Journal Issue

4. Impact So Far on the Affected Countries and Potential Further Shock

Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Dragana Ostojic, and Natan Epstein
Published Date:
November 2015
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Given the aforementioned spillover channels and strong historical ties with individual countries, the slowdown in Russia—the largest economy in the region—has adverse effects on neighboring economies. As a result, growth in CIS countries has decelerated as well. In addition, exchange rates are weakening against the U.S. dollar, inflation is rising, and risks are building up in the financial systems of some countries.


The negative spillovers contributed to sizable downward revisions to growth forecasts across the CIS and to a lesser extent in Baltic economies (text chart). Direct spillovers from Russia played an important role in explaining output behavior in most of CIS countries during the 2008–09 global financial crisis as well as during the recent slowdown, as Russian and CIS business cycles tend to co-move. In particular, for CIS oil importers, adverse spillovers from Russia in 2015 account for more than 2.5 percentage points of downward growth revision relative to April 2014. For CIS oil exporters and Baltics, negative spillovers from Russia contributed to around 1 percentage point downward revision in the growth forecast. In addition, slower secular growth in Russia will have negative implications for the medium-term outlook of CIS and Baltic countries.

Revisions to Real GDP Growth, 2015

(WEO April vs. April 2014, percent)

Note: The shaded area corresponds to the estimated impact of Western sanctions. Sources: IMF Staff estimates

Exchange rate and risk indicators

Currencies of most CIS countries depreciated (or were devalued) sharply against the U.S. dollar following the ruble’s depreciation, reflecting confidence effects and expected declines in foreign currency inflows from Russia (remittances, FDI, and exports).1 Countries with significant trade and remittance links to Russia experienced larger currency depreciation, reflecting expected deterioration in current account balances (see Figure 2). At the same time, most of the currencies appreciated against the ruble which led to real effective exchange rate appreciations. The rapid decline in oil prices has added to downward pressures on exchange rates of energy-exporting countries, due to weaker current account and fiscal positions. Sovereign spreads have widened significantly for some CIS countries reflecting the collapse in confidence since markets perceived these countries as the most vulnerable to spillovers from Russia.

Figure 2.Exchange Rate and Sovereign Spreads, 2014―15

Sources: Bloomberg, L.P.; National Bank of Russia; and IMF staff estimates.


Pass-through from exchange rate depreciations has been the main channel through which spillovers from Russia impacted inflation in CIS countries. Given that the majority of imports, even from Russia, are denominated in U.S. dollars, the depreciation of local currencies vis-à-vis the dollar has led to inflationary pressures despite appreciation of nominal effective exchange rates. This was a notable factor contributing to the inflation forecast revision for CIS oil importers. However, slowing growth and soft international food prices partly offset these inflationary pressures. The impact of declining oil prices on revisions of inflation forecasts has been limited so far to the Baltics, CEE, southeastern Europe (SEE), and Turkey, as the weight of gasoline and other fuels in the consumer price index (CPI) of CIS countries is typically small and regulated retail prices have been slow to adjust. The impact of import bans imposed by Russia on several agricultural and food products was another factor behind inflation developments. The impact was mainly felt in Baltic countries and Moldova. This has contributed to about 0.5 percentage points downward revision in the inflation forecast for 2015 relative to April 2014 forecasts for Baltics and Moldova.

Revisions to Inflation, 2015

(WEO April vs. April 2014, percent)

Note: The shaded area corresponds to the estimated impact of Russia’s counter-sanctions. The inflation revision due to Russia’s slowdown also includes the impact of exchange rate pass through of currency depreciation as a result of spillovers from Russia.

Sources: IMF Staff estimates

Financial stability

Spillovers from Russia could have financial stability implications in affected countries, although so far impact has been limited. Exchange rate depreciations in highly dollarized economies could worsen balance sheets of banks and households reducing banks’ profitability and asset quality. Already high and increasing levels of dollarization in the region, particularly in the CCA countries, where the share of dollar deposits is about 50–60 percent in most countries, points to weak confidence and expectations of further devaluations. In addition, the fall in demand and remittances, which in many countries are used to service debt could adversely affect banks’ asset quality. Moreover, rising FX loan-to-deposit ratios suggest a possibility of liquidity problems and currency mismatch. However, so far, there has not been a visible deterioration in banks’ profitability and asset quality, which could be attributed to countries’ relatively low financial sector exposure to Russia. Only Azerbaijan, Tajikistan, and Ukraine have experienced considerable deterioration in asset quality (see Figure 3).2 Profitability of banks has deteriorated somewhat in the CIS and Estonia with banking systems of Tajikistan and Ukraine recording losses. Still, NPLs are a backward-looking indicator and it will take time before the impact of these shocks would show up in higher NPLs. In this regard, having adequate buffers to deal with potential strains on banks’ health is crucial. While capital adequacy in Baltic and CIS countries on average is above regulatory requirement and bank provisions account on average 50 percent of NPLs, there are notable differences across countries (Figure 3).

Figure 3.CIS and CESEE: Financial Soundness*

* The definitions of NPLs and provisioning vary considerably across countries, with some countries having more conservative definitions than others.

Sources: Global Financial Stability Report, April 2015; IMF staff estimates.

Potential further shock

Downside risks for Russia are still present, and spillovers from a worsening of the current shock could affect the region, particularly CIS and Baltic countries (seeBox 1). In the case of continued lack of access to capital markets, a further rise in sovereign and corporate spreads due to deposit flight and currency substitution, and a permanent loss in productivity owing to inward-looking policy responses, a downside scenario for Russia could materialize resulting in much sharper contraction of output in 2015 and 2016. The impact of an additional Russia growth shock on the region was simulated using a Flexible System of Global models, and output losses range from ‒3 percent in Armenia to ‒0.1 in Romania. The direct impact of Russia’s more severe recession on the world GDP would be limited.

Box 1.Simulation of Impact of a Downside Scenario for Russia

In a case of a more severe shock to the Russian economy, significant spillovers via trade, remittances and FDI would result in additional GDP losses for neighboring countries. The impact on the rest of the world would be minimal. If such a scenario materializes, deeper and faster policy responses are warranted to boost potential growth, secure fiscal and external sustainability, and ensure a sound financial sector.

A downside scenario for Russia: Additional balance of payments pressures emerge as a result of lack of capital market access and weaker confidence. The ruble depreciates as a result of additional capital outflows and inflation increases further. Moreover, deposit flight and currency substitution would put pressure on banks’ balance sheets, and sovereign and corporate spreads would rise. This scenario would require a significant tightening of monetary policy and limit fiscal space. Inward-looking policy responses would result in a larger government presence in the economy (including the banking system) and less competition giving rise to a permanent loss in productivity. In the adverse scenario, GDP could fall by an additional 4 percent and 2 percent in 2015 and 2016, respectively, compared with the current WEO baseline.

Results of the RES Flexible System of Global models imply significant spillovers from additional Russia growth shock. The impact ranges from –3 percent of GDP in Armenia to –0.1 percent of GDP in Romania. Most affected are CIS countries because of their strong trade and remittances links with Russia and, to a lesser extent, Baltic countries. The magnitude of spillovers is commensurate with existing trade links amplified by remittances from Russia in the case of Armenia, Moldova, and other CCA oil importers.

The impact of Russia’s more severe recession on world GDP is deemed to be limited. The cumulative decline of world GDP for 2015-16 as a result of additional 4 percentage point recession in Russia would be about 0.2 percentage point. The main impact comes from Russia’s 3 percent weight in the world GDP, since Russia’s trade (excluding energy) and financial links with the rest of the world are relatively weak.

GDP Losses due to an Additional 4 percent fall in Russian GDP

(Cumulative for 2015-16, relative to March 2015 baseline, percent)

Source: IMF staff estimates.

In the case of Ukraine, other idiosyncratic factors also played an important role.

The deteriorating quality and weakening profitability of Ukrainian banks’ assets stem from problems that can only to a limited extent be explained by spillovers from Russia.

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