The FINANCIAL — Russia’s economy will endure a second year of contraction in 2016, while its downturn will take a greater toll than previously estimated on countries in Eastern Europe and Central Asia with which it has close trade and financial links, the European Bank for Reconstruction and Development said on May 14, according to Nasdaq.
By contrast, the bank said the launch of a quantitative-easing program by the European Central Bank has lifted growth prospects in those countries in Central and Southeastern Europe that have close trade and financial links with the eurozone.
Lower oil prices, sanctions and weakening investor confidence will push the Russian economy into a deep contraction this year, the EBRD said, although it now expects output to fall by 4.5%, having forecast a decline of 4.8% in January. However, in its first forecasts for 2016, it sees the economy contracting again, by 1.8%. For both years, its forecasts are more gloomy than those of the government, which projects growth of between 1.5% and 2.5% in 2016.
While Russia’s economic contraction may not be quite as severe as expected at the start of the year, the EBRD now sees it having a more damaging impact on neighboring countries.
During its oil-boom years, Russia attracted migrant workers from Eastern Europe and Central Asia, and many of them have lost their jobs and are returning home. The EBRD estimates that “hundreds of thousands” are back in Tajikistan and Uzbekistan, while the numbers in the Kyrgyz Republic “may be significant.”
Combined with the ruble’s depreciation, that has reduced the flow of money those workers had been sending back to their families, and which accounted for a big chunk of foreign-exchange revenue in their home countries. The EBRD described the rate at which remittances from Russia are dropping as “alarming,” and close to the more than 20% collapse seen in 2009, following the onset of the global financial crisis.
“Migration on this scale poses the significant challenge of how to absorb the returning workers into the domestic economy,” the EBRD warned. “This can become an urgent matter in a geopolitically sensitive region.”
In addition to four countries in central Asia and four other countries in Eastern Europe, the EBRD also lowered its growth forecast for Ukraine, where it now sees output falling by 7.5% in 2015 as a result of the conflict in its eastern, industrial Donbas region, having previously forecast a decline of 5%. Ukraine’s government has agreed a $17.5 billion loan program with the International Monetary Fund to help it reform its troubled economy.
“Assuming that the security situation does not deteriorate and the IMF program remains on track, Ukraine is likely to register a recovery in 2016,” the EBRD said. “Faster and successful reforms and abatement of the geopolitical risks may improve the growth outlook.”
The EBRD was established in 1991 to help countries in Central and Eastern Europe and the former Soviet Union to make the transition from centrally planned to market economies after the fall of Communism.
In recent years, the growth prospects in many countries in that region have been blighted by the eurozone’s long slump, which has reduced demand for their exports. But the launch of the ECB’s stimulus program in March, amid signs eurozone growth is starting to pick up, should help raise growth in Central and Southeastern Europe, the EBRD said.
“Interest rates in many CEB and SEE countries have consequently declined alongside interest rates in the eurozone, including in flexible-exchange-rate countries,” the EBRD said. “In addition, most currencies in the region have weakened against the U.S. dollar alongside the euro.”
It raised its 2015 growth forecasts for four Central European countries, including Poland, and for two countries in Southeastern Europe. It expects to see a slight acceleration in most countries in both sub-regions during 2016.
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