| LONDON, April 29
LONDON, April 29 The International Monetary Fund
said on Tuesday that central, eastern and south-eastern Europe
faced "an unusual constellation of risks" as the fund prepared
to cut its forecasts for Russian growth for the second time in
less than a month.
In a new report, the IMF said the region was expected to
benefit as the euro zone recovers from its debt crisis, but the
tension over Ukraine and market concern as the U.S. reduces
monetary stimulus were creating high uncertainty.
"An unusual constellation of risks clouds the outlook," the
Fund said in its spring Regional Economic Issues report.
"Geopolitical tensions surrounding Russia and Ukraine, more
challenging global financial conditions as monetary policy in
advanced economies normalises, and the possibility of protracted
weak growth in the euro area could take a toll on the region's
Although the bulk of the region was forecast to see growth
almost double this year to average 2.3 percent, Russia and
Turkey - the region's two biggest economies - were instead
expected to slow.
Aasim Husain, the deputy head of the IMF's European
department, said tension between Russia and the West over
Ukraine and the potential impact of sanctions were being studied
now by an IMF team. That team is in Russia and due to report
Only this month, the Fund cut its 2014 Russian growth for
the third time running, to 1.3 percent. Its original projection
was around 3 percent.
"The impact is not so much from the sanctions themselves but
the confidence effects that arise from what future sanctions
might look like," Husain told reporters. "... I am not going to
offer a guess as to how much of downward revision (in the growth
forecast) there will be, but I am almost certain we will see a
The United States froze assets and imposed visa bans on
seven Russians close to President Vladimir Putin on Monday. It
also sanctioned 17 Russian companies in reprisal for Moscow's
actions in Ukraine.
President Barack Obama said the moves, which add to measures
taken when Russia annexed Crimea last month, were to stop Putin
fomenting rebellion in eastern Ukraine - an allegation Moscow
GO WITH THE OUTFLOW
Some effect on other countries in the region from the
escalating tensions was likely, Husain said, but the financial
links with Russia and Ukraine were "not large," except in a few
cases like Moldova and Belarus.
He added, though, that for central and eastern Europe, "The
concern is what happens if the Russian economy slows. Sanctions
and counter-sanctions and the related confidence effects would
be a huge dampener on investment prospects in Russia."
Inevitably, the biggest worry was energy. About 40 percent
of Europe's gas comes from Russia, and even more goes to central
and south-eastern Europe. Russia also supplies about a third of
Another issue the IMF raised was the region's above-average
government debt, much of which is held by international
investors. Foreign investors tend to pull out faster in times of
tension, and rising interest rates in more predictable economies
like the U.S. are beginning to tempt them. That creates a risk
of outflows on top of higher borrowing costs.
"We have high frequency data ... those show outflows
re-emerging in Q1 and going into Q2," Husain said. "Judging from
that, it would not surprise me to see negative portfolio flows
for the region as a whole in the first half of the year."
Some countries in the region may also face more reductions
in bank lending. The European Central Bank's checks on euro zone
banks could put further pressure to deleverage on those banks
that have significant exposure to the region.
On the other hand, as long as ECB sticks to its promise to
keep its interest rates near zero, it could help protect the
region from the full impact of rising U.S. interest rates, which
tend to drive global borrowing costs.
(for full report click here)
(Reporting by Marc Jones; Editing by Larry King)