CIS Countries Economic Outlook March 2018

CIS Countries: Upcoming elections unlikely to reshape political and economic landscape

March 7, 2018

The economy of the Commonwealth of Independent States (CIS) continued its erratic recovery in the fourth quarter on the back of higher oil prices and strong global growth. Despite likely slowing slightly in Q4, Russia’s economy continued to gradually recover from the 2015–2016 slump, positively reverberating across the region. The country accounts for more than 75% of the region’s nominal GDP and is a major trading partner for most economies in the region, as well as a source of remittances. According to a more complete aggregate for CIS countries’ economic output for Q4, the region expanded 2.2% annually in the quarter, a notch below Q3’s 2.3% rise.

Data for Q4 revealed that Armenia expanded at a double-digit rate for the first time in nearly a decade, while Azerbaijan logged the first expansion—albeit a meagre one—in two years mainly due to higher oil prices. Growth in Kazakhstan, the region’s second-largest economy, lost some steam in Q4 but remained solid overall as growth benefited from new output at the Kashagan oil field. While details for the final quarter of 2017 are not yet available for the Russian economy, the full-year result for 2017 suggests that growth slowed significantly in the fourth quarter, despite higher oil prices.

Available data for the first months of the year suggests that regional GDP growth is stabilizing. Volatility in the oil market, large economic imbalances in some countries and a slow economic recovery in Russia are keeping regional growth subdued. Against this backdrop, our panel of analysts foresees the CIS economy expanding 2.2% annually in Q1.

In the political arena, Russian President Vladimir Putin, who faces virtually no opposition, is set to win another six-year term in the 18 March election. Putin’s victory would ensure a continuation of economic policies, and any major economic shift will be determined by the evolution of oil prices and new sanctions. Azerbaijan will also hold presidential elections after President Ilham Aliyev called a snap election for 11 April, six months ahead of schedule. While opponents claim this move is intended to sideline them, Aliyev will likely extend his rule to 2025. He has constantly won all the previous elections amid allegations of vote rigging. Similarly, on 25 March, parliamentary elections will take place in Turkmenistan. With all three contesting parties claiming loyalty to President Gurbanguly Berdymukhamedov, no relevant political and economic changes are expected.

Regarding the three economies that are not included in the regional aggregate, the economies of Georgia and Turkmenistan experienced stronger growth in Q4 due to healthy dynamics in their external sectors. The main blackspot was, once again, Ukraine, which saw growth slowing for the fourth consecutive quarter, hitting a one-and-a-half-year low in Q4. The conflict in the Donbass region, poor progress in economic reforms and a disappointing external sector weighed on growth in the quarter. Available data for Q1 show that activity kicked off 2018 on strong footing in Georgia and Turkmenistan. On a positive note, in Ukraine, industrial production gained steam in January, and the government approved IMF-mandated legislation to crack down on corruption on 1 March.

Oil market volatility and potential new sanctions against Russia cast a shadow on this year’s economic outlook

While growth is set to accelerate this year in the CIS region mainly due to higher commodity prices compared to last year and strong global growth, risks to the 2018 economic outlook appear to be skewed to the downside. The plunge in oil prices observed in early February following an equity rout in the U.S. highlights that volatility is back, following a long period of calm in financial markets. Heightened volatility in global financial markets could impact the region in the form of lower commodity prices, sharp currency depreciations or spikes in interest rates, threatening to derail the region’s economic recovery. While the European Union and the United States decided in recent months to hold off on new economic sanctions against Russia, the threat continues to cloud the outlook for Russia and, by extension, the rest of the region.

Regional GDP is seen growing 2.1% in 2018, unchanged from last month’s forecast. In 2019, regional GDP is projected to also grow 2.1%. This month’s stable 2018 forecast reflects a lower projection for Russia that was offset by upgrades to the economic outlooks for Armenia, Azerbaijan, Belarus and Tajikistan. Growth estimates were left unchanged for the Kazak, Kyrgyz, Moldavan and Uzbek economies. As for the three countries that are not included in the regional GDP aggregate, analysts downgraded Turkmenistan’s outlook, while the projections for Georgia and Ukraine were left unchanged.

Uzbekistan is projected to be the fastest-rising economy in the region this year, with a 6.2% increase. On the other end of the spectrum, Azerbaijan’s economy is projected to expand at the slowest rate, with expected growth of 1.6%. Among the region’s larger economies, Kazakhstan is expected to grow at the fastest rate (3.4%), followed by Belarus (2.1%) and Russia (1.8%).

RUSSIA | Slow-but-steady economic recovery triggers credit rating upgrade

Incoming data suggests that Russia’s economic recovery was broadly steady in recent months, although growth likely remained lackluster. The manufacturing PMI fell to the lowest level since July 2017 in February, and the Ural oil price also lost some recent gains. However, industrial production expanded notably in January, after two months of contraction, while exports grew at a double-digit pace in December, the latest month for which data is available. Overall, the economy has come a long way since the 2015–2016 recession, and on 23 February, S&P Global Ratings upgraded Russia to investment grade status after three years at junk—raising the rating from BBB- to BB+ with a stable outlook. The move sparked a rally in Russian assets. Meanwhile, President Vladimir Putin is widely expected to win the 18 March election, ushering in a continuation of current economic policy.     

FocusEconomics analysts trimmed their GDP forecasts this month, following a weaker-than-expected print for 2017. Limited oil production is expected to keep activity restrained this year, although the recovery is seen gaining modest steam from last year supported by low inflation, reduced interest rates and higher commodity prices. FocusEconomics Consensus Forecast panelists see GDP expanding 1.8% in 2018, which is down 0.1 percentage points from last month’s forecast. In 2019, growth is seen stable at 1.8%.

KAZAKHSTAN | Economic growth loses some momentum at the start of the year

Official GDP data confirmed that the oil-dependent economy grew 4.0% in 2017, escaping the grips of a marked slowdown amid falling oil prices in 2016, when it expanded just 1.1%. The noteworthy turnaround came on the back of a boost to oil production, encouraged by an upturn in oil prices. A robustly performing Eurozone and the recovery in Russia, which are among Kazakhstan’s top trading partners, also aided the substantial pick-up. Recent data points to a promising start to 2018, although the economy likely lost pace. Economic activity rose at a solid, but slower, rate in January compared to December. Retail sales continued growing strongly in January against a steady level of unemployment and falling inflation, but the rate of expansion fell by almost half from the previous month. Growth in industrial output was broadly stable in the same month, dipping marginally from December.

The economy is expected to continue expanding at a robust pace this year, on the back of an increase in oil output and recovering domestic demand as inflation drops. Growth will likely remain below pre-crisis levels, however, as exports are anticipated to decelerate more sharply than imports, translating into a drag on overall growth by the external sector. Diversifying the economic structure and tackling the high bulk of non-performing loans in the banking sector will be crucial to improving prospects and achieving greater stability. FocusEconomics panelists project growth of 3.4% in 2018, which is unchanged from last month’s forecast, and 3.5% in 2019.

UKRAINE | Economy shifts into lower gear in Q4 as reforms stall

GDP growth slipped for a fourth consecutive period in the final quarter of 2017, rounding out a year of lackluster recovery. Although the details behind the release are not yet available, a poor performance by the external sector and muted industrial production were likely behind the disappointing result. The recovery has languished over the past year as tensions with rebel-held areas remained high and progress on implementing economic reforms sputtered. The slow pace of reforms led the country’s bailout program with the IMF to fall off track, delaying bailout funds. On 1 March, however, the government made some progress in approving a first draft of a law to create an IMF-mandated anti-corruption court. The same day, a new dispute started between Ukraine and Russia, after Russia’s state-run Gazprom cut gas supplies to Ukraine during harsh winter weather; the two countries are in the midst of a long-running legal battle. On 28 February, an international arbitration court ruled in favor of Ukraine, ordering Gazprom to pay the country’s Naftogaz around USD 2.6 billion.

The economy has stabilized since the 2014–2015 crisis; however, growth will likely remain moderate without deep economic reforms and a lasting solution to the military conflict. FocusEconomics panelists see GDP rising 2.9% in 2018, which is unchanged from last month’s forecast. In 2019, growth is expected to inch up to 3.0%.

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BELARUS | Economy ends the two-year recession in 2017

The economy returned to growth in 2017, expanding at a six-year high, following two years of recession. It also started this year on a strong note. According to data released by the National Statistics Committee, the economy grew 4.6% in annual terms in January. Year-on-year industrial production expanded at more than double December’s print in January, marking an over five-year high. In addition, economic activity grew healthily in the month on the back of an astounding surge in fixed investment and sustained export growth. Exports jumped by over one third in January, driven by a very strong demand from non-CIS countries and especially the EU, although the figure benefitted from a relatively low base. Meanwhile, private consumption was fueled by record-low inflation and rising wages at the beginning of the year. More negatively, Russia issued a ban on dairy imports from Belarus following a trade dispute. Effective 6 March, the ban will hamper Belarus’ export potential, highlighting the economy’s exposure to the Russian market.

Private consumption growth is set to gain ground this year, on the back of tight labor market conditions, moderating inflationary pressures, and strong external demand from CIS countries and the EU, which will continue propelling exports and fuel the ongoing economic recovery in 2018. FocusEconomics panelists expect the economy to grow 2.1% in 2018, which is up 0.2 percentage points from last month’s forecast, and 2.0% in 2019.

MONETARY SECTOR | Regional inflation hits all-time low in January

Inflationary pressures remained muted in January amid relatively stable currencies, historically low inflation in Russia and subdued food prices. Regional inflation fell from 3.1% in December to 2.7% in January, the lowest level on record.

Low inflation is giving central banks in the region leeway to ease their monetary policies. The Central Bank of the Russian Federation cut its key interest rate by 25 basis points to 7.50% at its 9 February meeting, while the National Bank of Kazakhstan reduced the one-day repo rate by 25 basis points to 9.50% on 5 March. Conversely, the National Bank of Ukraine hiked its principal interest rate for the fourth consecutive time since October on 1 March due to resurfacing inflationary pressures.

Higher commodity prices and reduced economic slack will push up regional inflation this year. That said, the increase will be limited as factors that kept inflation in check last year will likely carry over to 2018. FocusEconomics panelists see inflation ending 2018 at 4.5%, which is down 0.1 percentage points from last month’s forecast. In 2019, inflation is expected to inch down to 4.4% by year-end.



Angela Bouzanis

Senior Economist 


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