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Collateral Damage From Russian Recession Could Be Global

The European Bank for Reconstruction and Development (EBRD) sees modest economic improvement in much of Eastern Europe for the near future, but its outlook for Ukraine and Russia, which have been at odds for more than a year now, is much less optimistic.

According to the EBRD, the hostility between Russia and Ukraine will keep them in recession throughout 2015, despite a moderate economic expansion in the other 33 countries the EBRD has served since it was created in 1991.

For example, the economies of several EBRD countries are expected to improve this year thanks to lower interest rates not only in Eastern and Central Europe but also in the euro zone, which makes up their biggest market for exports.

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Not so, however, for Ukraine, whose economy contracted by 6.8 percent in 2014 and is expected to contract by 7.5 percent this year, even worse than the 5.0 percent the EBRD anticipated four months ago. And Russia is expected to remain in recession through 2016 under the simultaneous pressures of low oil and gas prices and Western sanctions over its role in Ukraine’s political crisis.

The bank said the uprising by pro-Russian separatists in eastern Ukraine has severely disrupted the region’s economy. It said this trouble, along with “the negative impact of the depreciation of the hryvnia [Ukraine’s currency], tight economic policies, energy tariffs hikes and a continued contraction of credit are expected to maintain pressures on the economy this year.”

Still, the EBRD said that if this conflict doesn’t get worse and Kiev adheres to an economic program drawn up by the International Monetary Fund, Ukraine’s economy actually could grow by 3 percent next year.

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As for Russia, the bank gave a slightly improved view of the depth of its recession, saying it will contract by 4.5 percent, not the 4.8 percent it previously projected, because of a recent recovery in oil prices. Nevertheless, it said, the recession in Russia will also be felt in neighboring countries, whose economies would have improved even more had they not been affected by Russia’s troubles.

“Deep recession in the Russian economy is having larger-than-expected negative spillover effects on countries with which it has strong economic links,” the EBRD report said. “The impact of the Russian downturn has worsened the outlook for Eastern Europe and the Caucasus and for Central Asia.”

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In a worst case scenario, this collateral economic damage from the Russia-Ukraine confrontation could spread, the EBRD said. “An escalation of the conflict would have significant spillover effects for the entire region and lead to extension and expansion of the economic sanctions regime,” it reported. “In the extreme scenario, this regional risk can become a global [economic] threat.”

In fact, despite the geographical breadth of the countries served by the EBRD and the optimistic outlook for many of its client states, the focus of potential trouble remains on Russia, according to Hans Peter Lankes, the bank’s acting chief economist.

“There is definitely scope for optimism especially in countries closely tied to the euro zone,” Lankes said. “But the Russian recession is cause for concern in many other economies.”

By Andy Tully of Oilprice.com

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