Journal Issue

1. Introduction

Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Dragana Ostojic, and Natan Epstein
Published Date:
November 2015
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In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia decelerated in late 2014, resulting in negative spillovers on Commonwealth of Independent States (CIS)1and, to a lesser extent, on Baltic countries. The spillovers to eastern Europe have been limited. The degree of impact is commensurate with the level of these countries’ trade, remittances, and foreign direct investment (FDI) links with Russia. So far, policy action by the affected countries has focused on mitigating the immediate consequences of spillovers.

Falling oil prices and Western sanctions are pushing the Russian economy into recession. Russia saw a large increase in risk premiums and capital outflows, which resulted in more than 65 percent depreciation in the national currency against the U.S. dollar between June and December 2014.

Given historical links and geographic proximity, developments in Russia will have negative spillovers on the economies of CIS and Baltic countries. Trade, remittances, and FDI are the main channels of spillovers. Some eastern European countries also have sizable trade and financial links with Russia. In general, western Europe’s trade and financial links with Russia on average are weaker (Finland being a notable exception). The main link is through energy imports from Russia, which exceeds 5 percent of total energy consumption for several western European countries. Henceforth, the note will focus on spillovers to CIS, Baltic, and eastern European countries.

Russia’s growth slowdown has had major adverse effects on CIS economies and to some extent on Baltic countries. Currencies of most of the CIS countries weakened sharply against the U.S. dollar, following the ruble’s depreciation. Pass-through from exchange rate depreciation intensified inflationary pressures in most CIS countries. In addition, sovereign spreads have significantly widened in some CIS countries, which was partially a result of spillovers from Russia. Expected recession in Russia in 2015 has contributed to significant growth revisions in the CIS and to a lesser extent in Baltic countries.

So far, policy responses by affected countries have aimed at addressing the short-term impact of spillovers. In most of these countries, monetary policy was tightened, while fiscal policy was loosened. Despite foreign exchange (FX) interventions by central banks, national currencies have depreciated or have been devalued in nearly all CIS countries.

Georgia and Turkmenistan are not members of the CIS, but they are included in this group because of their geographic proximity and similarity of economic structure.

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