 2% -22% Ukraine 15,213 9.8% 25.1% 5% 2% 8% Uzbekistan 6,980 11.6% 48.0% 55% 3% -21% Sources: Bank of Russia, National Bank of Ukraine, National Bank of Georgia, and KNOMAD-World Bank Notes: * Assuming decline of 40% in remittances from Russia. Projected growth rates for other source countries are assumed to remain unchanged from those reported in the Migration and Development Brief 35 (KNOMAD–World Bank, November 2021) **Data for Georgia are taken from the National Bank of Georgia. Remittance inflows from Russia to Georgia are available for all 4 quarters of 2021 (annex table 3). POLICY BRIEF 17 March 4, 2022 6. There will be a two-fold impact on remittance flows to Central Asia. A weakening of economic activity in Russia would dampen the employment and incomes of migrant workers and their ability to send remittances. The second channel of impact would be through a weakening of the ruble against the US dollar, which would reduce the nominal US dollar value of remittances sent in rubles. As of March 3, 2022, the ruble had depreciated by nearly 25 percent against the US dollar. It is likely that the weakness of the ruble will continue in 2022 despite the recent sharp increase in oil prices. Unlike in the past, the ruble and oil prices seem to have decoupled since late 2020 (figure 3). Figure 3. The correlation between the Ruble/US$ exchange rate and oil prices has changed in recent years 130 15 ($/bbl) (Ruble/US$) 110 Brent crude price (left axis) 35 90 Russian ruble/US$ (right axis) Decoupling 70 55 50 75 30 95 10 Jan-14 Jan-19 Apr-15 Oct-17 Mar-18 Apr-20 Jul-16 Jul-21 Jun-14 Aug-18 Jun-19 Dec-16 May-17 Dec-21 Nov-14 Sep-15 Feb-16 Nov-19 Sep-20 Feb-21 Sources: Haver Analytics and KNOMAD–World Bank staff estimates. 7. The sanctions on the Russian banking system in the form of exclusion from the SWIFT network for fund transfers is likely to directly disrupt remittances through formal channels, which could lead to a partial shift to indirect and informal channels. Also, the sanctions can affect remittance flows indirectly if they lower employment and incomes for migrant workers in Russia. 8. The short-term projections above are highly uncertain, dependent on the scale of the military conflict in Ukraine and the effectiveness of the sanctions on outbound payments from Russia. POLICY BRIEF 17 March 4, 2022 Policy Recommendations 9. Support Ukrainian migrants and refugees. The war has displaced millions of people in Ukraine within the span of a few days. Facilitating their journey and ensuring arrival in a safe environment will be crucial. 10. Support migrants stranded in Ukraine. Ukraine is host to a large number of migrants, refugees and students from Africa, Asia, and Europe. Many of these people are facing difficulties, and need help, in moving to a safer place or returning home. 11. Provide much-needed healthcare. Even as the war is topmost on everyone’s mind, COVID-19 variants have still not gone away. All migrants and refugees—Ukrainians as well as those from other countries stranded in Ukraine—need access to healthcare during the pandemic. 12. Facilitate remittance services. In the immediate term, there is a need to restore access to personal remittance services in Ukraine as well as in Russia. Remittances tend to be the first form of financial support that people receive in times of crisis. Access to remittance services is likely to have been disrupted in Ukraine because of the war. Further, the sanctions on Russia (especially exclusion from the SWIFT payments network) are likely to have disrupted access to remittance services for Central Asian and other migrants in Russia. 13. Reduce the cost of remittances. Some money transfer companies have announced a waiver of fees for sending money to Ukraine. This is a welcome development, and hopefully it could be emulated by other remittance service providers. Even before the war and the sanctions, the cost of sending money to Ukraine was high, ranging from 4.7 percent in Hungary and Italy to 5.9 percent in Poland and 7.0 percent in the Czech Republic (figure 4). Reducing the fees on remittances by 2 percentage points could save Ukrainian migrants $400 million per year. If costs are eliminated, the saving could be $1 billion per year. Lowering remittance costs could be an effective complement to scaling up aid to the people of Ukraine. Figure 4. Costs of sending money to Ukraine are high 7.0 Cost of sending $200 to Ukraine from different countries (%) 5.9 5.4 5.2 4.8 4.7 4.7 Czech Rep* Poland USA* Germany* Romania Hungary Italy* Sources: Remittance Prices Worldwide, and KNOMAD-World Bank staff estimates Note:*2021 Q3, Poland, Hungary and Romania are for March 3, 2022 POLICY BRIEF 17 March 4, 2022 Annex Table 1. Sources of remittances to Ukraine (% share) 2021 Countries 2015 2016 2017 2018 2019 2020 (Q1-Q3) Poland 19.1 26.4 33.6 32.8 29.8 27.5 38.7 United States 7.4 7.6 7.3 7.8 8.3 10.2 9.7 United Kingdom 3.5 3.4 3.3 3.5 5.0 8.5 6.8 Russian Federation 26.4 18.5 13.9 9.8 10.6 7.2 5.1 Czech Republic 4.5 5.0 4.7 7.6 9.3 7.0 5.7 Germany 3.9 3.9 3.4 3.8 3.9 4.3 4.0 Italy 5.0 5.5 4.8 4.4 4.2 4.0 3.2 Cyprus 3.5 3.3 3.1 3.1 3.3 3.5 2.8 Israel 1.6 2.3 3.0 3.0 2.9 3.0 2.8 Greece 2.7 2.4 1.9 1.7 1.6 1.6 1.4 Netherlands 1.0 0.9 1.1 1.1 1.1 1.6 1.4 United Arab Emirates 1.2 1.2 1.3 1.4 1.1 1.2 1.2 Singapore 1.1 1.0 1.1 1.2 1.0 1.1 1.0 Canada 1.4 1.0 0.9 0.9 0.8 0.9 0.7 Spain 0.9 0.9 0.8 0.8 0.7 0.8 0.7 Turkey 0.6 0.8 0.9 1.0 0.7 0.7 0.6 Switzerland 0.9 0.8 0.8 0.8 0.7 0.7 0.6 Portugal 0.6 0.6 0.6 0.5 0.5 0.6 0.5 Norway 0.5 0.6 0.6 0.5 0.5 0.4 0.3 Virgin Islands, British 0.5 0.5 0.6 1.4 1.5 1.6 0.4 Others 13.7 13.4 12.2 12.8 12.3 13.7 12.5 Sources: National Bank of Ukraine and KNOMAD–World Bank. POLICY BRIEF 17 March 4, 2022 Annex Table 2. Outbound remittance flows from the Russian Federation (% share) 2021 Countries 2015 2016 2017 2018 2019 2020 (Q1-Q3) Azerbaijan 5.8 6.2 5.7 6.0 6.2 5.8 5.7 Armenia 7.1 5.6 6.0 5.9 5.6 5.4 6.3 Belarus 3.6 4.0 4.0 3.5 3.2 2.8 3.2 Kazakhstan 2.2 3.0 2.7 3.1 2.0 1.6 1.1 Kyrgyz Republic 9.3 11.1 10.8 12.0 13.0 13.7 15.5 Moldova 5.6 4.5 4.6 4.0 3.2 2.5 1.9 Tajikistan 12.8 13.2 13.9 14.2 15.6 12.6 11.1 Turkmenistan 0.1 0.1 0.0 0.0 0.0 0.0 0.0 Uzbekistan 18.8 17.4 18.9 19.3 22.9 26.3 32.8 Ukraine 11.2 9.4 7.2 7.6 6.7 5.4 5.1 Others 23.5 25.5 26.2 24.3 21.6 23.9 17.3 Source: Bank of Russia and KNOMAD-World Bank. POLICY BRIEF 17 March 4, 2022 Annex Table 3. Sources of remittances to Georgia (% share) Countries 2015 2016 2017 2018 2019 2020 2021 Russia 40.1 34.2 32.8 28.9 24.7 19.3 17.5 Italy 10.1 10.7 10.7 12.2 13.8 15.8 16.4 U.S.A. 9.3 11.1 10.2 10.1 10.3 11.6 12.1 Greece 10.9 10.8 10.2 10.8 11.1 11.6 10.2 Israel 3.0 5.3 8.6 9.6 9.4 8.3 7.9 Germany 2.5 2.6 2.5 2.6 2.9 3.9 4.8 Turkey 6.4 7.5 7.9 6.7 5.5 5.7 4.4 Ukraine 1.9 1.8 1.9 1.8 2.5 4.6 3.9 Azerbaijan 1.4 1.3 1.1 1.3 1.3 2.9 3.6 Kazakhstan 1.4 1.0 1.0 1.0 1.5 1.0 2.6 Spain 2.5 2.7 2.6 2.6 2.7 2.5 2.4 France 1.0 1.0 1.0 1.2 1.5 1.5 1.6 Poland 0.1 0.1 0.2 1.2 1.8 1.5 1.4 Kyrgyz Republic 0.1 0.1 0.2 0.7 1.7 0.4 1.3 Others 9.4 9.8 8.9 9.1 9.3 9.3 9.6 Source: National Bank of Georgia and KNOMAD-World Bank. Endnotes i KNOMAD and Migration and Remittances Team, Jobs Group, Social Protection and Jobs, World Bank. Sincere thanks to Michal Rutkowski and Ian Walker for guidance and to Vandana Chandra, Vinayak Nagaraj, Rebecca Ong, and Sonia Plaza for helpful comments. ii World Bank Migration and Remittances Factbook 2016. iii This figure is significantly higher than the estimates published in November 2021 by KNOMAD –World Bank (see Migration and Development Brief 35). iv According to the National Bank of Ukraine, remittances from Russia in 2020 amounted to $863 million. The Central Bank of Russia reports a similar figure ($807 million) for outbound remittances to Ukraine in 2020. The research presented in this policy brief was funded by the Thematic Working Group on Remittances and Diaspora Resources of KNOMAD, a global hub of knowledge and policy expertise on migration and development. KNOMAD is supported by a multi-donor trust fund established by the World Bank. The European Commission, and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH commissioned by and on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), and the Swiss Agency for Development and Cooperation (SDC) are the contributors to the trust fund. The views expressed in this policy brief do not represent the views of the World Bank or the partner organizations.