Russia’s slowing economy is having an increasingly damaging effect on emerging Europe and Central Asia with the biggest hit being felt in countries bordering the embattled country, analysts are warning.
Within a matter of months, a succession of regional economies once tipped to grow positively and even strongly this year has been forced to accept an inevitable return to recession.
Moldova, whose economy is tightly bound to Russia’s, was expected by the EBRD to grow by 4% in 2015. That forecast, projected in September, was cut to zero in January. Its economy is now set to contract by around 2%.
Growth is also set to turn negative in other strongly Russia-dependent nations, including Armenia and Belarus, with the latter set to contract by 3.5% in 2015, according to the World Bank, against a previous forecast of 1.8% growth, and by a further 1% in 2016.
Even the Baltic states, Western-leaning but still heavily dependent on agricultural and manufacturing exports to Russia, are facing a battle to avoid recession.
Estonia’s economy contracted 0.3% in the first quarter of 2015, against growth of 1.8% a year ago, according to the country’s statistics agency. “It’s worrying that we are seeing slower growth already this year in the likes of Lithuania and Estonia,” said Liza Ermolenko, emerging Europe economist at Capital Economics.
“If you look at the countries that are hurting the most, it tends to be those that export the most to Russia.”
The worst hit, naturally, is Ukraine, whose economy is set to contract by as much as 7.5% this year. “Trade has collapsed there as a result of the events with Russia,” she said.
Russia’s problems — or its spillover impact on the wider region — are unlikely to go away soon. The IMF sees the economy shrinking by 3.8% in 2015; others put the number closer to 5%.
Capital flight remains a pressing concern: Russia’s central bank expects $131bn to exit the country this year, against $154.1bn in 2014, itself the highest number in two decades. The net outflow of capital hit $32.6bn in the first three months, the Central Bank of Russia said.
Remittances hit
Nor are Russia’s problems being felt only at the upper end of the wealth spectrum. Remittances to Central Asia, emerging Europe and the Caucuses region are declining at an alarming rate.
“There has been a massive hit on remittances, which are a huge source of funding from Moldova to Georgia to Central Asia as a whole,” said Charles Robertson, global chief economist at Renaissance Capital. “Tourism industries are taking a hit, with fewer Russian tourists heading to traditional destinations like Georgia and Ukraine. You’re also seeing a hit to direct trade, with Russian imports of goods plunging, and an obvious evaporation in Russian-funded FDI projects.”
Robertson said the negative impact had outweighed any positive influence felt on the region from the European Central Bank’s quantitative easing programme.
The one bright spot for Russia — and, by extension, the wider region — in recent weeks has been slowly rising oil prices. Robertson is not alone in pinning the blame for the country’s economic woes squarely on the price of oil, which collapsed to nearly $120 a barrel in June to $45 in January.
But Goldman Sachs warned this week that oil had again become overpriced, having risen since March to around $60 a barrel. The industry’s “weak fundamentals” would lead to a renewed fall in oil prices in the months ahead, the US bank said.