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Ukraine Crisis Chokes East Europe Growth, World Bank Says

June 11 (Bloomberg) -- Economic growth in eastern Europe will slow “sharply” this year because of dwindling demand from Russia, which may face wider sanctions from the U.S. and the European Union if it fails to help end violence in Ukraine.

Expansion will slow to 1.7 percent this year in the post-communist east from 2.2 percent last year, the Washington-based lender said on its website. The forecast includes the Czech Republic, Poland and Russia, which are considered high income by the World Bank.

The threat of additional retaliatory measures against Russia for President Vladimir Putin’s actions in neighboring Ukraine is endangering the region’s recovery from the impact of the euro area’s recession and debt crisis. U.S. President Barack Obama said last week Putin has weeks to stop supporting pro-Russian insurgents in Ukraine or face stiffer penalties.

“Should tensions further escalate, more intrusive sanctions, possibly interrupting trade and banking flows, cannot be ruled out,” the World Bank said in the report.

Ukraine’s economy will shrink 5 percent this year after stagnating last year and Russian output will grow 0.5 percent after expanding 1.3 percent in 2013, according to the lender.

Fighting in Ukraine’s easternmost regions, where government forces are battling pro-Russian rebels, continued yesterday after three-way meetings between Russia, Ukraine and the Organization for Security and Cooperation in Europe in Kiev reached agreement on implementing a peace plan drawn up by Ukrainian President Petro Poroshenko.

If tensions ease, eastern Europe’s growth may accelerate to 3.7 percent next year and 4 percent in 2016, excluding high-income nations, from 2.4 percent this year, according to the World Bank.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net James Kraus

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