Wide-ranging political events in 2022-2023 have had collateral social and economic impact on the Europe and Central Asian region. We have seen human mobility intensity bounce back from the pandemic-induced decline. Besides the increased migrants, internally displaced and refugee flows, especially due to the war in Ukraine, the most unexpected turnout refers to remittances. As the flows and nature of remittances changed significantly in the last two years, let us reflect on six major trends we’ve seen in the region.

Record transfers noticed from Russian Federation 

The Russian Federation remained the main source of remittances with record amounts of money transferred to neighbouring countries. Remittances equalled about 21 percent of GDP in 2022, up sharply from 13 percent in 2021. There’s been a higher mobility and reallocation of Russian citizens and small companies to neighbouring countries, the high Russian ruble exchange rate (translating into higher values in US dollars) and an increased demand for migrant workers in Russia, partially due to mobilization and already existent labour gaps in certain areas. On another note, countries from Central Asia and South Caucasus which experienced significant inflows of Russian “migrants” also faced an unprecedented increase of outflows back to Russia. These new and unusual trends for the region arise from small-scale capital movements and payments supporting families back to Russia.

Ukraine: the largest recipient of remittances in the region

As for Ukraine, two contradictory forces are at work: the displacement of millions of Ukrainian refugees (mostly women and children) in Central and Western Europe and beyond, versus the return of Ukrainian men, who had been working abroad, to serve in the Ukrainian army. Ukraine continues to be the region’s largest recipient of remittances, with an inflow of $17.1 billion in 2022, but that number is down 5.4 percent from 2021. This is due to a decline of remittances originating from Poland, the main remittances-sending country, together with a decrease in wages of Ukrainian migrants working abroad. It is fair to say the war has had a negative impact on remittances for Ukraine, a trend likely to be maintained, as already confirmed by 2023 data. 

High costs of remittances

The volume of remittances was also accompanied by an increase in the cost of sending them. T. (The number might seem small, but it is very high when it comes to the cost of remittances. It’s also twice as high as the SDG target of only 3 percent by 2030.) This partially comes from new compliance regulations governing anti-money laundering and combating the financing of terrorism, which continues to restrict access of new service providers. This average cost does not include data on corridors originating in Russia, which used to be one of the lowest-cost senders of remittances globally, but overall Europe and Central Asia is now the second-most-expensive region for sending remittances, after Sub-Saharan Africa. 

Tighter bank controls

The imposition of sanctions against Russian banks in 2022 had a significant impact on remittances in Europe and Central Asia—especially for countries in Central Asia. These sanctions, which aimed to limit the financial activities of targeted Russian banks, resulted in tighter banking controls over cross-border flows, particularly in terms of remittance transfers. This did create opportunities for some countries, who managed to maintain flexibility and proposed new financial products, like Türkiye (mostly by) and and Georgia (where more than 100,000 accounts were opened). This also created demand for non-traditional currencies, like cryptocurrencies. But secondary sanctions and further financial controls could affect these channels in the coming years.

New ways to look at remittances and respond to fiscal constraints 

As countries of the region grapple with fiscal constraints, governments may be tempted to explore new avenues for revenue generation. One potential option that appears to be a “low-hanging fruit” is the taxation of remittances, which are relatively easy to track and which still represent a significant flow of foreign exchange market. Such a move could have unintended consequences, including the risk of pushing remittances into a grey zone. 

Remittances are already indirectly taxed, as approximately 80 to 90 percent are being spent on goods and services. In most countries, consumption is subject to value-added tax (VAT), which means remittances indirectly contribute to government revenue. Imposing additional taxes specifically on remittances would not only burden the hard-earned money sent by migrants to support their families back home, but also disrupt the formal channels through which remittances flow. This could inadvertently lead to remittances being diverted into informal or illicit channels, making it harder to track and regulate these vital financial flows. 

Instead of resorting to taxing remittances, governments should focus on creating an enabling environment that encourages formal channels and supports the productive use of remittances to stimulate economic development and poverty reduction.

Increased value of non-monetary remittances

Last, but not least, non-monetary remittances play a crucial role in a country's development, especially at the local level. They create a space for a large number of migrants to engage and support their communities back home. As seen in the Republic of Moldova and Ukraine, non-financial remittances can contribute to sustainable local socio-economic development, harness cultural connection and build trust and social cohesion.

Remittances clearly have a significant impact on economies in the Europe and Central Asia region, and UNDP is providing support to 19 national Governments to understand remittances in national contexts and effectively design new ways to amplify the development impact of remittances, both through using Blockchain and enhancing the effective engagement of Diaspora and migrants in the development of their communities back home.