In 2015, Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS) will endure its fourth consecutive year of economic growth below 3% – the longest period of weakness since the early 1990s – and there are “significant downside risks”, according to the European Bank for Reconstruction and Development’s latest Transition Report.
In "Transition Report 2014: Innovation in Transition", the EBRD predicts growth across its region will decline sharply to 1.3% this year (from 2.3% in 2013) and will remain depressed at 1.5% in 2015.
It blames the Ukraine crisis and the Western sanctions imposed on Russia, which have partly offset the impact of the improving Eurozone economy. This has had a significant knock-on effect on CIS countries that depend on Russia for trade, such as Belarus, or for remittances, notably Tajikistan.
It forecasts that in 2015 Russia will only have a mild recession, while Ukraine’s decline will become less severe – and it could even begin to grow towards the end of next year if macro-economic adjustment and structural reform are successful.
A stronger regional recovery remains hostage to the stand-off between Russia and the West, as well as the threat of monetary tightening in the US and Eurozone. The EBRD also says that cross-border bank deleveraging has continued, though it has slowed.
It warns governments that the days of relying on loose monetary policy to prop up growth may be coming to an end. “Looking ahead, countries in the region may find that they have less scope to combine fiscal tightening with accommodative monetary policies. In particular, when interest rates in advanced markets start to rise, there will be less scope for monetary policy easing, and monetary authorities may need to tighten policies in response to changes in cross-border capital flows.”
The report also detects waning appetite for reform across the region, and, for the first time, it awards more downgrades than upgrades in its analysis of reform by sector. Russia is downgraded for the restrictions on trade and foreign companies it has imposed as retaliation for Western sanctions.
More innovation, please
To stimulate regional growth in these gloomy economic times, the EBRD highlights the importance of innovation inside companies and the need for governments to foster the right conditions for innovation.
“Innovative firms are particularly sensitive to the business climate and, in order to promote innovation, authorities have to make sure that they address bottlenecks affecting innovation, such as corruption, inadequate skills among the workforce, limited access to finance and lengthy customs and trade regulations,” the report says. “A poor business environment can substantially increase the costs of developing new products and make returns to innovation much more uncertain, thus undermining firms’ incentives to innovate.”
It points out that at the moment innovative start-ups are relatively scarce in the region and that the most successful tend to quite rapidly migrate to other countries such as the US, causing an “innovation drain”.
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