The Commonwealth of Independent States is suffering from a series of crises – the war in Ukraine, deep recession in Russia and the fall in commodity prices – especially energy prices. The region is also affected by the slowdown in China, contagion from volatility in emerging markets in general and risk aversion of investors. The region as a whole will see its GDP shrink by 3.6% in 2015, with Ukraine understandably the worst performer, seeing its economy shrink by 12.3% in real terms. Growth in the region will recover only slowly and will remain significantly below trend levels in the medium term.
Average Real GDP Growth in CIS Economies: 2000-2007/2015-2022
Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), International Financial Statistics (IFS)
Note: Data for 2015-2022 are forecast..
Weak external environment
External pressures are having a negative impact on the economies of the region. Chiefly, the fall in energy prices and Russia’s economic crisis. Intra-regional trade remains high, and within that exports to Russia are extremely important to the economies of some members of the CIS. Belarus is most dependent, Russia is the destination of 42.1% of its exports, accounting for 19.8% of GDP in 2014.
Importance of Exports to Russia in CIS Economies: 2014
Source: Euromonitor International from national statistics/OECD/International Monetary Fund (IMF), International Financial Statistics (IFS)
On the other hand, Kazakhstan and Azerbaijan, although less reliant on Russia are both reliant on their own energy sectors as a driver of exports and economic growth, so their trade positions are also weak.
Exports of Crude Materials from CIS Economies: 2014
Source: Euromonitor International from national statistics/OECD/International Monetary Fund (IMF), International Financial Statistics (IFS)
In addition, China has become increasingly important as an export destination, particularly for Turkmenistan and Uzbekistan, so its slowdown is also having a direct impact on the region.
As well as the negative trade impact, the Russian recession is also impacting on inflows of remittances. CIS countries rank amongst the most dependent countries on remittances globally. Inflows are higher than exports in three of the CIS economies: Armenia, Kyrgyzstan and Tajikistan. According to the World Bank, Russia is the source of around two-thirds of all remittances sent to CIS economies. With unemployment on an upwards trajectory in Russia, downwards pressure is being brought to bear on this valuable source of income.
Remittance Inflows as % of Consumer Expenditure in the CIS: 2014
Source: Euromonitor International from national statistics/OECD/IMF/World Bank
Currency pressures, stemming from the weak Russian rouble, low commodity prices and the strong US dollar complete the picture of a region under fire on several external fronts.
All quiet on the home front?
The region also faces domestic challenges. Productivity is low and productivity growth has been underwhelming. Investment is also weak and there is a lack of economic diversification. Monetary policy has had to be tightened in response to inflationary and currency pressures and this in turn limits room for manoeuvre to stimulate economic growth. All but one of the economies (Uzbekistan) is expected to run a budget deficit in 2015. Structural reform is vital if the economies are to withstand the external pressures they are facing.
Budget Surplus/Deficit in CIS Economies: 2015
Source: Euromonitor International from IMF, Government Finance Statistics/national statistics/Eurostat
Note: Data are forecast
The Silk Road: Paved with gold?
The best opportunity for the region could come from China’s “One Belt One Route” (OBOR) policy – although it is still in its infancy. This policy, aimed at building networks from China across Central Asia to Europe to boost trade and investment, is a cornerstone of the country’s foreign policy. It includes a US$40 billion Silk Route investment fund. Investment in infrastructure – a weakness for many economies in the region – is likely to be a major beneficiary of the policy and this in turn could lift economic growth. The launch of the Asian Infrastructure Investment Bank has also been welcomed in the region.
Chinese companies are actively looking for investment opportunities in the region - such as XCMG Group, a machinery maker, which has set up a manufacturing plant in Uzbekistan. In early 2015, Kazakhstan and China signed US$33 billion of deals covering cooperation in the steel, non-ferrous metals, sheet glass, oil refining, hydropower and automotive sectors; and Chinese investors have pledged to invest US$6 billion into Tajikistan over three years.
The CIS is strategically placed as a bridge between Europe and China and the OBOR represents an important window of opportunity for the region. It’s no short-term solution for the region’s domestic and external pressures, nor is it a silver bullet, but it could offer a long-term boost to growth.