Economic Snapshot for the CIS Countries

March 6, 2019

Q4 2018 pick-up thanks to strong late-year Russian outturn

Last year’s uneven recovery of the Commonwealth of Independent States (CIS) economy picked up in the fourth quarter amid a seemingly broad-based expansion underpinned by improving extractives-sector activity and a construction boom in Russia, the region’s heavyweight. Fourth-quarter growth is likely to have jumped in Russia, which accounts for the lion’s share of the region’s nominal output, almost certainly fueling the broader acceleration given its strong economic ties to the remainder of the region. A preliminary estimate puts growth through last year-end at 2.6% year-on-year (Q3: +1.9% year-on-year). Available current-quarter data suggests, however, that the late-year bounce was short-lived on cooling manufacturing-sector activity, as well as deteriorating household-spending gains in Russia on the heels of last year’s value-added tax hike; FocusEconomics estimates first-quarter growth at 2.0% year-on-year.

Fourth-quarter national accounts revealed strong outturns for major-players Kazakhstan and Ukraine. In Kazakhstan, a supply-side breakdown revealed broad-based growth led by upbeat industrial-sector activity amid resilient oil and gas output. A rapidly-expanding services sector also highlighted the relative strength of homegrown gains heading into the current quarter. Ukraine, meanwhile, also appeared to clock domestically-driven growth through last year-end, as witnessed by the tight labor market and buoyant retail sales. Among the region’s smaller economies, Armenia and Azerbaijan also notched faster fourth-quarter growth on improving domestic demand and despite deteriorating external-sector gains.

With respect to politics, the region is in the thick of it. On 20 February, Vladimir Putin delivered his annual state-of-the-union address. Amid plummeting approval ratings in Russia, he promised to deliver on social-spending plans geared toward pensioners and the poor. Better-than-expected fiscal metrics, especially in the non-oil realm, have left the Russian president with some room to expand consumption-geared programs, which analysts expect him to pursue wholeheartedly given his tumbling popularity on the heels of last year’s reforms. A number of analysts argue that Putin will need to go further, however, especially in light of the announcement on 4 March that the United States would extend sanctions on Russia for another year. That said, credit-rating agency Moody’s recently upgraded Russian bonds to investment grade, highlighting the economy’s resilience to, among other external shocks, U.S.-imposed sanctions.

Elsewhere in the region, no clear winner has yet to emerge from Moldova’s controversial general election held on 24 February. Economic policy, in turn, remains up in the air and coalition talks are expected to prove difficult given the split between the pro-Russia and pro-European parties. Meanwhile, Ukraine will elect its next president on 31 March and, thus far, comedian Volodymyr Zelensky leads the polls. All three leading political candidates, which also include incumbent Petro Poroshenko and opposition leader Yulia Tymoshenko, are running on pro-European Union and pro-NATO platforms, although their respective commitments to cooperating with the IMF vary moderately. Most analysts currently see the vote a three-way toss-up.

See the Full FocusEconomics CIS Countries report

Russia’s woes continue to weigh on full-year regional growth prospects

Regional growth came in at 2.6% last year. Looking ahead to this year, however, growth prospects for the CIS economy are expected to moderate considerably. Russia’s economy is expected to slow as last year’s value-added tax hike exacerbates inflation and bruises household spending. On the external front, too, the region’s heavyweight economy will face myriad challenges, including the possibility of additional U.S.-imposed sanctions and constrained oil and gas output. Smaller economies in the region will likely bear the brunt of slower remittances growth from Russia, as well as higher borrowing costs. As always, the evolution of commodity prices is expected to drive the regional narrative.

All told, the CIS economy is expected to grow 1.8% this year, which is unchanged from last month’s forecast. Two of the region’s economies, including Belarus, had their full-year growth prospects for 2019 cut this month. In contrast, Armenia had its raised while the remaining economies’, including Russia’s, were left intact. Next year, regional growth is seen accelerating to 2.1%.

With respect to the three economies not included in the regional aggregate, all three—Georgia, Turkmenistan and Ukraine—had their full-year growth forecasts left intact in recent weeks.

RUSSIA | Putin outlines economic priorities for 2019 amid tumbling popularity

Growth hit a six-year high in 2018, driven by a strengthening external sector and booming construction activity at home. Adding to the positive news, on 8 February, Moody’s upgraded Russia’s credit rating from Ba1 to Baa3 with a stable outlook, raising it to investment grade. Against this backdrop, on 20 February, President Vladimir Putin delivered his annual state-of-the-nation speech. Amid still-weak growth and his tumbling approval ratings, the address was largely devoted to domestic issues. The President pledged to boost social spending through housing subsidies, tax breaks and higher child support payments. Meanwhile, available data signals weaker momentum in Q1: Growth likely moderated in January amid cooling activity in the manufacturing and construction sectors, and softer consumer demand following a rise in the VAT at the beginning of the year.

The economy is seen losing steam in 2019, as one-off factors that propped up the expansion in 2018 evaporate and despite the pledged ramping-up of public spending. The oil output cut agreed under the OPEC+ deal should materialize in the coming months, which, coupled with sanctions-related uncertainty and feebler consumer demand, will likely eat into activity growth. FocusEconomics panelists see growth at 1.4% in 2019, which is unchanged points from last month’s forecast. In 2020, GDP is seen increasing 1.7%.

KAZAKHSTAN | Broad-based expansion drives Q4 2018 outturn

The economy maintained a strong pace of expansion in Q4 2018, thanks to buoyant oil production and a solid performance in the non-oil sector. Prospects were less upbeat at the start of 2019, however, with economic activity losing considerable pace in January. Contracting manufacturing output amid a persistent downturn in Chinese industrial activity, along with weakness in the construction sector and a slowdown in investment, weighed on the reading. That said, a robust mining sector and healthy consumer spending continued to support growth. Meanwhile, with next year’s election looming, President Nazarbayev recently sacked the cabinet over the failure to raise living standards. Shortly after, the President mandated tapping into the nation’s USD 3.6 billion emergency fund on 27 February, which will be spent on boosting public sector wages, as well as on social assistance, affordable housing, healthcare and infrastructure.

Growth is expected to moderate this year, owing to a more challenging external environment. Moreover, recent announcements of a halt in production at the Kashagan, Karachaganak and Tengiz oil fields for maintenance will likely cause overall oil production to moderate slightly from last year. On the plus side, strong domestic demand should continue to support growth. Downside risks stem from a decline in commodity prices, while uncertainty over the transition of power also clouds the outlook. FocusEconomics analysts expect GDP to increase 3.4% in 2019, unchanged from last month’s estimate, and 3.3% in 2020.

See the Full FocusEconomics CIS Countries report

UKRAINE | Political novice leads polls ahead of 31 March presidential vote

Upbeat end-of-year economic data is rolling in as the election season nears full swing. Growth accelerated in Q4 amid buoyant domestic demand. Private consumption seemed to have been bolstered by tightening labor market conditions and a strong hryvnia, as demonstrated by healthy retail sales growth in Q4. On top of that, exports continued to expand, albeit modestly, against the backdrop of feeble external demand conditions. Available Q1 data, however, paints a mixed picture: While industrial production tumbled in January, soaring retail sales reflect upbeat consumer demand. Looking ahead, voters will elect their next president on 31 March. Comedian Volodymyr Zelensky has emerged as the frontrunner in opinion polls, followed by incumbent President Petro Poroshenko and opposition leader Yulia Tymoshenko. The battle for president thus remains crowded, with a second-round vote highly likely.

Growth is seen losing pace this year, as a tight monetary policy environment weighs on activity growth and the one-off effect from a bumper grain harvest in 2018 evaporates. Household consumption will spearhead the overall expansion, amid tightening labor market conditions, rising real incomes and growing remittances. Election-related uncertainty clouds the outlook, however. FocusEconomics panelists see GDP growth of 2.7% in 2019, unchanged from last month’s forecast, and 2.9% in 2020.

BELARUS | External sector weighs on early-2019

The economy stumbled at the start the year, as weaker dynamics in the back-end of 2018 appeared to have carried over into Q1. Seemingly subdued household spending in Q4 likely persisted at the outset of the year, as reflected by slower retail sales in January and high inflation. Furthermore, industrial production spluttered in the same month and agricultural output remained in the red, further stoking prices. On the external front, detailed data for Q4 shows exports decelerated sharply through year-end, while imports grew marginally. On 13 February, Vladimir Putin offered to maintain vital energy subsidies and financial aid to Belarus, in exchange for greater integration between the two countries. The deal would likely support near-term growth, although it could be seen as a potential takeover by Russia as it contemplates sharing the same currency, tax regime and courts.

Growth is expected to moderate this year amid a broad-based slowdown. Private consumption could tap the brakes, due to higher unemployment and persistent inflation. Meanwhile, slower external demand should weigh on industrial production this year. The slowdown in Russia, the country’s main trading partner, poses the main downside risk to the outlook. FocusEconomics analysts expect growth of 2.5% in 2019, down 0.1 percentage points from last month’s forecast, and 2.4% in 2020. 

MONETARY SECTOR | Inflation picks up in December

A comprehensive estimate revealed that regional inflation jumped at the outset of the year, climbing from 4.6% in December 2018 to 5.1% in January due to Russia’s value-added tax hike. Moreover, pass-through from the weak Russian ruble has exacerbated inflationary pressures across the region in recent months. Amid a more challenging external backdrop, policymakers in Kazakhstan, Russia and Ukraine took a wait-and-see approach in recent weeks and left their respective interest rates as is.

Inflation across the CIS economy is expected to continue rising over the coming months, chiefly due to Russia’s value-added tax hike. Regional inflation is projected to peak in the first half of this year before easing to 5.0% by year-end, which is unchanged from last month’s forecast. Regional inflation is seen ending 2020 at 4.3%.

See the Full FocusEconomics CIS Countries report

Angela Bouzanis

Senior Economist