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Russian economy to shrink 10% this year: EBRD

Before Russia invaded its pro-Western neighbour on February 24, the London-based European Bank for Reconstruction and Development had been pencilling in growth of 3.5 percent for Ukraine and 3.0 percent for Russia.

March 31, 2022 / 10:51 AM IST

The economies of Russia and Ukraine will contract by 10 percent and 20 percent respectively this year as the war between the two countries causes "the greatest supply shock" for 50 years, the European development bank, EBRD, said on Thursday.

Before Russia invaded its pro-Western neighbour on February 24, the London-based European Bank for Reconstruction and Development had been pencilling in growth of 3.5 percent for Ukraine and 3.0 percent for Russia.

The EBRD, issuing emergency forecasts, said it was the first international financial institution to update its guidance since the outbreak of the war in Ukraine last month.

The latest prognoses "assume that a ceasefire is brokered within a couple of months, followed soon after by the start of a major reconstruction effort in Ukraine," it said.

Under such a scenario, Ukraine's gross domestic product should rebound by 23 percent next year.

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But the heavy economic sanctions imposed on Russia by the West would mean that it would register zero growth.

"Sanctions on Russia are expected to remain for the foreseeable future, condemning the Russian economy to stagnation in 2023, with negative spillovers for a number of neighbouring countries in eastern Europe, the Caucasus and Central Asia," the EBRD said.

"With so much uncertainty, the bank intends to produce a further forecast in the next couple of months, taking into account further developments."

Belarus -- which borders both Ukraine and Russia, and also faces Western sanctions over its role in the conflict -- was forecast to shrink by three percent this year and then stagnate in 2023.

Founded in 1991 to help former Soviet bloc countries switch to free-market economies, the EBRD has since extended its reach, including to countries in the Middle East and North Africa.

The bank predicted that its investment zone, excluding Belarus and Russia, would grow by 1.7 percent this year, less than half of the previous growth forecast of 4.2 percent in November.

Growth is then expected to pick up to five percent in 2023.

- High uncertainty -

"Projections are subject to an exceptionally high degree of uncertainty, including major downside risks should hostilities escalate or should exports of gas or other commodities from Russia become restricted."

The world economy faced "the greatest supply shock since at least the early 1970s", it said, pointing out that Russia and Ukraine "supply a disproportionately high share of commodities, including wheat, corn, fertiliser, titanium and nickel."

EBRD chief economist Beata Javorcik said that inflationary pressures, which were already high before the invasion, "will certainly increase now, which will have a disproportionate effect on many lower income countries where" the bank invests, "as well as on the poorer segments of the population in most countries".

The bank earlier this month unveiled a two-billion-euro ($2.2-billion) "resilience" package to help citizens, companies and countries affected by the war in Ukraine, including those hosting refugees.

"Europe has also seen the greatest forced displacement of people since the Second World War, and the report examines the potential consequences of this migration," it said.

"Skilled workers from Ukraine may provide a boost to some economies in the longer term, particularly in countries with ageing populations," it said.

But "in the short-term, economies are facing fiscal pressures and administrative challenges as they scale up the provision of housing, healthcare and schooling".

The EBRD, which has condemned Russia's invasion of Ukraine, said Tuesday that it will close its Moscow and Minsk offices in an "inevitable outcome of the actions taken by the Russian Federation with the help of Belarus".

The group has not undertaken any new investment projects in Russia since 2014, when Moscow invaded and then annexed Crimea.

The lender usually provides its economic updates in May and November.



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AFP
first published: Mar 31, 2022 10:51 am
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