CIS Countries: Russia's nascent recovery and higher commodity prices bode well for the region despite ongoing challenges
April 5, 2017
Economic growth in the Commonwealth of Independent States (CIS) improved only mildly in 2016, after a sharp deterioration in 2015 following a continued deceleration between 2011 and 2014. The region’s GDP increased just 0.1% last year, supported by the easing of the recession in Russia and a recovery trend in most commodity prices, which led to improvements in economic activity and regional trade. At the beginning of 2017, however, things began to look up as the region’s nascent recovery persisted and economic activity seemed to pick up further in the first quarter, showing resilience to uncertainty related to another U.S. interest rate increase in March. According to an estimate produced by FocusEconomics, the region’s GDP accelerated from a 0.5% year-on-year increase in Q4 to a 1.0% expansion in Q1.
Available data for Q4 2016 showed that Russia’s GDP increased 0.3% year-on-year, rebounding from a 0.4% contraction in Q3, causing overall economic growth to fall just 0.2% in the full year 2016. Elsewhere in the region, economic activity decelerated in Kazakhstan to a 1.0% increase in 2016 (2015: +1.2%) and contracted 3.8% in Azerbaijan (2015: +1.1%). The recessions in Azerbaijan and Russia and subdued economic activity in Kazakhstan continued to weigh heavily on Central Asia and the Caucasus, where growth remained well below long-term trends. In Belarus, GDP decreased 2.6% in 2016, which followed a contraction of 3.9% in 2015, taking the cumulative contraction for the two years to 6.5%.
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In Ukraine, GDP increased 2.3% in 2016, rebounding from the 9.8% plunge in 2015. The recovery was driven by a pick-up in investment, particularly public investment, which reflects infrastructure rebuilding in the war-hit country. However, Ukraine’s improvement in economic activity is threatened by renewed tensions in rebel-held eastern regions, due to the government’s recent announcement to halt freight traffic across the frontline in the Donbas region. In addition, the High Court in London ruled, on 29 March, in favor of Russia that the non-payment of a USD 3.0 billion Eurobond by Ukraine should not proceed to trial, meaning that Ukraine is now forced to repay the bond in full. Ukraine had sought to take the case to a full trial to seek justification for not paying its dues, arguing that it had suffered massive, unlawful and illegitimate economic and political pressure, including as a result of the annexation of Crime. The result is a blow to Ukraine, with the repayment threatening to aggravate the country’s already weak public finances despite having received recently fresh funds from the IMF.
Regional economic activity to accelerate in 2017
Following tepid growth in 2016, the region’s economic activity is expected to accelerate this year, supported mainly by the result of a return to growth in Russia and higher commodity prices, particularly oil prices. Economists surveyed this month by FocusEconomics expect the CIS economy to expand 1.5% this year, which was left unchanged from last month’s projection. Next year, analysts project that regional GDP will continue accelerating and expand 2.0%.
This month’s stable result reflected unchanged forecasts for Azerbaijan, Kyrgyzstan, Moldova, Russia and Tajikistan. Meanwhile, GDP growth projections for the economies of Armenia, Belarus, and Uzbekistan were cut, while Kazakhstan was only economy for which analysts raised their growth forecasts.
Regarding the three countries that are not included in the regional GDP aggregate, analysts lowered the 2017 GDP growth forecasts for Georgia and Ukraine, while they left their forecast for Turkmenistan unchanged from the previous month.
BELARUS | Economy remains in the doldrums despite regional improvement
Belarus’ ongoing recession showed no sign of abating towards the end of last year despite rising commodity prices and stronger economic activity in the region. Recently revised data confirmed that the economy contracted at a steeper pace in Q4, marking the eighth consecutive quarterly contraction. The print mainly reflected a sharp drop in fixed investment and a more modest decrease in household consumption. In early March, the imposition of a so-called parasite tax triggered the largest anti-government protests in years all across the country, and was quickly repealed as a result. The new tax would have required people who do not work a minimum number of days each year to pay a hefty fee.
The economy should emerge from the recession over the course of 2017 thanks to higher commodity prices and Russia’s expected recovery. Against this backdrop, FocusEconomics Consensus Forecast panelists forecast that GDP will increase by just 0.2% in 2017, which is down 0.2 percentage points from last month’s forecast. For 2018, panelists see growth picking up to 1.4%.
KAZAKHSTAN | Recovery remains in place at the beginning of 2017
2016 was characterized by a painful adjustment to sluggish global growth, low commodity prices, deteriorating terms of trade and a floating exchange rate regime. This caused GDP to increase just 1.0% over the whole year, marking the worst economic performance in nearly two decades. Economic activity did however strengthen towards the end of 2016, supported by an expansionary fiscal policy and a gradual relaxation of interest rates as inflation fell and the Kazakh currency stabilized. Another solid expansion in industrial production in February signals that the positive momentum has carried over into this year.
The country’s GDP should receive a boost this year and beyond from the Kashagan oil field, which finally became fully operational in late 2016. Improvements in global oil market dynamics and the government’s fiscal stance should also support growth. Analysts polled this month raised Kazakhstan’s 2017 growth forecast by 0.1 percentage points relative to last month’s estimate and expect GDP to increase 2.2%. For 2018, our Consensus Forecast shows a 2.8% expansion.
RUSSIA | Nascent recovery continues in Q1 2017
The Russian economy has responded exceptionally well in the last two years to the dual shocks of collapsing oil prices and the continuation of Western sanctions. GDP decreased just 0.2% in 2016, which followed an upwardly revised 2.8% contraction in 2015 (previously reported: -3.7%). Tighter fiscal and monetary policies and a flexible exchange rate ensured a much smaller GDP decline in 2015 and 2016 combined than in 2009, when the economy plummeted nearly 8%, despite higher oil prices back then. Further indications that a nascent economic recovery remains in place at the beginning of this year were supported by PMI data for March and a strong increase in exports in January, which resulted from a pickup in exports both of oil—due to higher prices—and of non-oil products, particularly machinery, reflecting stronger demand from other CIS countries.
This year, the gradual economic recovery is expected to be supported by higher oil prices and the continuation of a disciplined policy approach, as Russian authorities seem determined to persist with prudent policymaking. Economists project that the economy will expand by 1.3% in 2017, which was left unchanged from last month’s forecast. For 2018, analysts see GDP growth accelerating to 1.7%.
UKRAINE | Inflation continues to fall in February
Recent developments are starting to derail the economy’s fragile recovery. The government formalized an economic blockade of the rebel-held eastern regions on 15 March, escalating a tense political situation that has seen rebel factions seize a number of Ukrainian companies located in their territory. The trade ban has severed vital links in the country, including transport of coal and other industrial goods, and has started to take a toll on economic data: industrial production plummeted in February. On a bright note, the government received USD 1.0 billion in fresh funds from the IMF on 3 April. However, the Fund warned that a number of reforms need to be implemented to secure additional aid going forward. Continued support from the IMF is critical for the country’s outlook, yet reform momentum has been sluggish due to little political willpower.
The economic blockade has soured the country’s economic outlook. Stunted industrial production and reduced exports have caused our panelists to shave 0.1 percentage points off Ukraine’s GDP forecast this month. The FocusEconomics panel sees GDP rising by 2.4% this year and growth picking up to 3.1% in 2018.
INFLATION | Inflation falls at outset of 2017
Inflationary pressures in the CIS economy continued to abate at the beginning of this year. An aggregate estimate showed that inflation in the region declined from 5.3% in January to 4.9% in February, marking a new multi-year low. The drop mainly reflects the stabilization of currencies and still relatively subdued domestic demand.
Inflation is expected to stabilize at the current level in the coming months, and to increase toward the end of the year as commodity prices recover and domestic demand across the Commonwealth improves. The analysts we surveyed forecast inflation to end 2017 at 5.1%, which is down 0.2 percentage points from last month’s projection. Going forward, inflation is projected to fall to 4.8% in 2018.
Written by: Ricardo Aceves, Senior Economist