EBRD: Russia-Ukraine crisis threatens recovery in transition region

EBRD: Russia-Ukraine crisis threatens recovery in transition region


By Clive Leviev-Sawyer of the Sofia Globe

The European Bank for Reconstruction and Development (EBRD) said on May 14 that the continued tension between Russia and Ukraine could have a significant negative impact on the economic recovery of the countries in the region covered by the bank.

In its latest economic forecast report, EBRD said that “events in Ukraine/Russia have significantly increased geopolitical and economic uncertainty, with direct negative effects on the economies of Ukraine and Russia and potentially wider implications for the region as a whole.”

The bank said that the outlook for growth in the transition region – EBRD was set up in 1991 to spur transitions to market economy in the former countries from the communist bloc – had “materially deteriorated” since its previous economic forecast report in January, “dashing hopes that the continuous decline in the region’s growth rate since 2011 would be reversed in 2014.”

EBRD’s baseline scenario now envisions economic growth of 1.4 per cent in region, down from 2.3 per cent in 2013, compared to the bank’s forecast of 2.7 per cent that it made in January.

“The negative spillovers are expected to be largely contained to the neighbourhood of Russia and Ukraine under our central scenario, though several central and south-eastern European economies will also see some impact. A modest pickup to 1.9 per cent is possible in 2015 provided that the Ukraine/Russia crisis does not escalate,” EBRD said.

But the risks to this scenario were considerable, because of the high uncertainty concerning the future developments in the Ukrainian crisis. The imposition of financial sanctions on Russia could push the country’s economy into recession, which would stifle average growth in the region both this year and in 2015, the bank said.

While events in Ukraine provided significant downward pressure on growth, other notable developments outside the region had a positive impact on it – namely the diminished pressure on emerging markets from the reduction of the quantitative easing policy in the US and the stable economic recovery in the euro zone.

The latter had a particularly strong impact on central and south-eastern Europe and the Baltic states – areas made up of EU member states that have close links to the euro zone, EBRD said.

As a result, the bank’s forecast for the central Europe and Baltic states area remains unchanged at 2.2 per cent average growth (as a more optimistic forecast for Slovenia offset downward changes in growth estimates for other countries) and the forecast for south-eastern Europe was increased to 2.1 per cent (0.1 percentage points higher than in January).

Eastern Europe and the Caucacus, however, is now expected to see a decline on average of 2.6 per cent (mainly because Ukraine’s economy is expected to shrink by seven per cent, as opposed to 1.5 per cent growth) and Russia’s economy is seen as posting no growth this year (compared to 2.5 per cent growth forecast in January).