Eurozone worsening debt crisis effects spreading South and East

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July 25, 2012 – ECONOMY – Russia’s economy is set to succumb to the baleful effects of the euro zone’s fiscal and banking crises as commodity prices fall, the European Bank for Reconstruction and Development said Wednesday. As long ago as October of last year, the EBRD slashed its growth forecasts for eight economies in central Europe and the Baltics, or CEB, and seven economies in southeastern Europe, or SEE, citing their close trade and financial links to the euro zone. With strong growth elsewhere in the global economy supporting prices for oil and other raw materials, the EBRD’s forecasts for Russia were largely unchanged. But in its latest report on the outlook for the economies in which it invests, the development bank said the impact of the currency area’s prolonged crisis will spread further east, and drag Russia down. “The negative spillovers are reaching east, and to Russia in particular through two main channels: lower commodity prices and a general reduction in risk appetite,” said Piroska Nagy, director for country strategy and policy at the EBRD. As recently as May, the EBRD forecast that Russia’s economy would grow by 4.2% this year and 4.3% next, roughly in line with the 4.3% expansion it enjoyed in 2011. In the development bank’s latest report, those forecasts were slashed to 3.1% and 3.3% respectively. Those forecasts jar with the Russian government’s view. On Friday, Economic Development Minister Andrei Belousov said the government expects the economy to grow by between 3.8% and 4% this year, having earlier forecast it would grow by 3.4%. The EBRD’s warning on the growth outlook follows a report by Moody’s Investors Service Monday that said that if the euro zone’s crisis intensifies, the Russian economy could contract by 5% over the next 10 to 12 months, and the ruble could depreciate by 30%. With its own economic fortunes on the line, the Russian government Monday reaffirmed its commitment to support the currency area. “We hold 40% of our gold and forex reserves in euros, and structurally we’re not lowering that level of our reserves, and some of these reserves have been invested in the government securities of European states,” President Vladimir Putin said. “We’re not changing anything, we believe in the fundamental possibilities of the European economy.” The EBRD’s projections are based on the assumption that the euro zone “muddles through” its crisis, neither resolving it in the near term, nor letting a major economy such as Italy or Spain lose access to the international bond markets, leading to failures in a number of large banks. The development bank warned that should the crisis intensify, its forecast for growth in Russia and elsewhere would be even lower.