Executive Summary: Remittance which was sent by migrant workers to their home countries are seen as small amounts that meet the needs of the migrants’ households. However, these small amounts are three times larger than total foreign aid in 2015. Russia is an important destination for the Central Asian countries. Over 60% of the remittance inflow to Kyrgyzstan and Tajikistan comes from Russia. The Central Asian countries are heavily dependent on remittances and in 2015 the amount of remittances that were sent to Uzbekistan from Russia decreased by 57%, for Tajikistan this number dropped by 66% and for Kyrgyzstan by 46% in terms of dollar value due to economic stagnation in Russia, sharp fall in oil prices and depreciation of Ruble against dollar. This policy brief looks at the current situation on remittance outflow from Russia and ways to ease the fall in the amount of remittances which were sent to the Central Asian countries.
Introduction
There are 250 million international migrants living abroad and approximately 180 million of these migrants from poor countries, migrated to another country looking for job opportunities (Ratha, 2014; WB 2016). Remittances are an important source of income for households in developing countries. For example; in 2015, 432 billion dollars were sent to their home countries by migrants (WB, 2016). This amount could be increased by improvements in transfer costs and work permit.
Russia holds the second place for hosting 12 million international migrants after United States (47 million) (UN, 2015). According to the cross-border remittance statistics by the Central Bank of Russia, in 2013 $6.6 billion were sent to Uzbekistan, $4.1 billion to Tajikistan and $2 billion to Kyrgyzstan. However, starting from 2014 the amount of remittances has decreased significantly due to sharp fall of oil prices, the economic slowdown in Russia. In addition, steep depreciation of Ruble against US Dollar has decreased the salaries of migrant workers by half in terms of the dollar. Therefore, remittances in terms of dollar reduced to $2.3 billion for Uzbekistan, $1.2 billion for Tajikistan and $1 billion for Kyrgyzstan (CBR, 2016). Furthermore, the changes in the regulations of work permit have created an additional economic burden by increasing the price for legal working conditions in Russia.
Majority of the remittances that the Central Asian migrants sent back their home countries comes from Russia and tightening the rules for entering and obtaining a work permit in 2015 has negatively affected the wages of the migrant workers. Before the changes, there was a national price level for the work permit but new changes in the regulations have given the right to define their own price for a work permit to the governors of the regions (rus4all.ru, 2015).
Among the new changes, a patent system is introduced which could be used as a legal document for a work permit and given for a 12 month period with a maximum extension to a year. Previously, in order to obtain work permit, the Central Asian labor migrants had to pay a national standard, 1200 Ruble monthly, however since 2015 the price of the work permit has been tripled to 4000 Ruble for a month (this amount is for Moscow which is the most preferred city for the majority of the migrant workers) (Hashimova, 2015). In addition, they have to submit two additional documents, namely, medical insurance and certificate of knowledge of Russian language, history and legal system in order to be able to get the patent, which will allow them to work legally in Russia. Besides, these documents have additional costs, the cost of medical insurance would be over 5000 Ruble and the cost of the complex test would be over 4900 Ruble (Hashimova, 2015).
Changes in Remittance
The sharp decline in oil prices, the economic slowdown in major remittance receiving countries and depreciation of local currencies against dollar especially in Russia have led to a decrease in the growth rate of remittances. It is estimated that the growth rate of remittances which were sent to the developing countries has decreased from 3.2% in 2014 to 0.4% in 2015 (WB, 2016).
Graph 1: Relationship between the Oil Prices and Remittance (1994-2015)
Source: World Bank, 2016.
During 2010-2013 period, oil prices have increased to $100 per barrel (bbl) allowing the remittances which were sent from Russia to jump from $30 billion in 2010 to around $40 billion in 2013. The significant decrease in oil prices that plummet below $30 bbl in January 2016 has shrunk the outflow of remittance of Russia to around $20 billion. Regarding the relationship between remittances which were sent from Russia and oil prices, we can see a strong correlation. (Figure 1) (WB, 2016). According to the World Bank estimations, this sharp fall in oil prices has negatively affected the Russian economy consequently reduced the remittance outflow by 40% in 2015. Moreover, the Central Asian countries are heavily dependent on remittance outflow from Russia where over 60% of the remittance to Kyrgyzstan and Tajikistan comes from Russia. Therefore the decrease in Russia remittances has significantly affected the remittance that the Central Asian countries received in 2015 (WB, 2016).
Graph 2 and Graph 3: Total Amount of Remittance Sent From Russia for 2012-2015 and Q1 2015-Q12016.
Source: the Central Bank of Russia, 2016
The additional costs of obtaining the permit, together with the depreciation of Ruble against the dollar and the economic slowdown in Russia have reduced the amount of remittances significantly in 2015. In 2015, the amount of remittances in terms of dollar value significantly drop by 57% for Uzbekistan, for Tajikistan by 66% and for Kyrgyzstan by 46% according to the cross-border remittance statistics of the Central Bank of Russia (CBR, 2016). Moreover, comparing the first quarter of 2015 and 2016 shows that the remittances which were sent to Uzbekistan decreased by 44%, this figure is 71% for Tajikistan and 34% for Kyrgyzstan (CBR, 2016).
Work Permit
In 2015, 1.78 million patents were given and 34 billion Ruble was sent to Russian government budget. Comparing with the last year statistics, we can see that there is a 25% decrease in the number of patents which were sold. However, increasing the price of the work permit has increased the earnings by 27% or 12 billion Ruble (Ministry of Interior, 2016). This result indicates that 25% share either did not come or decided to work illegally. Considering the two options sound more logical keeping in mind that in terms of migration destinations, the Central Asian migrant workers do not have many choices rather than going to Russia searching for job. Russia is the only country in near abroad, which will accept these migrants on visa-free basis and Russia’s labor market could absorb a large number of migrant workers.
It is estimated that there are 4.3 million people who are working in Russia illegally in 2014 (Moscow times, 2014). Central Asian migrants could stay in Russia for 90 days without registration and according to Russian laws, if a person stays over the duration indicated in its work permit, he/she is considered to be illegally staying in Russia (Hashimova, 2015). Working illegally might allow migrant workers to save some money on the one hand. But on the other hand, it forces them to work for lesser wages and without the protection of their rights, which cause a reduction in the amount of remittances.
Transfer costs
Remittance Prices Worldwide indicates that the global average transfer cost was 7.4% in 2015 that is considerably higher than the millennium development goals that set the target for global average cost of migrant remittance transfer to be lesser than 3% by 2030 (Oxford, 2015). However, the average transfer cost is reducing gradually and it decreased only 2.6% during the last 7 years. One of the reasons for this slow decrease is that international banks concern regarding the risk of money laundering and other financial crimes under the name of remittance transfers (WB, 2016).
Graph 3: Total Average Cost of Transfers (G8 Countries)
Source: World Bank, 2016
Remittance Prices Worldwide indicates that transfer costs are slowly decreasing over the years. The G20 average cost dropped slightly over 10% in 2008 to 7.61% in 2016 Q1 while global average cost followed a similar trend and reduced to 7.53% in 2016 Q1 from 10% in 2008. As for Russia, the average cost decreased from 2.88% in 2008 to 2.11% in Q1 2016 (WB, 2016). However, in Q1 2016 average cost increased in Russia with 0.16% comparing with Q4 2015 the highest increase among the G8 countries (WB, 2016). We should mention that the transfer costs in Russia is one of the lowest in the world and this is due to high competition between international and national providers. Besides, the usage of different channels to transfer remittance is widespread in Russia (G20, 2015). Furthermore, there are a number of e-wallet services that send money to the members without any transaction fee but their usage is around 5% in Russia (G20, 2015).
Conclusion
2015 was a difficult year for the Central Asian labor migrants due to international events such as falling oil prices and devaluation of Ruble which has reduced their wages dramatically. In addition, increased prices and tightened legalization process of the work permit created an extra burden. 2016 Q1 results indicate that small changes took place in terms of remittances, while the number of legally working migrants sharply decreased. Concerns on 25% decrease might shift towards the shadow labor market and start working illegally. Labor migrants are struggling to ease their losses with different saving methods such as spending less on their healthcare, working illegally in order to avoid paying for the patent and if possible working in two jobs. Certain changes in transfer cost and obtaining work permit might assist the migrants to remit more to their home countries.
Although the average transfer cost in Russia is lower than the G20 transfer cost average, they could be lowered even further by spreading the usage of alternative systems like as e-wallet programs. Certain flexibilities in bureaucracy and payments in work permit could allow illegal migrant workers to work legally which would be beneficial for both sides. There are some other options that can help to improve the process such as raising public awareness for the alternative innovative technologies in order to increase the financial literacy on money transferring options and creating a separate category for workers with low-income with a different price range for obtaining the patent.
Reference
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*Published in the August 2016 No. 8 issue of the “Asya Avrupa: Haber-Yorum” journal.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.