Amid escalating geopolitical tensions, trade patterns in the Emerging Europe and Central Asia region are undergoing significant transformations, according to a report by the European Bank for Reconstruction and Development (EBRD) released on May 15.

“There are multiple things happening. On the one hand, we see firms reorganising global supply chains to increase their resilience,” said EBRD chief economist Beata Javorcik in an interview with bne IntelliNews on the sidelines of the EBRD annual meeting in Yerevan. 

“Then with the sanctions and rise of intermediated trade and trade diversions around Russia, there has been a dramatic drop in Western exports, and an increase of exports from Turkey, China, and intermediated trade coming via Central Asia,” Javorcik added. 

“Yet another aspect is geopolitics driving [foreign direct investment] FDI flows.” 

Among the changes outlined in the report is the imposition of restrictions on exports, particularly targeting raw materials crucial for the digital economy and the green transition. Additionally, there has been a noticeable increase in the utilisation of emerging market currencies in international trade transactions traditionally dominated by the US dollar.

Since 2022, trade within blocs of geopolitically aligned countries has been experiencing markedly faster growth compared to trade across such blocs. 

Russia sanctions drive trade realignment

The sanctions imposed on Russia since its invasion of Ukraine in February 2022 have led to the emergence of intermediated trade routes in the region. 

“Following the imposition of trade sanctions on the Russian economy, EU exports to selected economies in Central Asia and the Caucasus increased sharply. This intermediated trade via the Caucasus and Central Asia continued growing, providing impetus to the intermediary economies. In recent months, such trade has stabilised at high levels,” said the report. 

Despite the recent stabilisation, intermediated trade remains a significant contributor to growth. EU exports to the Kyrgyz Republic witnessed a 172% year-on-year increase in 2023, contrasting with a contraction in total EU exports. Similar growth trends were observed in exports to Armenia, Georgia and Kazakhstan.

Arms trade grows 

There has been a sharp increase in defence spending since the start of the Ukraine war. This surge in defence-related trade signifies a departure from the previous trend, where defence expenditures were declining. Defence goods dominate the list of product groups with the fastest export and import growth in 2023.

The report notes that in the EU members in the region, the share of arms in imports and exports has shot up from around 0.1% of  total cross-border trade to 0.3-0.5%. 

“The so-called ‘peace dividend’ — the economic benefit resulting from a reduction in defence expenditure and a subsequent reinvestment of funds in the civilian economy — has been reduced significantly,” said the report 

FDI patterns shift 

When it comes to FDI there has been a sharp increase in inflows from China to the EBRD region of operations in 2023, with some significant announcements in Serbia — which recently hosted Chinese President Xi Jinping — as well as the north African economies of Egypt and Morocco. Chinese investment has particularly targeted sectors such as electronics, metals and renewables.

Similarly, FDI from Russia to Central Asia surged in 2023, driven by logistics services. The highest volume was directed into the region’s largest economy Kazakhstan, but in relative terms FDI inflows are also high in Central Asia’s smaller economies, the EBRD said. 

“Geopolitical fragmentation of trade has also coincided with notable shifts in FDI patterns, with increasing investment in “bridging” economies that maintain close trade ties with rival blocs of economies” said the EBRD report.