Europe’s Russian Connections


By Aasim M. Husain, Anna Ilyina and Li Zeng

(Version in Русский)

The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian financial markets (Chart 1). A deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels.

Chart 1

CESEE-Blog_7-30-14_final.001

What would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn? To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties. See also separate blog on Russia-Caucasus and Central Asia links.

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Links and Levers: How the Caucasus and Central Asia Are Tied to Russia


Alberto BeharBy Alberto Behar

(Version in Русский)

The countries of the Caucasus and Central Asia (CCA) are closely linked with Russia through trade, financial, and labor market channels. These ties have served the region well in recent years, helping it make significant economic gains when times were good. But how is the region affected when Russia’s economy slows down?

Underlying structural weaknesses have reduced Russia’s growth prospects for this year and over the medium term. Tensions emanating from developments in eastern Ukraine—including an escalation of fighting, the downing of Malaysian Airlines Flight 17, and new sanctions—have led to renewed market turbulence in Russian markets.

Experience has shown that lower growth in a large country can inflict significant collateral damage on neighboring countries with strong linkages of the type that the CCA has with Russia. (See also separate blog on Russia-Europe links.) We took a closer look at these connections to see how they transmit shocks, with particular attention to the impact on the region’s two main categories of economies—hydrocarbon importers and hydrocarbon exporters (see map).

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If China Sneezes, Africa Can Now Catch a Cold


By Paulo Drummond and Estelle Xue Liu

(Version in  中文)

Growing links with China have supported economic growth in sub-Saharan Africa. But the burgeoning commercial and financial ties between the developing subcontinent and the world’s second-biggest economy carry risks as well. These links also expose sub-Saharan African countries to potentially negative spillovers from China if the Asian giant’s growth slows or the composition of its demand changes.

The old aphorism “If America sneezes, the world catches a cold” referred to the U.S. economy’s role as a locomotive for the global economy, but it can now apply to any symbiotic relationship between a dominant economy and its clients. China has become a major development partner of sub-Saharan Africa. It is now the subcontinent’s largest single trading partner and a key investor and provider of aid.

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Mideast Braces Itself for a Multi-Year Transition


By Masood Ahmed

(Version in عربي)

This week I’ve been traveling extensively across the region, both listening and learning. I am writing this from Dubai, where we have just launched our Regional Economic Outlook. And earlier this week, I had the opportunity to participate in the GCC Ministerial Meeting in Abu Dhabi and the World Economic Forum’s special meeting on Economic Growth and Job Creation in the Arab World in Jordan.

My core takeaway from all these events is that the underlying sense of optimism in the promise of the Arab Spring is very much there, but there is also a growing recognition that managing the short-term transition will be even more difficult with the persistence of economic pressures and rising social expectations.

Not an easy year

2011 has not been an easy year for many countries in the Middle East and North Africa. The combination of domestic unrest and external uncertainty has resulted in a marked downturn in economic activity, and this is expected to pick up only gradually over the coming year. Continue reading

Mideast Oil Exporters Face the Crisis Head On


By Masood Ahmed

Middle East oil exporters are squarely facing the worst financial crisis since the Great Depression head on. Despite the sharp drop in oil prices last year, the oil exporters rightly decided to maintain spending by drawing upon reserves amassed during the boom years.

High public spending and exceptional anticrisis financial measures have not only cushioned oil exporters’ own economies but are also contributing to sustaining global demand. They have also helped the interlinked economies of neighboring oil importers. 

Facing this boom-bust cycle 

Between 2004 and 2008, Middle East oil-exporting countries grew by about 6 percent a year and accumulated $1.3 trillion in foreign assets. With the striking drop in oil prices—from a peak of $147 per barrel in mid-2008 to around $30 per barrel at the beginning of 2009—the countries of the Gulf Cooperation Council (GCC) have been hardest hit. Iraq and Saudi Arabia are expected to see the most pronounced drops in oil GDP growth—8 and 15 percentage points, respectively—this year.

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

Despite sharp drop in oil prices last year, oil exporters rightly decided to maintain spending by drawing on reserves amassed during boom years (photo: Wathiq Khuzaie/Getty Images)

During the precrisis boom years, banks had lent substantial amounts for real estate and equity purchases and made large profits. With the onset of the crisis, asset values fell sharply and the global deleveraging led to a severe tightening of credit conditions, especially in the GCC. Banks’ balance sheets have come under pressure credit growth has slowed sharply—up to 40 percentage points in Qatar.

 

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Africa and the Global Economic Crisis: Weathering the Storm


By Antoinette Sayeh

Last week, my colleague Hugh Bredenkamp talked about how the IMF is helping the low-income countries overcome the global  economic crisis. This week, I want to follow this theme, but hone in more on sub-Saharan Africa. I know this region reasonably well, both from current and past vantage points. In my present role, I am the director of the IMF’s African department. Previously, I was minister of finance in Liberia and, before that, I spent a significant part of my long World Bank career working on African countries. Grappling with the kinds of economic challenges that affect the lives of millions of Africans is a passion for me.

In this first post, I want to talk about growth prospects for Africa. Let’s take a step backwards. Before the global recession, sub-Saharan Africa was generally booming. Output grew by about 6½ percent a year between 2002 and 2007—the highest rate in more than 30 years. This acceleration was broader than ever before, going beyond the typical short-lived commodity driven booms and touching many more countries. Hopes were high that the region was slowly but surely turning the corner.

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Then, in a great reversal of fortune, the global economy went into a tail-spin. Initially, we hoped that the fallout in Africa would be limited. And, indeed, when the global financial tsunami made landfall, it first hit the relatively small number of countries with well-developed financial linkages to international capital markets. South Africa in particular faced difficult challenges as portfolio outflows spiked. Together with Ghana, Uganda and several other frontier markets, its currency plunged, confidence dipped, and foreign direct investment slowed.

But the impact didn’t stop there.  Falling export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa, causing fiscal and external balances to deteriorate significantly. Remittances from the diaspora shrank and credit dried up. The result, in many countries, was stalled growth.

 

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