Russian stagnation to drag down region, says World Bank

By bne IntelliNews January 14, 2015

bne IntelliNews -


The World Bank in a new report "Global Economic Prospects" says that sustained low oil prices will weaken economic activity in the exporting countries, predicting Russia's 2015 GDP contraction at 2.9% vs an estimated 0.7% growth in 2014. The outlook is based on a $60/barrel average oil price forecast. In 2016 the recession will turn into stagnation, the WB believes: Russia is expected to “barely get back” into positive territory with 0.1% growth.

The World Bank's baseline scenario assumes that “geopolitical tensions remain contained”, but that current sanctions imposed on Russia's banks, energy, and defense sectors over its aggression in Ukraine will stay in place “for an extended period".

Private investment will remain low because of difficulties sourcing financing, and consumption will be dampened by the effects of devaluation, soaring inflation and low real wage growth. Banks and large corporates will not be able to roll over international financing and need help from state funds and the central bank.  The effects of import substitution will be low, because of the lack of reform, while public investment will also be low, because  the fall in the price of oil will reduce fiscal space, the World Bank concludes in its report.

“Ukraine’s economy faces a highly uncertain outlook”, says the World Bank's analysts, with the conflict-stricken country suffering an 8.2% collapse in its economy in 2014, and with another -2.3% slump forecast for 2015. “The fiscal deficit remains high amid weakness in revenue collection and increased security-related spending,” according to the World Bank report.

Despite a massive 85% devaluation in 2014 helping the current account to balance, “high debt refinancing needs weigh on the balance of payments", the World Bank finds, seeing also “heightened uncertainties” continuing because of the stand-off with Russia regarding natural gas supplies, prices, and debts, as well as over pipeline transit.

Belarus is set to benefit from Russia's prohibition on food imports from the West, but will be hit by the devaluation of the Russian ruble, and inability to attract foreign investment. Nevertheless growth is forecast as increasing from an estimated 1.5% in 2014 to 1.8% in 2015.

The meltdown in Russia and Ukraine and the collapse in commodity prices will have harsher implications for Central Asian countries. “Sharp or sustained declines in commodity prices or remittance inflows from Russia (…) represent major risks for CIS countries,” that are likely to “weaken these countries’ current account balances, household consumption, and poverty dynamics,” warns the report. However, Central Asia will continue to have relatively high growth rates, with the lowest growth forecast for Kyrgyz Republic at 3.0%, and the highest for Turkmenistan at 11%, with Kazakhstan expected to grow by 4.1%, Uzbekistan by 7.9%, and Tajikistan by 6.4%.

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