Russia Hinders East Europe Growth Rebound, Development Bank Says

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(Bloomberg – – Agnes Lovasz – November 11, 2013) Russia’s deepening economic slowdown is impeding eastern Europe’s recovery as lower oil prices hurt the world’s largest energy exporter, the European Bank for Reconstruction and Development said.

Russia, the largest of 34 economies from Morocco to Mongolia where the London-based EBRD invests, will grow 1.3 percent in 2013 and 2.5 percent in 2014, the bank said today in an e-mailed report, cutting May estimates by 0.5 percentage point for each year. Russia expanded 3.4 percent in 2012.

Russia, whose $2 trillion economy grew an average 7 percent a year during Vladimir Putin’s 2000-2008 presidency as commodity prices rose, is enduring its worst slowdown in four years due to a decline in investment. Gross domestic product will rise at an average pace of 2.5 percent through 2030, trailing the global average, Economy Minister Alexei Ulyukayev said. Nov. 7.

“Structural reforms and improvements in the overall business environment are needed to boost investment, diversify the economy away from excessive reliance on oil and gas revenues and lift Russia’s potential growth above 3 percent,” the EBRD said. “Commodity prices no longer provide a boost.”

Brent crude, the benchmark for more than half the world’s oil, has fallen 5 percent this year. For Russia, which receives about half its budget revenue from oil and natural gas, lower energy prices limit the government’s fiscal scope to counter the downturn, the EBRD said.

Forecasts Cut

The 30 eastern European and central Asian economies where the EBRD works will expand 2 percent this year and 2.8 percent in 2014, the bank projected, down from May forecasts of 2.1 percent and 3.1 percent.

“The revisions are largely driven by the worsening outlook for Russia and its knock-on effects,” it said.

Expansion in central Europe and the Baltics will quicken to 1.9 percent in 2014 from this year’s 0.9 percent, the EBRD said. Poland will grow 2.3 percent next year, compared with 1.2 percent in 2013. Lithuania and Latvia will remain the best performers, with GDP surging 3.5 percent and 3.2 percent.

While Ukraine will probably exit its recession in the fourth quarter, GDP will contract 0.5 percent this year before returning to growth of 1.5 percent in 2014, the EBRD said. Slovenia’s recession will extend into next year, when GDP will shrink 2.5 percent because of the country’s corporate debt burden, it said.

Risks to the bank’s forecast include a flare-up of the euro-region debt crisis, an increased chance of an economic slowdown in China and other large emerging markets and the U.S.’s fiscal health, according to the EBRD.

The bank is calling on governments in the countries where it does business to step up efforts to overhaul their economies as sluggish growth may be a sign of a decline in potential long-term expansion.

“The current slowdown in the region is only partly cyclical,” according to the report. “Many of its causes are structural, reflecting lower growth potential, limited sources of finance for investment and unfinished structural reforms.”

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