At the EBRD Regional Review on Economic Growth, which took place online during the bank’s annual meeting in Samarkand, Sergei Guriev, an economist and professor at the Paris Institute for Policy Studies, gave a speech. summarizes the main points of his talk.

On the consequences of Russia’s war against Ukraine

In his speech, Sergei Guriev noted that the war has different consequences for different countries in the region.

“EBRD has been right on target, predicting a 30% decline in Ukraine’s GDP and was too pessimistic of Russia’s GDP growth, but optimistic in terms of the impact of the sanctions on Russia. If you think about a country like Armenia, it had double-digit growth because of the unprecedented migration of qualified upper-middle-class Russians. Some countries have benefited from trade patterns. So, the picture is very, very heterogeneous.”

Speaking about future economic growth trends, the economist said that this was not the best year to predict because of the many upheavals the region has faced.

“Unfortunately, it’s very hard to see what’s going to happen in the wider region overall because we don’t know how the war is going to play out. We don’t know which sanctions will have what impact. We don’t know whether secondary sanctions will force Russia’s neighbours to change their behaviour. So this is really an uncharted territory we are in,” said Sergei Guriev.

The economist stressed that Russia’s GDP growth rate was unexpected, contrary to forecasts.

“Everybody was expecting -8%, -10%. For 2022, the outcome was -2%, which is much, much better. One of the factors is that the real sanctions kicked in only in December. Throughout 2022, Russia benefited from high oil prices and continued to export oil and gas to Europe. Sanctions on Russian oil did not come into effect in Europe until December 2022 and against Russian oil products in February 2023,” he said.

“The sanctions against Russian sovereign wealth funds and the Central Bank were the largest in history, and so there was a thought that Russia would go down like other countries hit by sanctions before it. But the difference is that Russian officials in the economic bloc are much more competent in technical terms than politicians in countries such as Iran, or for that matter, monetary policymakers in Turkey,” the expert pointed out.

Sergei Guriyev also noted that GDP growth may not always be a suitable tool for assessing the standard of living in a country.

“We have to remember that during the war, GDP dynamics is a misleading metric. When you produce artillery shells for tanks, that also leads to GDP growth. Armaments by 1 billion is 1 billion on top of GDP. But increasing the production of military equipment does not mean that you are improving the quality of life. And if you look at the quality of life [in Russia], the results have been quite disastrous. If you look at the consumption level of Russian households, retail trade, and turnover at comparable prices, it has actually fallen by 8−10% in 2022. So using the right metrics is important too,” he said.

On economic growth in Central Asia

According to the EBRD’s recent forecast, Central Asian economies will grow by an average of 5.2% in 2023 and continue to grow next year. Compared with other regions, economic growth in Central Asia has been the most robust in recent years.

ebrd, sergei guriev

Source: EBRD.

“The EBRD is much more optimistic about the growth in Central Asia and the Caucasus now than it was a year ago. This is partly because we have seen the resilience of these economies in 2022, but also because they have benefited from the trade diversion patterns, with Russia moving from direct trade with Europe, which was its largest trading partner, to trade with Europe through third countries, including Central Asia, the Caucasus, and Turkey,” the economist stressed.

He noted that this trend has contributed greatly to economic growth in Central Asia and the Caucasus.

Now Europe is trying to shut loopholes that help Russia circumvent sanctions. And this is a major threat to economic growth in countries that have benefited from this trade diversion. Europe is taking this quite seriously. Last year, as you know, they created a special envoy for sanctions. The 11th sanctions package will target some of these loopholes. There are secondary sanctions that Europe has already announced, and they will punish companies that help Russia circumvent sanctions. So this is a very, very serious threat to the economic growth of Russia’s neighbours, in particular Turkey, the Caucasus, and Central Asia,” Guriyev said.

He also recalled that trade strongly depends on distance, and therefore countries trade with their neighbours first.

On the inflation rate in the region

The economist claims that additional factors that did not previously exist have an impact on the level of inflation in the Caucasus and Central Asia. One of them is migration from Russia.

“Russians with skills and money who are fleeing from Putin’s regime are buying property in these countries, and buying goods and services. This is good for economic growth, but it also puts increased pressure on prices. And this is an unexpected factor. No one thought there would be such a big influx,” said Sergei Guriyev.

Speaking about the factors that influenced the inflation rate, he stressed that the war was not the only reason.

“Inflation started long before the war because of global demand factors such as fiscal stimulus in the US, which was probably excessive, supply chain disruptions due to COVID-19 and China’s COVID-19 zero-tolerance policy, and monetary policy mistakes in countries such as Turkey. I think central banks in the EBRD regions are much more competent than they were in 1990. Central banks know how to conduct monetary policy; only the authorities deny them independence,” the expert stressed.

ebrd, sergei guriev

According to the EBRD surveys conducted among households in 14 countries in late 2022 and early 2023, about half of Central Asian households barely make ends meet or spend their savings to support their economic well-being.

On the transition to a green economy

Commenting on Uzbekistan’s plans to increase the share of renewable energy sources to 25% by 2030, Sergei Guriev called the transition to a “green” economy one of the best options for growth.

“Around the world, the transition to a green economy is now accelerating. And the war has demonstrated that relying on fossil fuels, which are exported from undemocratic countries, is dangerous. And in that sense, the transition to a green economy creates a good opportunity, and it will be demanded by all countries. We are already lagging behind in achieving the goals of the Paris Agreements, so all those who can contribute to the transition to a green economy globally should do so and benefit from it,” the expert said.

On the impact of sanctions on Russia

In his speech, Sergei Guriev also commented on the impact of sanctions on the Russian economy.

“The sanctions against Russian oil were imposed on the third day of the war, but the flow of petrodollars into Russia continued last year. This year, Russia is having a big problem with oil revenues, and gas sales to Europe have virtually stopped. This has taken a heavy toll on the Russian budget, and the authorities now face the need to impose austerity. And that will not be easy for either the Russian government or the Russian economy. Russia’s oil and gas revenues in the first quarter of 2023 were about half those of the same period in 2022. That is a huge difference. And that is why Russia will have to do something about debt financing,” he said.

Sergei Guriev called the IMF’s forecasts for Russia’s economic growth optimistic.

“The IMF’s optimism is based on the idea that Russian banks have a huge supply of liquidity. But this is unknown. We should be able to distinguish between known unknowns and unknown unknowns. And this is the known unknown. Russian banks don’t publish data. So you have to make assumptions about how stable they are and whether they can lend to the Russian government to help overcome a serious financial problem. And we don’t know that,” he said.

On the US-China trade war

“I find it very difficult to remain optimistic about the situation in Ukraine, Russia, and neighbouring regions. But things could get a lot worse if the geopolitical problems between China and the US start. The optimistic scenario is that some kind of understanding may emerge between these countries, which will clearly define where these countries are cooperating and where they are competing,” said Sergei Guriyev.

“And when we talk about friendshoring, fragmentation, a lot of the excitement comes from the uncertainty that we don’t know what the US or China will do if one of them does something. An optimistic scenario would be some kind of appeasement, or at least some clarity about how a new Cold War will be fought. Because our regions — Western Europe, Central Europe, Eastern Europe, SEMED (Southern and Eastern Mediterranean), Central Asia, and the Caucasus — are embroiled in this Cold War. And once the US and China agree to disagree on some issues and cooperate on others, the world will become much clearer, and it will become much safer both geopolitically and economically,” he said.

Referring to the fragmentation in international trade, the economist expressed hope that it would be limited to a narrow set of strategic goods and services. “In an optimistic scenario, protectionist forces will not abuse the definition of strategic goods to protect their own markets where it is not a strategic good.”

“Ultimately, the US and China will have to cooperate, for example, on the transition to a green economy. And I hope that will help everyone. But even between the US and Western Europe, cooperation on the green transition is not easy,” admitted Sergey Guriev.