CIS Countries July 2018

CIS Countries: Economic Snapshot for the CIS Countries

July 1, 2018

Recovery remains uneven in first half of 2018

A more complete estimate of GDP for the economy of the Commonwealth of Independent States (CIS) confirmed that the regional recovery regained some steam in the first quarter of 2018. Regional GDP expanded 1.9% annually, picking up after a sharp slowdown in the fourth quarter of last year (Q4 2017: +1.5% year-on-year). Higher commodity prices and solid consumption supported improved activity, as the region continues to recover from a recession induced by low commodity prices in 2015–2016. However, the recovery remains moderate overall, and the pace of growth has seesawed in recent quarters, with spells of faster momentum being short-lived.

The region’s acceleration was broad-based in the first quarter, with the four largest economies—Azerbaijan, Belarus, Kazakhstan and Russia—all gaining steam. Russia benefited from rebounds in the mining and manufacturing sectors in Q1, and the recovering Russian economy supported remittances and export demand throughout the region. Notably, Azerbaijan grew at the fastest pace since Q3 2015 thanks to a solid performance by the non-oil sector economy, while soaring export growth propelled economic activity in Belarus. Healthy manufacturing and services sectors were behind Kazakhstan’s quicker expansion.

Incoming data for the second quarter, however, suggests that growth weakened somewhat. FocusEconomics estimates that regional GDP expanded a slower 1.7% annually in Q2. While high oil prices supported the region´s energy exporters in the period, sanctions-related uncertainty is likely to have hit investment in Russia, and growth is expected have eased from recent highs in Azerbaijan and Belarus.

On the political front, policymakers have had some success at increasing economic diversification and tackling the regional’s structural issues since the 2015–2016 recession; they continued to make inroads in recent weeks. On 22 June, while the country was distracted by the World Cup, Russia´s government announced two important and unpopular reforms: raising the retirement age and hiking the VAT. The moves should help fund President Vladimir Putin´s ambitious growth and development plans, as well as ease the burden on the country´s pension system.

In Ukraine, however, political willingness for tough reforms has been weak in recent months, stalling a deal with the IMF. In June, after months of delay, the government finally adopted the anti-corruption court mandated by the Fund to tackle rampant graft in the country. However, the bill creating the court contains an amendment that critics have argued will undermine its effectiveness, and it remains to be seen when Ukraine will get the green light from the IMF for more funds. Political infighting and a lack of appetite for tough measures have plagued the government. In June, the finance minister was ousted amid a dispute with Prime Minister Volodymyr Groysman.   

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Firm commodity prices to boost growth in 2018

The CIS economy is seen gaining modest momentum this year, thanks to higher commodity prices. Firmer commodity prices, a healthy labor market and solid external demand should buttress growth, and the recent decision by OPEC and Russia to increase oil production should give a boost to Russia’s energy sector. After growing 1.9% in 2017, regional GDP is seen expanding 2.1% this year, which is unchanged from last month’s forecast. While geopolitical risks remain high, especially for Russia, the direct impact of recent protectionist measures by the U.S. is expected to be modest, given low trade exposure. More important are the outlook for sanctions on the country, and whether key Russian companies can win exemptions from the measures; and the effect of global financial volatility on the ruble. In 2019, regional growth is seen remaining stable at 2.1%.

This month, regional heavyweight Russia, as well as Armenia, Kazakhstan, Moldova and Uzbekistan, saw no changes to their growth projections for 2018, keeping the regional outlook stable overall. Meanwhile, the rest of the region’s economies had their prospects upgraded, including Azerbaijan and Belarus. As for the three countries that are not included in the regional GDP aggregate, analysts held the forecasts for Georgia and Turkmenistan unchanged, while Ukraine’s GDP forecast was revised up.

Tajikistan and Uzbekistan are expected to be the region’s best performers this year, both growing over 5.5%. In addition, Turkmenistan, which is not included in the regional aggregate, is seen growing a robust 5.9%. In contrast, Azerbaijan and Russia are projected to be the slowest growing economies, expanding 1.8% and 1.7%, respectively. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.6%), followed by Belarus (3.2%).

RUSSIA | Oil-exporting economies agree to raise production

A second estimate of GDP confirmed that the Russian economy regained some steam in the first quarter, although growth was still moderate overall. Turnarounds in the manufacturing and mining sectors boosted activity amid firmer commodity prices and solid demand. The recovery is expected to have broadly kept pace in the second quarter, supported by a healthy labor market and solid exports, while sanctions-related uncertainty is likely to have impacted investment. The unemployment rate inched down to a multi-year low in May, and the Ural oil price rose to the highest level since October 2014 in June. On 22 June, Russia and OPEC members agreed to raise oil production, a move that should bode well for Russia’s oil revenues going forward. Despite higher production, oil prices are expected to remain firm due to falling production in Venezuela and negative spillovers from the U.S. sanctions on Iran. Meanwhile, on 14 June, the government announced an upcoming increase in the VAT and a gradual raise in the retirement age, to keep government finances on a sustainable path.

Low unemployment, rising real wages and firm commodity prices should fuel quicker growth this year. However, geopolitical uncertainty and the impact of U.S. sanctions are likely to act as headwinds to the recovery. FocusEconomics Consensus Forecast panelists see GDP expanding 1.7% in 2018, unchanged from last month’s forecast. In 2019, growth is seen at 1.8%.

KAZAKHSTAN | Revived energy sector fuels healthy activity

Kazakhstan­’s economic recovery remains on course, thanks to buoyant external conditions. A surge in oil prices and higher oil exports have boosted revenues, leading to positive fiscal metrics and an improved current account. Most of the oil revenues have been channelled into the country’s National Fund; in the January–May period, the Fund’s assets rose by USD 0.9 billion. The Ministry of National Economy recently reported that the economy grew 3.9% in the first five months of the year, with economic growth losing pace in Q2 largely owing to a winding down of investment at the Kashagan oil field. The latest data shows, however, that economic activity accelerated in May from April but remained below the average pace of expansion in Q1. While industrial production grew at the strongest rate in eight months in May, retail sales lost some speed in the month. That said, sales still rose at a solid stride amid low levels of unemployment and inflation, and moderate wage growth.

The upturn in oil prices and higher domestic demand supported by weaker inflationary pressures should fuel a healthy pace of expansion this year. That said, growth is expected to moderate from last year due to an anticipated slowdown in exports and as the government phases out its countercyclical fiscal policy to bring down the budget deficit to 1.1% from 2.6% in 2017. Medium-term challenges to the outlook include incomplete bank restructuring and an excessive dependence on oil. FocusEconomics panelists see GDP growing 3.6% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.5% in 2019.

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UKRAINE | Government moves ahead with anti-corruption court

Comprehensive first-quarter data confirmed the economy’s strong start to the year. Robust domestic demand was the main engine of growth in Q1, as improving labor market conditions, easing inflationary pressures and improved private-sector lending bolstered consumer spending. In addition, fixed investment growth carried over from the previous quarter as the country’s investment climate continued to improve. In contrast, data from the external sector was less upbeat. Exports slipped into negative territory in Q1, although the deterioration of imports was far more pronounced. Political fighting continued to plague reform efforts in the country, as the IMF-backed reformer Oleksandr Danylyuk was dismissed from the finance minister’s post in early June. Meanwhile, the IMF issued a statement in mid-June warning lawmakers that the law establishing an anti-corruption court must be amended before the next loan tranche can be unlocked. Earlier in June, the law was passed by the Rada, however, the key requirement for the anti-corruption court to adjudicate all cases under its jurisdiction was stripped out.

Domestic demand is expected to lead the recovery this year amid booming investment activity and solid household consumption growth. Meanwhile, industrial production will continue to benefit from the end of last year’s trade embargo and strong external demand. Nonetheless, the economy is unlikely to grow at potential in the short- to medium-term as the outlook remains dampened by the uncertainty over the government’s commitment to long-term economic and anti-corruption reforms ahead of next year’s elections. Our panelists see GDP rising 3.1% in 2018, up 0.1 percentage points from last month’s forecast, and 3.1% again in 2019.

BELARUS | Early data suggests moderating momentum in Q2

The economy appears to have shifted into a slightly lower gear in the second quarter, after growth hit an over six-year high in the first quarter. Economic growth appears to have decelerated for the third consecutive month in May; nevertheless, fundamentals remained strong. Domestic demand was bolstered in the month by higher disposable incomes, and dwindling inflationary pressures were reflected in robust retail sales, which grew at a nearly four-year high in May. Meanwhile, momentum in the external sector persisted into April, following a jump in merchandise exports by over a quarter in Q1, supported by booming mineral exports. Industrial production, however, decelerated to a year-to-date low in May. As both external and domestic demand remained strong, a fading base effect was, however, in part behind the slowdown.

Strong domestic demand should prop up growth this year on the back of household consumption bolstered by tight labor market conditions; however, the pace of expansion is expected to moderate in the coming quarters. The external sector will remain strong on waning, but still-healthy, demand from the EU and CIS countries, particularly Russia. On the flip side, Belarus’s strong reliance on Russia, its main trading and political partner, continues to cast a shadow on its ability to reach sustained economic independence in the long term. FocusEconomics panelists see the economy expanding 3.2% in 2018, which is up 0.3 percentage points from last month’s forecast, and 2.9% in 2019.

MONETARY SECTOR | Regional inflation inches down in May

A preliminary estimate of regional inflation revealed moderating price pressures in May. Inflation in the CIS region came in at 2.7%, down a notch from April’s 2.8%. Inflation is at a historically low level in the region, thanks chiefly due to favorable dynamics in food prices.

Low inflation led policymakers in Belarus to cut the key rate to a 10-year low in June. However, despite low inflation, Russia’s Central Bank held interest rates unchanged at its June meeting, as upside risks to inflation have intensified in recent weeks. The Bank specifically cited the government’s decision to raise the VAT tax and gave more cautious forward guidance, stating that the transition to neutral monetary policy needs to be slow.

Inflation is expected to rise by the end of 2018 and come in at 4.3%, which is unchanged from last month’s forecast. In 2019, inflation is expected to edge up to 4.5% by year-end.


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Angela Bouzanis

Senior Economist 


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