Ongoing tensions between Russia and Ukraine, which have reverberated across the globe, will particularly impact economies of the EBRD region, with a modest recovery predicted in 2015 following a sharp contraction this year.
The European Bank for Reconstruction and Development (EBRD) gave a gloomy prognosis for the whole region, which it says will slow to 1.3 percent in 2014, compared with 2.3 percent last year. Next year it anticipates 1.7 percent growth, marking the fourth consecutive year of regional growth below 3 percent.
Uncertainty is the dark cloud that dominates the EBRD report.
"The volatile security situation in Ukraine makes the forecasts exceptionally uncertain," it said.
At the same time, the violent conflict between Western and Eastern Ukraine, with each side accusing the other of receiving military assistance from external powers, points to an increase in military spending at a time when the country cannot afford such expenditures.
“Just when national governments remain financially strapped in the wake of the global financial crisis, any new build up in military spending will be an additional fiscal burden that will stand in the way of the recovery and economic reforms for the future,” the EBRD’s Chief Economist Erik Berglof said.
Much of Ukraine’s economic problems stem from the breakdown of trading with Russia, which was prepared to assist Kiev with its monetary problems before political strife broke out in Ukraine between West and East.
“There are significant downside risks to the outlook stemming from protracted and intensified fighting and from further breakdown of trade linkages with Russia,” the report said. “On the upside, eventual stabilization in the East may pave the way for infrastructure rehabilitation and for confidence recovery, although the timeline is highly uncertain.”
Meanwhile, Russia’s ban on food imports from central and south eastern European countries and the Baltics will act as a drag on growth in the region, partly offset by some positive influences from the eurozone.
In an echo to the monetary emergency policy that the US Federal Reserve employed to pull the US economy out of dangerous waters, the EBRD report discussed the possibility of using quantitative easing (QE) in the Eurozone for emerging European countries.
“The case for quantitative easing has become compelling to support the still fragile recovery in the Eurozone, to which much of the (Central Europe and Baltic and south eastern European) regions are strongly linked. An effective Eurozone QE may help lessen the risk of setbacks in the recovery of those regions,” the report said.
Russia under a sanction cloud
Although Russia and the West have exchanged tit-for-tat sanctions against each other over Ukraine, EU sanctions announced in September may be particularly painful, as they focused on Russia’s oil industry, the supporting column of its economy, EBRD said in a separate report.
A full quarter of budgetary revenues and half of Russia's exports are related to the oil industry.
The report said that the Russian economy would stagnate in 2014, after a slightly better than anticipated first half of the year. However, growth in 2015 has been predicted to contract by 0.2 per cent. In May, the bank forecast that the Russian economy would grow by 0.6 per cent in 2015.
In addition to affecting business confidence in Russia, the sanctions limit the access of companies and banks to international capital markets.
Meanwhile, Russian companies must make repayments of around $190 billion on foreign debt by the end of 2015. Unable to borrow outside of the country, interest rates may further increase, which could drag down consumer spending.
At the same time, Russia's own sanctions on food imports from European countries could push up inflation in Russia by one to two percentage points.