Russia’s Downturn Adds to Weakness in EBRD Economies

A sharp fall in the price of oil has piled pressure on an already fragile Russia, and is hitting growth in energy exporters and other emerging nations with close links to eastern Europe’s largest economy, according to the EBRD’s latest economic outlook.

EBRD economists expect Russian GDP to shrink by close to five per cent in 2015, a major downward revision from September’s forecast of a contraction of 0.2 percent.

However, the EBRD says lower commodity prices could benefit countries in central and south-eastern Europe (CESEE) and the South and Eastern Mediterranean (SEMED), helping to offset the continuing negative effects of weak external demand from the eurozone.

On average, countries across the EBRD regions are now expected to see a contraction of 0.3 per cent in 2015, after a forecast of 1.7 percent growth in September. “Even this forecast is subject to considerable risks,” said Hans Peter Lankes, acting EBRD chief economist. He referred specifically to the impact of any further large falls in the oil price, a further escalation in the Ukraine/Russia crisis, and a possible increase in uncertainty in the eurozone.

On the positive side, the oil price decline, and resulting improvements in terms of trade, could help soften the impact on emerging economies of the expected normalization of US monetary policies.

The halving of oil prices has added to problems in Russia, whose economic growth was already slowing down amid uncertainty and weak investor confidence after the imposition of sanctions in 2014. Energy exporters Kazakhstan, Azerbaijan, and Turkmenistan have also been negatively affected by the lower prices.

Even for energy importers in eastern Europe, the Caucasus and Central Asia, the oil price fall is a mixed blessing, as benefits are being outweighed by lower export demand and remittances from a weakened Russia.

The economies of Armenia and Moldova are now expected to stagnate in 2015, while in Belarus a contraction of 1.5 percent is forecast.

The depreciation of the rouble has increased pressures on the currencies of economies with strong trade, investment, and remittances ties to Russia, with the sharpest declines seen in Belarus, Turkmenistan, and Armenia.

The Ukrainian economy remains in a particularly precarious state, the report said. In addition to the impact of the conflict in the east of the country, there is currently uncertainty about the volume and timing of international financial assistance. After a sharp contraction in 2014, a further fall of five percent is predicted for this year.

The EBRD report said future developments depended on both external and domestic factors, including the ability of the Kiev government to implement a number of key reforms, a reduction of the regional geopolitical risks, an end of fighting in the Donbas, and adequately timed and scaled international support.

The report added that domestic demand was supporting growth in Central Europe and the Baltics (CEB), where it was helping to offset weaker exports as growth in the eurozone remains anaemic.

Domestic demand was also a positive factor in some countries in south-eastern Europe. However, developments there have been mixed. Serbia entered a recession in 2014, with an already fragile economy weakened further by flooding in May. Its return to growth in 2015 (+0.5 percent) will be less robust than expected in September.

The report said any uncertainty following elections in Greece on January 25 could weigh on the economies of central and south-eastern Europe.

Turkey is expected to see growth of 3 percent in 2015, supported by the lower oil import bill and potential monetary easing. However, continued weakness in external demand and lower spending by Russian tourists could be negative factors.

Lower oil prices will also be a positive factor in the southern and eastern Mediterranean region. However, significant benefits from oil prices may be partially offset by lower export demand, investment, and remittances from the Gulf Cooperation Council countries.

High non-performing loans (NPLs) are a key reason for weak credit growth. NPL ratios are close to 20 percent in most countries in south-eastern Europe and Ukraine. In Kazakhstan they exceed 30 percent, while in Cyprus they are around 50 percent, respectively.