bne IntelliNews -

Economies in the Commonwealth of Independent States slowed further in the second half of 2014, and the outlook for the region has deteriorated markedly, according to a new report by the International Monetary Fund.

In its latest World Economic Outlook issued on April 15, the IMF says that a contraction in Russia's economy of as much as 3.8% in 2015 and by 1.1% in 2016 will drive down economies across the region. The new growth forecast for Russia in 2015 is 4 percentage points below the previous forecast, according to the report.

Falling oil prices and international sanctions have compounded Russia's underlying structural weaknesses, undermining confidence, and resulting in a significant depreciation of the ruble, according to IMF analysts. In response, the Central Bank of Russia hiked its policy rate by 750 basis points to 17% in December, adding to the pressure on growth.

The remainder of the CIS is projected to grow at 0.4% in 2015, 3.6 percentage points below the previous forecast. Lower commodity prices and spillovers from Russia through trade, foreign direct investment, and especially remittances are dampening the outlook in the light of existing structural vulnerabilities, resulting in large downward revisions to 2015 growth projections for Armenia, Belarus, Georgia, and Kazakhstan, the IMF report finds. 

Ukraine’s economy will be the worst performer in the CIS, projected by the IMF to contract by 5.5% in 2015, with an economic collapse triggered by Russian-backed aggression expected to bottom out later in the year, following a 6.8% contraction in 2014. Since October 2014, pressure on the hryvnia has increased substantially, contributing to a drop in foreign exchange reserves and accelerating inflation.

Belarus is projected to enter into recession in 2015, with the downward turns reflecting spillovers from Russia.

Growth in the Caucasus and Central Asia will drop from 5.3% in 2014 to 3.2% in 2015, a downward revision of 2.4 percentage points relative to the October 2014 WEO.

Oil exporters such as Azeribaijan and Kazakhstan will be hit by sharply lower oil prices and the significant contraction in Russia. Oil importers will see the benefits from lower oil prices more than offset by domestic economic weaknesses and spillovers from the contraction in Russia, says the report.

“With worsening economic conditions and significant downside risks, a key priority is to preserve macroeconomic stability,” the IMF report recommends. Russia, with large fiscal buffers, should consider a limited loosening of the non-oil structural balance in 2015 to stimulate its economy, advises the IMF, while Ukraine should stick to bolstering reserves and maintaing a tighter fiscal stance . Belarus should consider greater exchange rate flexibility, tight macroeconomic policies and deep structural reforms in order to curb inflation and reduce external imbalances.