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Ukraine economy to recover in 2023 if war ceases in next two months, EBRD says

March 31 (Reuters) - Russia’s war on its neighbour will plunge both countries into the sharpest economic contraction in over 25 years, but Ukraine could bounce back sharply in 2023 if there is a ceasefire soon, the European Bank for Reconstruction and Development predicted.

The Feb. 24 invasion has savaged Ukraine and seen Moscow slapped with sweeping sanctions, severing Russia from the global financial fabric and pushing commodity and energy prices sharply higher.

The conflict prompted the EBRD, which covers economic trends across Europe, Asia and Africa, to slash forecasts for economic expansion in its region to 1.7% this year - 250 basis points below its November forecast.

Ukraine’s economy will shrink 20% this year with military activities taking place on territory accounting for 60% of its pre-COVID GDP, according to chief economist Beata Javorcik. However, GDP could bounce back by 23% in 2023 if there is a ceasefire “within a couple of months”, she added.

“Ukraine, which was a poor country to begin with, will become poorer,” Javorcik told Reuters. “We understand that between one-third and a half of the firms stopped operations, and electricity consumption is at 60% of pre-war level.”

Russia calls its actions in Ukraine a “special operation”.

The bank’s latest predictions are based on “optimistic assumptions” such as an easing of food commodity prices and oil prices declining to $90 per barrel.

Russia’s economy is expected to shrink 10% this year and record zero growth in 2023 as the severity of sanctions increase. For both countries, the contraction would be the steepest since 1994, when economic turmoil in the wake of the fall of the Soviet Union ripped through the region.

The report calculates that Russia lost around $30 billion of export revenues due to recent oil and gas sanctions, equivalent to around 2% of GDP. “Even if sanctions are removed, Russia’s reputation as an investment destination is going to be damaged,” Javorcik said. “The talks of nationalization of assets of multinationals will be remembered for a while.”

The fallout from the conflict would be felt far and wide, Javorcik said, saying there was a “considerable risk” some emerging market economies would ramp up exports restrictions to shield domestic consumers from further prices increase. Central banks rate hikes would accelerate in this scenario.

Turkey was one of the countries facing “strong headwinds” due to a mix of rising energy and grain import costs while a lack of revenues from Russian and Ukrainian tourists added to pressure.

Growth for Turkey, the single biggest recipient country of EBRD funds, was trimmed by 150 basis points to 2.0% this year and 3.5% in 2023.

EBRD governors -- representatives from its member countries -- will decide within days on a proposal to suspend Russia and Belarus indefinitely from access to its financing, Javorcik added.

The EBRD has not put new money to work in Russia since Moscow annexed Crimea in 2014 and introduced a moratorium on new investment in Belarus following its disputed 2020 election.

The lender, set up three decades ago to invest in the ex-communist economies of eastern Europe, now operates in around 40 economies.

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