OREANDA-NEWS. May 16, 2014. The crisis in Russia and Ukraine is having a severe impact on the economies of the two countries and is threatening to slow down the recovery in the wider EBRD region – or even bring it to a complete halt.  

The EBRD’s latest economic report predicts growth in the transition region of just 1.4 per cent in 2014, a sharp reduction from the rate of 2.7 per cent forecast in January. A modest upturn of 1.9 per cent in 2015 is possible, but is only achievable if the crisis does not escalate.

Under the EBRD’s most likely scenario, Ukraine would return to recession in 2014, with a contraction of 7 per cent and show no growth in 2015. The Russian economy would stagnate in 2014 and show only minimal growth next year.

However, there is an unusually high level of uncertainty surrounding the forecasts with major risks on the downside.

Under a less-benign scenario including the imposition of financial sanctions in particular, Russia would slip into recession, the output contraction in Ukraine would deepen and average growth in the region would grind to a halt in 2014-15.

“At this point, the Russia-Ukraine crisis would start impacting the global economy,” the report says.

Ukraine’s economy is expected to undergo a major, though gradual, adjustment with significant short-term output costs. Ukraine’s IMF programme is expected to help bring down external and fiscal imbalances, complemented by support from donors and international financial institutions, including the EBRD.

According to the economists’ baseline scenario, necessary structural reforms in Ukraine would be implemented on schedule and a systemic banking crisis would be averted. However the costs linked to the recapitalisation of Ukraine’s banks could turn out to be significant. Significant vulnerabilities in the financial sector constrain credit growth. As a result, domestic demand is expected to contract in 2014. Trade liberalisation with the EU and the hryvnia depreciation may benefit exports, although further disruption of economic and financial links with Russia will affect investor and lender confidence and trade flows.

On Russia specifically, the report says recent events have hit investor confidence, which had already been feeble. Any further deterioration in confidence could increase capital flight and lead to even lower investment and slower growth.

High inflation and pressure on the rouble could limit the scope for monetary easing while any fiscal response would be constrained by current oil price levels and supply-side bottlenecks.