March 29, 2024

Ukraine turmoil to hit emerging economies as Russia braces for setback

European Bank for Reconstruction and Development's (EBRD) Chief Economist Erik Berglof (AFP Photo / Leon Neal)

European Bank for Reconstruction and Development’s (EBRD) Chief Economist Erik Berglof (AFP Photo / Leon Neal)

Ongoing tensions between Russia and Ukraine, which have reverberated across the globe, will particularly impact economies of the EBRD region, with a modest recovery predicted in 2015 following a sharp contraction this year.

The European Bank for
Reconstruction and Development (EBRD) gave a gloomy prognosis for
the whole region, which it says will slow to 1.3
percent in 2014, compared with 2.3 percent last year. Next year
it anticipates 1.7 percent growth, marking the fourth consecutive
year of regional growth below 3 percent.

Uncertainty is the dark cloud that dominates the EBRD report.

“The volatile security situation in Ukraine makes the
forecasts exceptionally uncertain,”
it said.

At the same time, the violent conflict between Western and
Eastern Ukraine, with each side accusing the other of receiving
military assistance from external powers, points to an increase
in military spending at a time when the country cannot afford
such expenditures.

“Just when national governments remain financially strapped
in the wake of the global financial crisis, any new build up in
military spending will be an additional fiscal burden that will
stand in the way of the recovery and economic reforms for the
future,”
the EBRD’s Chief Economist Erik Berglof said.

Much of Ukraine’s economic problems stem from the breakdown of
trading with Russia, which was prepared to assist Kiev with its
monetary problems before political strife broke out in Ukraine
between West and East.

“There are significant downside risks to the outlook stemming
from protracted and intensified fighting and from further
breakdown of trade linkages with Russia,”
the report said.
“On the upside, eventual stabilization in the East may pave
the way for infrastructure rehabilitation and for confidence
recovery, although the timeline is highly uncertain.”

Meanwhile, Russia’s ban on food imports from central and south
eastern European countries and the Baltics will act as a drag on
growth in the region, partly offset by some positive influences
from the eurozone.

In an echo to the monetary emergency policy that the US Federal
Reserve employed to pull the US economy out of dangerous waters,
the EBRD report discussed the possibility of using quantitative
easing (QE) in the Eurozone for emerging European countries.

“The case for quantitative easing has become compelling to
support the still fragile recovery in the Eurozone, to which much
of the (Central Europe and Baltic and south eastern European)
regions are strongly linked. An effective Eurozone QE may help
lessen the risk of setbacks in the recovery of those
regions,”
the report said.

Russia under a sanction cloud

Although Russia and the West have exchanged tit-for-tat sanctions
against each other over Ukraine, EU sanctions announced in
September may be particularly painful, as they focused on
Russia’s oil industry, the supporting column of its economy, EBRD
said in a separate report.

A full quarter of budgetary revenues and half of Russia’s exports
are related to the oil industry.

The report said that the Russian economy would stagnate in 2014,
after a slightly better than anticipated first half of the year.
However, growth in 2015 has been predicted to contract by 0.2 per
cent. In May, the bank forecast that the Russian economy would
grow by 0.6 per cent in 2015.

In addition to affecting business confidence in Russia, the
sanctions limit the access of companies and banks to
international capital markets.

Meanwhile, Russian companies must make repayments of around $190
billion on foreign debt by the end of 2015. Unable to borrow
outside of the country, interest rates may further increase,
which could drag down consumer spending.

At the same time, Russia’s own sanctions on food imports from
European countries could push up inflation in Russia by one to
two percentage points.


Article source: http://rt.com/business/188784-ebrd-ukraine-crisis-slowdown/

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