​Political instability and potential economic shocks emanating from China are the main reasons to be cautious about future growth in Emerging Europe, EBRD chief economist Sergei Guriev said in an interview at the development bank's annual meeting in Cyprus on May 10.

Turkey – currently the EBRD's largest investment destination – is a key worry for the development bank, which turns 16 years old this year, after the government declared that a referendum had been narrowly passed to give President Recep Tayyip Erdogan significantly expanded powers. Opposition parties are appealing to the European Court of Human Rights over the way the referendum count was conducted.

“In Turkey the big issue is politics and security. Investors are concerned about this. The vast majority of our portfolio in the country is in the private sector,” says Guriev. “The government says that once stability is restored then reforms will start but first we want to see the stability.”

The situation in Turkey is made more complicated by the civil war raging across the border in Syria, which to some extent has become a proxy war between the US and Russia that could destabilise the whole region. However, Guriev was upbeat on Turkey’s ability to weather the story. “The Turkish economy is very resilient,” Guriev said.

The EBRD is currently blocked from making new investments in Russia, previously its main investment location, but the country remains an important “investment node” for the Central and Eastern Europe region, a term promoted by Guriev and his predecessor as EBRD chief economist Erik Berglof. Later this month former finance minister and co-head of the presidential council Alexei Kudrin is due to submit to president Vladimir Putin a new reform plan to accelerate Russia’s growth and keep it in the game. There is a battle going on amongst the Kremlin elite as to how this plan should work: Kudrin is championing a drive to improve productivity, whereas the so-called Stolypin club of officials wants to borrow heavily and use directed credits to support selected companies to promote growth.

“The decision will be taken by Putin. Kudrin will submit his ideas. Other people will submit their ideas. And Putin will design a strategy,” says Guriev, who until he left Russian under threat of arrest was the main architect of Russia’s economic reform plans, having authored, among other things, a privatisation plan.

For Guriev there is no choice over which version to choose. “There is a clear choice in favour of Kudrin’s ideas. Growth comes from productivity growth. Inflation kills growth…. [The Stolypin club] wants to print a lot of money and give cheap credits to selected enterprises. This is what people in our international financial institutions (IFIs) call crony capitalism.”

Central Asia has also been suffering, but there the problems have more to do with economics than geopolitics. “In Central Asia the biggest shock has been the recession in Russia. In Uzbekistan the remittances have fallen by a factor of two and the fact that Russia will not grow quickly means the government has to create hundreds of thousands of jobs for people coming back [from working in Russia],” says Guriev. “It is a big challenge.”

Uzbekistan has returned to the EBRD AM after several years of absence and the chatter in the networking area at the conference is that things are beginning to change in the most populous country in Central Asia following the death of President Islam Karimov last September. The new president Shavkat Mirziyoyev appears to be slowly trying to open up a country that had been in prickly semi-isolation under Karimov, but he is constrained by his need to consolidate his hold on power and the clan-based fractions that remain in the upper echelons of Uzbek politics. The economy has been growing but remains almost untouched when it comes to putting in market orientated reforms.

Neighbouring Kazakhstan is already a key country for the EBRD, which is strongly supporting Astana's declared "third phase" package of reforms. Kazakhstan also expects to launch its international financial centre programme this September shortly after the country’s showcase Expo 2017 is held that month. “Kazakhstan has not relied on remittances or migrant labour. It brings in migrant labour from neighbouring countries. The problem with Kazakhstan is the need for privatisation and reforms to the banking sector. The lack of these lead to the accumulation of non-performing loans,” says Guriev.

The privatisation programme has been much talked about but little has happened. However, Guriev seems confident that some steps could be taken this year. “We work with several state-owned companies that are talking about privatisation happening very soon – at the end of this year or the start of next,” says Guriev.

While the IMF and WTO are both predicting a pick up in global growth that will bolster the position of all the coutnries in the region, the sword of Damocles hanging over the whole region’s head is a potential crisis in China. Chinese investment has been growing rapidly in the region as part of the New Silk Road project that will connect Southeast Asia with Europe overland. And China is expected to ramp up its already significant investment into the region in coming years as the first goods flowed down new rail links earlier this year. Kazakhstan and Belarus are especially active in courting China, which is overtaking the traditional IFIs and Russia as the most important source of funds in the region.

However, China has several potential crisis-inducing problems that need to be addressed, such as a real estate bubble and the lack of reform at state-owned banks and companies. “China is not a country of operation for the EBRD but we watch it closely as its impact on Russia in particular is important. It is a huge source of investment and a major trade partner,” says Guriev. “The health of the EU economy is an issue; oil prices are a big issue for some countries; but geopolitical stability is a huge risk and China is a huge risk for the region.”