The war in Ukraine is fuelling an FDI and manufacturing boom in the Commonwealth of Independent States (CIS) as local entrepreneurs rush to fill the gaping holes left in Russia’s supply chains by departing Western firms, reports Oxford Economics on November 5.

Several ex-Soviet economies are continuing to grow at rates exceeding pre-conflict expectations, buoyed by major changes to the make-up of Russia’s economy and trade patterns across the region.

FDI surges in 2022-2023

Foreign direct investment (FDI) in 2022-23 surged across the entire region, leading to a manufacturing boom that is likely to be sustained into the mid-2020s, although growth is expected to moderate somewhat in 2025-26 as the Russian economy is cooling as the military Keynesianism boost factors begin to wear off.

Russia has re-emerged as what the European Bank for Reconstruction and Development (EBRD) previously dubbed a “node country” for investment in the region; Russia plays an economic role similar to that of Germany in Western Europe, as a source of investment and a driver of growth for all the former members of the USSR, funded by its excess income from raw material exports.

Industrial growth up on high demand

Russian demand for manufactured goods soared after extreme sanctions were imposed in 2022 and fostered regional industrial growth, with Kyrgyzstan, Uzbekistan, Armenia and Belarus benefitting the most from the exit of Western firms from the Russian market, says Oxford Economics. “This shift has allowed regional manufacturers to capture new market share in Russia,” Oxford Economics said. Alongside domestic demand, the growth is underpinned by “real wage increases and relatively low inflation,” allowing for looser monetary policy and reduced borrowing costs across the CIS.

The biggest winner has been the civilian sector. While there are suspicions that some of the countries are helping to supply Russia’s military industrial complex, by far the biggest demand is from the civilian sector as Russia seeks to replace simple products that temporarily disappeared from its shelves as Western firms producing non-sanctioned items left the market for reasons of reputational risk.

The ongoing conflict has also driven investment into sectors like logistics and IT, especially from Russian sources. Tourism, a traditionally smaller sector, has also seen renewed interest and FDI inflows, further supporting GDP growth. Armenia and Georgia have led the way with significant upticks in FDI following Russia’s 2022 partial mobilisation, which saw an exodus of funds and skilled workers to the region. Armenia’s FDI peaked after Russia's third quarter mobilisation announcement, while Georgia and Belarus saw their FDI flows peak in mid-2023 before easing to historic levels in 2024.

GDP growth revised up

Although growth is forecasted to moderate in the next two years, recent data has led to revisions in expectations, says Oxford Economics. Growth forecasts for Georgia, Azerbaijan and Tajikistan in 2024 have been raised by 3.1, 1.5, and 1.7 percentage points respectively.

Belarus and Moldova saw more modest adjustments, while Armenia’s growth forecast was cut by 1 percentage point to 6.8%. Analysts expect Armenia, Azerbaijan, Belarus, Georgia and Kyrgyzstan to maintain above-average growth rates in 2024, driven by “a combination of external and domestic factors,” says Oxford Economics.

Among the few exceptions, Moldova’s economy has struggled to regain its footing following a 4.6% contraction in 2022. Its GDP grew by only 0.7% in 2023, with an expected 3% growth this year, a pace below historic averages.

Sanctions on Russia are a good thing

Oxford Economics suggests this divergence reflects a broader trend where those countries that are more integrated with Russia’s economy have done far better than those with more diversified business interests. In this context complying with Western sanctions would be extremely detrimental to the local economies and have been eschewed by all the members of the CIS. Ironically, the sanctions regime on Russia is the reason why the CIS countries are flourishing.

This regional economic outperformance has been propelled by Russia’s own surprisingly strong growth. “After a brief GDP contraction in 2022, Russia returned to growth with fiscal stimuli and monetary easing,” Oxford Economics reports. Russia’s economy grew by 3.6% in 2023, with an estimated similar growth rate this year. With domestic demand surging, bolstered by state-backed lending, demand for labour remains high, supporting remittance-dependent economies such as Tajikistan and Kyrgyzstan in particular.

As bne IntelliNews reported Central Asia has been the big winner from the war in Ukraine, acting as a bridge between trading blocs. EBRD analysts note that Central Asia is maintaining robust trade ties with competing economic powers, benefiting from enhanced FDI flows largely tied to logistics and trade services. In particular, Kyrgyzstan has taken the war-time windfall and is investing into the massive new Kambarata-1 HPP hydropower plant that will turn the mountainous republic into a net power exporter and provide the government with a new source of income, but like the other ‘Stans is also enjoying a manufacturing boom.

Industrial output

Key sectors in the CIS are benefiting from the effects of redirected FDI and rising exports to Russia, Oxford Economics data reveal. Belarus, Armenia and Uzbekistan have all registered notable gains in industrial production, which, according to analysts, reflects “the earlier influx of FDI and a rise in exports to Russia.”

While formally direct trade ties between the EU and Russia have been cut and are currently at a 25-year low, in practice many private Western firms are simply redirecting their trade via third countries. Exports of EU products to countries like Armenia, Kyrgyzstan and Belarus have risen by thousands of percentage points in the last two years. With car sales in Europe stagnant, makers of luxury Western brands have lobbied the EU to not tighten sanctions on Belarus, as it is an open secret that Minsk is now a major way station for their continued sales to the Russian market.

The conflict-induced demand is particularly visible in Belarus, where the economy quickly rebounded from a 2022 recession. Belarus’ industrial output surged by 15% year on year on average so far in 2023, supported by “strong trade ties with Russia” and increased demand for local goods as Western firms exited the Russian market.

In Armenia, industrial production rose more than 25% y/y in the first quarter, while Uzbekistan has posted steady manufacturing growth that often exceeded 15% y/y over the past four years. Uzbekistan is in a particularly sweet spot as its economy was already booming as the raft of economic reforms put in place by Uzbek President Shavkat Mirziyoyev starting in 2016 were already kicking in before war in Ukraine began, which has only supercharged the growth.

This manufacturing boom is reinforced by a shift in the IT sector across Central Asia and the Caucasus, fuelled by “digital nomads” and skilled Russian workers who relocated after Russia’s 2022 mobilisation. Armenia’s IT and telecoms sector led the region, growing by an average of 41.5%, followed by Uzbekistan at 25.5% and Kyrgyzstan at 8.7%, according to an EBRD report.

 

Labour market shifts bolster remittances and consumption

Russia’s chronic labour shortage has amplified remittance flows to neighbouring economies like Tajikistan and Kyrgyzstan, as Russia turns to migrants to fill factory benches.

“The high demand for migrant labour in Russia, coupled with rising wages there, has driven up remittances well above pre-war levels, providing substantial support to household consumption in these smaller economies,” Oxford Economics reports.

Despite stricter immigration controls following the tragic Crocus City Hall mall terror attack on March 22 that saw over 140 people killed, the acute need for low-skilled workers has sustained these remittance flows, with Tajikistan seeing notable increases in 2022–24.

In parallel, household demand across the Caucasus and Central Asia has accelerated, supported by moderating inflation rates and favourable monetary policy. Inflation in Georgia and Armenia has dropped to record lows, allowing central banks to cut rates further. This, in turn, has driven a surge in consumer lending and real wage growth, especially in Kyrgyzstan, where retail sales have shown double-digit increases since 2023.

“Retail sales growth recently picked up in Azerbaijan and Kazakhstan,” analysts note, attributing the uptick to low inflation, rising wages, and a lending boom. Azerbaijan’s domestic demand is forecast to rise by 6.3% this year, up from 2% in 2023, while Georgia’s demand growth is expected to reach 8.3% in 2024.

Tourism boom drives investment in hospitality

Another quirk of the sanctions has been to completely remake tourism in the region. Russians love to travel and in theory they are still able to visit their favourite holiday spots in Europe, but as airline routes between the EU and Russia have been effectively closed the long roundabout routes are prohibitively expensive and time consuming leading most Russians to switch to alternative destinations with direct flights from Moscow.

sanctions and a weak rouble has driven many of Russia’s middle class to seek travel destinations within the region rather than in the West, driving up tourism receipts across ex-Soviet countries, with some countries reporting considerable increases in services exports since early 2022. The resulting influx of tourists has stimulated investment in local hospitality sectors, reinforcing economic resilience in these nations.