Economic Contraction

The decorrelation of national currencies is a new phenomenon in the EAEU+, according to a report

BISHKEK — The Eurasian Development Bank (EDB) has released a macroeconomic review, which summarizes economic developments in the bank’s member states — Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan — for the first six months of 2022.


The review notes diverging economic trends among Bank member countries in the second quarter of 2022. The economies of Russia and Belarus came under heavy sanctions, leading to a drop in trade activity, while Kazakhstan , Armenia and the Kyrgyz Republic showed strong economic momentum. . In Tajikistan, GDP growth slowed but remained positive. Overall, Bank analysts estimate overall GDP growth in the EDB region of operations at 0.9% year-on-year in the first five months of 2022.

Economic activity in Russia contracted in May due to Western restrictions. The country’s GDP fell 4.3% year on year, after falling 2.8% year on year in April. A key factor in the decline of the Russian economy is the contraction of domestic demand due to the tightening of credit conditions, difficulties in cooperation with foreign counterparties and increased uncertainty. EDB analysts estimate that in June, Russia’s GDP could decline by 4.5-5% year on year.

They also note that the economic downturn in Belarus has intensified. In May, Belarus’ GDP fell 8.8% year-on-year, following a 6.5% year-on-year decline in April. All major economic sectors are contracting, with the exception of the IT sector, which has shown continued but slower growth. Economic activity in Belarus will contract further in the coming months due to weak consumer and investment demand, as well as lower export supply. GDP could fall by 4-4.5% YoY by the end of the first six months of 2022 (minus 8.5-9.5% YoY in June). The reference forecast for the whole of 2022 (–6.5%) remains valid.

Kazakhstan’s economic indicators are growing. From January to May, the country’s GDP grew by 4.6% year on year. Strong economic growth is supported by greater activity in the service sector, high construction rates and growth in the manufacturing sector. Thanks to the country’s strong performance in the first six months, its GDP growth could reach 3-3.5% by the end of 2022. Economic activity in the second half will be supported by fiscal policy and prices of Kazakhstan’s main export products. raw materials higher than a year ago. However, a likely recession in the Eurozone and the United States could limit growth due to lower demand for Kazakhstan’s exports.

Armenia posted the strongest growth, with a 10.2% year-on-year increase in economic activity in the first five months of the year, driven by a successful tourist season and increased demand from Russian consumers. With a stronger than expected second quarter, Armenia’s GDP growth this year will exceed all projections.

From January to May 2022, the GDP of the Kyrgyz Republic increased by 5.7% year-on-year. A significant contributor to this growth is the expansion of gold production (+29.7% year-on-year). With the weak base effect for the year exhausted, GDP growth will slow.

Inflation in the EDB region remains high, but there are signs of stabilization. At the end of June, EDB analysts estimated (aggregate) consumer price growth in the region at 15.2% year-on-year.

In Russia, deflation was 0.35% in June and annual consumer price growth slowed to 15.9% from 17.1% in May. This deflation is partly explained by a correction in prices after their peak in March and a fall in the very volatile prices of fruits and vegetables. Disinflationary pressures are also exerted by the fall in demand and the strengthening of the rouble. At the end of the year, inflation could reach 13 to 14%. However, there is a risk of inflation accelerating in the fall due to the likely depletion of stocks and rising transport and logistics costs. In Kazakhstan, inflation accelerated to 14.5% year-on-year in June 2022, from 14.0% a month earlier. Persistent inflationary factors are increased demand for socially important products and high world market prices. By the end of the year, inflation is forecast at 13%. Inflation in Belarus reached 17.6% year-on-year in June. Transport and logistics complications, rising global commodity prices and a weakening Belarusian ruble against the Russian ruble continue to put pressure on prices. These factors will persist in the coming months, but weak domestic demand should increase the disinflationary impact. The EDB analysts’ 2022 baseline forecast for Belarus (18% YoY) remains valid.

EDB analysts note an unprecedented appreciation of the Russian ruble against major currencies in recent months. In June, the ruble traded at almost 50 to the dollar for some time, which has not been the case since 2015. The strengthening of the ruble results from the contraction of domestic trade activity, restrictions on change and the forced abandonment of the budgetary rule. . Imports into Russia have fallen more than 40% since the start of the year and showed only slight signs of recovery in May. Measures taken to ease currency restrictions and authorities’ statements regarding possible intervention in the foreign exchange market have weakened the ruble to 60-63 to the dollar since early July. It would be premature to suggest that the ruble will continue to weaken, as it is continuously pushed higher by a high trade surplus, which is a fundamental factor. The base case of the report foresees an average RUB/USD exchange rate of 62 in Q3 and 70 in Q4.

“Another new phenomenon associated with the appreciation of the Russian ruble against the dollar is a strong decorrelation of the dynamics of the national currencies of the region against the Russian ruble,” said Evgeny Vinokurov, chief economist at the EDB. “The tenge has weakened against the ruble by more than 30% since the start of the year, with most of this happening in June. Similar trends can be seen in the Kyrgyz Republic, where the Kyrgyz som is has been at 79.5 to the dollar since early June and has depreciated by 14% against the Russian ruble.The Belarusian ruble has weakened against the Russian ruble by 17% in June and nearly 40% since June. beginning of the year. The Armenian dram depreciated by 20% over the same period. All of this could have tangible and ambiguous consequences for economies that have not yet emerged. The weakening of other currencies against the ruble could lead to lower imports from Russia and become an additional inflationary factor.On the other hand, deliveries to Russia from these countries would become more competitively priced, supporting industrial and agricultural exporters. for in Belarus. For the Kyrgyz Republic and Armenia, this could suggest an increase in remittances from migrant workers in local currencies, which could further support consumer demand.