Caucasus and Central Asia suffer from Russian slowdown

By bne IntelliNews November 4, 2014

Naubet Bisenov in Almaty -


Economic activity in Caucasus and Central Asia (CCA) countries is dwindling largely because of sluggish domestic demand and the slowdown and rising regional tensions affecting Russia, which is the region's key trade partner and source of remittances, according to the IMF. Because of overdependence on Russia, the region's non-oil producers will be hurt most, it believes.

In its Regional Economic Outlook Update for the Middle East and Central Asia published in October the IMF said that weakening domestic demand and spillovers from the slowdown in Russia would bring economic growth in the region down to 5.5% in 2014 and 2015, 0.75 percentage points lower than projections made in May. "Russia's growth is very close to zero for this year and next year and obviously, Russia's growth rate matters a lot to this region as does China's," Juha Kähkönen, deputy director of the IMF's Middle East and Central Asia Department, said presenting the report in Almaty on November 4. China's economy is still growing fast at more than 7% but it is slowing down, Kähkönen noted.

However, the outlook suggests that the region's oil and gas exporters - Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan - will be able to reduce the negative effects of Russia's slowdown thanks to "high oil prices, large policy buffers and diversified export markets" but their combined economic growth will still soften to 5.6% in 2014-15 from 6.8% in 2013. "The reduction in oil exporters' growth mainly reflects further delays in the production of the Kashagan oil field in Kazakhstan and weaker domestic demand growth in Azerbaijan," the IMF concludes.

Non-oil growth in oil-exporting countries will decline by about a percentage point to 7.5% in 2014-15 on the back of slower consumer lending, as a result of macroprudential measures, investor caution because of the devaluation of the tenge and other regional currencies, and increased geopolitical risks surrounding Ukraine-Russia crisis, it added.

Kähkönen said that the growth projections presented in the outlook update were made in the summer and didn't take account of the falling oil price, noting that forecasts were made on the premise that the average oil price would be $103 per barrel this year and $99  next year. He also explained that the outlook update did not anticipate a tightening of Western sanctions against Russia over its support to rebels in eastern Ukraine.

The region's oil importers' - Armenia, Georgia, Kyrgyzstan and Tajikistan - larger dependence on remittances from and trade with Russia, coupled with limited initial policy space, will cut growth from 5.6% in 2013 to 4.6% in 2014, despite the expected recovery in Georgia, the IMF said. "Growth is expected to pick up steadily in 2015 and beyond, supported by gradual fiscal consolidation and a reduction of external vulnerabilities," the report explains. "Armenia's favourable new five-year gas supply agreement with Russia and Gazprom, and large infrastructure projects in the Kyrgyz Republic, will also contribute to the recovery in the medium term."

Geopolitical risks surrounding the Russia-Ukraine conflict may lead to a deeper and a more protracted Russian slowdown which will in turn impact on CCA economies through remittances (Armenia, Kyrgyzstan and Tajikistan), trade (Kazakhstan, Kyrgyzstan and Turkmenistan) and direct investment (Armenia, Kyrgyzstan and Tajikistan) channels.

A 1 percentage point decrease in Russia's GDP would cut CCA non-hydrocarbon exports by an estimated 0.75% and remittances by about 1.5%. "If the Russian ruble were to depreciate relative to that of a CCA country, the purchasing power of remittances could decrease further," the IMF warned. "This channel is especially important in the CCA oil importers, where remittances comprise a sizable share of national income."

Despite weaker growth and falling food prices, inflation is expected to rise to 6.5% in CCA countries in 2014 and 2015 as a result of the recent devaluations of national currencies, particular in Kazakhstan, the update says. In the CCA oil and gas-exporting countries inflation is expected to increase to 6.5% in 2014 from 6.3% in 2013. The 19% February devaluation of the Kazakh tenge is expected to raise inflation but it will be within the central bank's target range of 6-8%, the IMF said. In the oil and gas-importing countries inflation is expected to accelerate from 3.6% in 2013 to about 5% in 2014. "A weakening of the Russian ruble is putting pressure on the Kyrgyz and Tajik currencies, feeding quickly into inflation."

While the slowdown in the Russian economy is threatening economic growth in the CCA countries, more so in oil and gas-importers, Kähkönen believes that deeper integration of Armenia and Kyrgyzstan with Russia and the Customs Union it leads will not be significantly detrimental to their economies. The Customs Union, set up by Russia, Kazakhstan and Belarus in 2010, will be transformed into the Eurasian Economic Union in 2015. In October Armenia signed a treaty to join the free-trade bloc in 2015, and Kyrgyzstan is also expected to sign the treaty and join the organisation next year. "Armenia has negotiated and is still negotiating exemptions for a seven-year transition period that would smooth the entrance to the Customs Union," Kähkönen told bne. "As part of joining the Customs Union and the Eurasian Economic Union it is also getting a good deal on gas from Russia that is lowering gas prices compared to the past."

He suggested that this, combined with possible financial assistance from Russia, will somewhat offset a weaker growth in Russia, "but Armenia's growth next year will still be the lowest in the region". Unlike Yerevan, Bishkek is still negotiating its accession to the Moscow-led free-trade bloc, so "it's too early to expect what will happen" when Kyrgyzstan joins the EEU, Kähkönen cautioned.

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