Ukrainian Conflict Is Infecting Regional GDP, EBRD Says

Five months of deadly fighting in Ukraine is curbing eastern Europe’s growth prospects, the European Bank for Reconstruction and Development said.

Gross domestic product in the 31 emerging European economies where the bank lends will grow an average 1.2 percent this year as the recovery in the euro area with which many nations have strong trade and banking ties remains “fragile,” according to an e-mailed report released today. Growth will pick up to 1.5 percent in 2015, marking the fifth consecutive year with expansion of less than 3 percent, the lender said.

“The continuing crisis between Russia and Ukraine is weighing on the economies of the EBRD region, with only a modest recovery expected in 2015 after a sharp slowdown in growth this year,” the bank said. “The volatile security situation in Ukraine makes the forecasts exceptionally uncertain.”

Eastern Europe’s recovery from the effects of the euro-area debt crisis is in danger as Russia, the region’s largest economy and main energy supplier, is punished by the European Union and the U.S. over Ukraine. President Vladimir Putin’s government is facing sanctions that target industries from energy to finance and defense, while he’s retaliated by blocking most European food imports. Russia has also halted natural gas deliveries to Ukraine over unpaid bills, threatening flows to the EU.

‘Significant’ Risks

Ukraine’s recession is deepening because of the fighting in its easternmost regions, the London-based EBRD said. The disruption to production and trade, agricultural losses and a partial military mobilization will lead to a 9 percent GDP contraction this year, a downward revision of 2 percentage points from a May forecast, while the economy will shrink 3 percent in 2015, it said.

While a cease-fire between the army and pro-Russian rebels was agreed on Sept. 5, fighting hasn’t abated completely.

“There are significant downside risks to the outlook stemming from protracted and intensified fighting and from further breakdown of trade linkages with Russia,” the EBRD said in the report. “On the upside, eventual stabilization in the east may pave the way for infrastructure rehabilitation and for confidence recovery, although the time-line is highly uncertain.”

In response to these pressures, Ukraine will need external financing beyond the $17 billion International Monetary Fund bailout program already in place, EBRD chief economist Erik Berglof told a news conference yesterday, declining to speculate on the possible amount.

Sanctions Effect

The crisis is also harming Russia, where sanctions and the possibility they’ll be widened have hit business confidence, according to the EBRD. It sees GDP stagnating this year and contracting 0.2 percent in 2015, with fiscal stimulus and spending on energy infrastructure aiding the economy, while “stubbornly high” inflation and low investment constrain growth.

The bank also warned eastern European governments against increasing military spending in response to the conflict in Ukraine, saying there’s limited fiscal scope for such a step.

“Just when national governments remain financially strapped in the wake of the global financial crisis, any new build up in military spending will be an additional fiscal burden that will stand in the way of the recovery and economic reforms for the future,” Berglof said in the report.

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