TRANSITION REPORT 2014 Innovation in Transition

Increased economic uncertainty

Events in Ukraine have sharply increased economic uncertainty in the region, dashing hopes that the continuous decline seen in the region’s growth rate since 2011 would be reversed. As the events in Crimea developed in late February and early March 2014, Ukraine’s currency lost around 30 per cent of its value against the US dollar between January and May 2014. At the same time, credit default swap spreads on government bonds widened sharply, while net private capital inflows turned sharply negative. In late March it was announced that an IMF programme had been agreed, but this brought only temporary respite, as disturbing news from eastern Ukraine further unsettled markets. A two-year IMF stand-by agreement was approved to assist Ukraine with the macroeconomic adjustments and structural reforms necessary to improve the country’s external position.

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In Russia, equity markets and the currency also came under substantial pressure. This partly reflected the impact of the various waves of economic sanctions that the United States and the European Union had introduced since March 2014. Those sanctions, combined with uncertainty about their possible escalation in the future, negatively affected business confidence, limited the ability of companies and banks to access international debt markets and contributed to an increase in private capital outflow.

Net private capital outflows, which have persisted for several years, increased to around US$ 75 billion in the first half of 2014, as investor confidence weakened and Russian companies postponed or cancelled plans to borrow in international markets. This affected the annual growth rate of the Russian economy, which had already fallen to 1.3 per cent in 2013, down from between 3.0 and 5.0 per cent in 2010-12. Growth then slowed further to stand at 0.9 per cent year-on-year in the first quarter of 2014, while fixed capital investment contracted by 7.0 per cent over the same period.