# 1. Introduction

Russia’s invasion of Ukraine has had far-reaching consequences through various social, economic, and other channels, creating global ripple effects. The economic impact of the invasion has been felt through multiple channels, including commodity and financial markets, trade and migration links, and business confidence and investor uncertainty. These effects have added to existing concerns about a potential global economic slowdown, increased inflationary pressures, rising levels of debt, and a surge in poverty rates. Russia’s invasion of Ukraine (the invasion) has heightened economic uncertainties and underscored the need for careful analysis and response to mitigate its adverse effects on the global economy and local businesses alike.

Central Asian (CA) countries also felt major consequences of the invasion through multiple channels, including the sanctions imposed on Russia and Russia’s recession. Closed trade and payment system links curbed trade, remittances, investment, and tourism, adversely affecting economic growth, inflation, and external and fiscal accounts shortly after the invasion.<sup>1</sup> As a result, the growth of CA economies slowed to 4.1 percent in 2022, from 5.3 percent in 2021. Economic growth is set to remain mediocre in 2023, with the real GDP of CA projected to grow by 4.0 percent (World Bank, 2023a). And businesses in CA countries report that their imports from Russia or Ukraine have decreased or they have stopped sourcing from these countries altogether. They are responding to the resulting growth in production costs by raising their sales prices or coping with reduced profitability (Iootty and Melecky, 2022).

A few papers use microeconomic data to examine the effects of Russia’s invasion of Ukraine on business. For example, EBRD (2023) explores the compounding effects of the global pandemic and the invasion on businesses in EBRD countries, focusing on trade and finance transmission channels. The findings suggest that trade disruptions prompted firms to enhance their supply chain resilience by stoking up inputs and diversifying their supplier base.<sup>2</sup> Other studies have examined the invasion's impact on firm financial performance, particularly in relation to rising energy prices and the disruption of energy imports. Ferriani and Gazzni (2023) find evidence of decreased equity returns for European firms listed in the Eurostoxx 600 index, especially for those with high energy intensity and carbon emissions. Bougias et al. (2022) identify higher asset volatility, credit spreads, and default probabilities resulting from the invasion. Hutter and Weber (2022) observed a 1 percent decrease in production for German firms due to the increase in energy prices after the invasion—although turnover increased, reflecting sales from stock, and employment was safeguarded through short-time hiring. Mattera and Soto (2022) found that Spanish energy firms that transitioned to renewable energy sources and implemented ESG strategies and CSR commitments exhibited stronger financial performance and lower dependence on uncertain and weakened markets after the invasion.

Our study contributes to the emerging literature on the impacts of Russia’s invasion of Ukraine on business, with a specific focus on Central Asian countries. It examines how firms responded to the early stages after the invasion, depending on their varied trade exposure to Russia and varied levels of

> 1 More recently, CA countries have been reportedly benefiting from serving as a hub for reexports and arbitrage in financial flows and payments to and from Russia. Specifically, estimations presented in EBRD (2023) show that following the invasion of Ukraine and the trade sanctions imposed on Russia, Kazakhstan was poised to make a small gain (0.4 percent of GDP) as it scales up exports of goods that were previously exported by Russia.

> 2 The study also highlights the negative spillover effects of evergreening loans to vulnerable firms, which affected the investment, revenue, and employment of healthy firms operating in sectors with a high presence of zombie firms.

2