EBRD warns on deeper recession threat facing Ukraine

Ukraine faces a plunge into recession this year and Russia could follow, the EBRD bank warned Wednesday as it joined other major institutions in highlighting the crisis' deep economic fallout. The country has been riven in recent months as Russia has taken over the Crimea and demanded the country immediately pay off huge gas debts, while pro-Moscow insurgents in other regions have clashed with government troops as they push for greater autonomy from Kiev. "The crisis in Russia and Ukraine is having a severe impact on the economies of the two countries," the European Bank for Reconstruction and Development said in a report released at its annual conference in Warsaw. Sharply downgrading its forecasts made in January, the EBRD said it now expected Ukraine to tumble into recession in 2014 with a contraction of 7.0 percent -- and to deliver zero growth next year. The International Monetary Fund (IMF), which last month approved a $17-billion (12.4-billion-euros) aid package for Ukraine, has forecast a 5.0-percent contraction to the nation's economy this year. At the start of the year, before the outbreak of the crisis, the EBRD had forecast that Ukraine's economy would grow by 1.5 percent in 2014. Ukraine's interim President Oleksandr Turchynov on Wednesday said that Russia's hotly disputed annexation of Crimea in March had cost his country about $100 billion. EBRD chief economist Erik Berglof meanwhile told a Warsaw press conference that "uncertainty (surrounding the crisis) is tremendous". He added: "We think that the uncertainty is so high that we need to think through different scenarios" when making growth forecasts. The EBRD was founded in 1991 to help ex-Soviet bloc countries such as Ukraine and conference host Poland make the transition to free-market economies and democracy. On Wednesday, the bank forecast Russia's economy to post zero growth this year and expand by only 0.6 percent in 2015, as investors place their money elsewhere. In January, it had expected Russia to grow by 2.5 percent in 2014 but noted that in the first quarter of this year, private-sector capital outflows reached $64 billion, exceeding the annual amount for the previous year. The EBRD now warns that Russia could slip into recession this year while Ukraine may suffer an even deeper contraction, especially if Western nations slap tighter sanctions on Moscow. "Under a less-benign scenario including the imposition of financial sanctions in particular, Russia would slip into recession, the output contraction in Ukraine would deepen and average growth in the region would grind to a halt in 2014-15. “At this point, the Russia-Ukraine crisis would start impacting the global economy,” the EBRD concluded in its latest report. The IMF in April forecast that Russia was already in recession. The Fund's $17-billion Ukraine programme is meanwhile part of a larger $27-billion deal involving loans from the World Bank and the European Union aimed at strengthening the country under the its new pro-Western government. On Monday, the EU ramped up sanctions over the crisis, adding 13 people and two Crimean firms to an existing blacklist. - 'Brink of civil war' - Russia on Wednesday declared that Ukraine was on the edge of civil war just as Kiev's leaders were to host Western-sponsored "national unity" talks to try to save the country from falling apart. The discussions -- which crucially do not involve the pro-Moscow rebels waging an armed insurgency in the east -- come barely two weeks before Ukraine holds a presidential election that the West is scrambling to keep alive. In Poland, the EBRD also slashed the 2014 growth forecast for its entire region of operation to 1.4 percent from an estimate of 2.7 percent made in January. Its region of investment, including mainly former communist nations across Central and Eastern Europe but which now comprises also Turkey and emerging economies in north Africa and the Middle East, grew by a combined 2.3 percent in 2013. "The outlook for growth in the transition region has thus materially deteriorated compared with the January 2014 forecast, dashing hopes that the continuous decline in the region's growth rate since 2011 would be reversed in 2014," the EBRD noted.