Future Considerations and Challenges to Growth
Overview
Belarus President Alexander Lukashenko extended a warm message to the leaders of the Commonwealth of Independent States (CIS) member states on the occasion of the 25th anniversary of the CIS. The head of state noted that the CIS Treaty which was signed on December 8, 1991 marked the start of integration in the post-Soviet space. “Over the past 25 years, relying on the principles of respect for national priorities and freedom of expression of its member states, the CIS has grown into a modern regional community that considers the interests of all the parties,” Lukashenko stressed.
The president emphasized a renewed commitment in 2016 to adapt the CIS to the present-day challenges and confirmed that he is confident that this landmark event will strengthen the image of the CIS, making it an even more relevant organization. Despite major differences country-to-country, groups within each state share many common economic, political, and cultural characteristics, which many hope will fade with the passing of those generations that remember the common state. In this context, the Russian Federation holds a unique position in the Euro-Pacific area. Separate, distinct, but still bordering these regions and related to all of them to differing degrees, in the 2010s Russia will step up efforts to become an independent center of gravity in Northern Eurasia. Leaning on its CIS allies and partners, Moscow is willing to fortify its stance visà-vis its geopolitical competitors—the European Union in the west, and China in the east.
Russia and the CIS continue to experience appreciable slack. Output gaps remain negative, on the back of subdued private consumption and investment, and real credit growth, while improving, is still negative. Although still elevated, inflation in these countries has declined, reflecting the still negative output gaps together with lower-than-expected exchange rate pass through and declining international food prices.
The decline in foreign banks’ claims on CIS countries accelerated after these countries slipped into recession in 2014. Since late 2015, however, external positions of the Bank for International Settlements (BIS)-reporting banks outside the CIS have shown some signs of stabilization. According to bank surveys, Western banks adjusted their exposures in the region, differentiating across countries based on their economic prospects and progress on private nonfinancial sector deleveraging. Banks have gradually increased exposures to countries with better economic fundamentals and market potential, while continuing to withdraw from countries struggling with high nonperformance loans, high corporate leverage, and weak aggregate demand. Going forward, challenges remain, as many European banks continue to struggle with still high levels of impaired assets and low profitability in a low-growth and low-interest rate environment (IMF 2016, Chapter 1).
In Russia, following a significant moderation of the recession in 2016, GDP is projected to return to growth in 2017 supported by higher oil prices. In the CIS, the recovery is projected to gather pace in 2017, supported by an improved outlook in Russia, given the close linkages between Russia and the rest of the CIS through trade and remittances. Inflation is projected to moderate further over the near term reflecting somewhat stronger exchange rates.
Prospects for 2017
This book had provided a regional analysis, as well as country scan (see Appendix A), of the CIS regional block economies. We examined their history since the breakup of the formal Soviet Union and the formation of the CIS bloc, including creation of regional agreements such as the CIS Free Trade Area and the Eurasian Economic Union, a single economic market which now represents more than 180 million people.
What lies ahead in coordinating this economic, political, and security collective? Most analysts are predicting a gradual improvement in the region’s economic backdrop in 2017, as the easing of geopolitical tensions and the expected recovery in commodity prices will support faster growth in the CIS this year. Acknowledging the state’s significant influence over the politics and economies of the CIS region, they are basing their predictions of improvement on an expectation of return to growth in Russia. More broadly, strengthening economic activity in Azerbaijan, Kazakhstan, and Russia will support growth in the subregions of Central Asia and the Caucasus.
Nevertheless, the combination of factors that determined the plunge in the economy of the CIS since the second quarter of 2015 still persists today. These factors included the sharp fall in commodities prices, restrictions on access to international capital markets due to sanctions against Russia and a deceleration in China, which is the region’s main trading partner. Although economic conditions in most of the CIS economies are challenging, differences in growth dynamics persist. Oil and gas exporting countries, namely Azerbaijan, Kazakhstan, Russia and Turkmenistan, are seeing economic conditions deteriorating rapidly because of the sharp fall in energy prices. Meanwhile, most of the labor-exporting countries (Armenia, Kyrgyzstan, Moldova, and Tajikistan) are seeing the deterioration in growth rates, mainly due to strong production in the agricultural sector and, in some cases, increased activity in the extractive sector.