Welcome!

News Feed Item

Ukraine Conflict and Deteriorating Investment Climate Hit Russia's Economy

In addition to souring relations between Russia, Europe and the United States, further escalation of Russia's engagement in Ukraine could cost Russia more than 3 percent in GDP in real terms or USD115 billion in current dollar terms on average in 2015. The conflict could also exacerbate recessionary pressures, and lead to a reduction in European real GDP of about 0.15 percent overall, according to a scenario developed by economists at IHS Inc., (NYSE: IHS), the leading global source of critical information and insight. Details of the scenario will be presented at the IHS Forum in Berlin May 13.

Russia’s economy, already likely in recession, will dampen further in the face of a deteriorating political situation; tougher sanctions; falling investor confidence; and a business climate worsened by fears of retaliation against western companies that produce in or sell to Russia, according to the IHS scenario.

A severe slowdown of Russia’s economy in the second half of 2014 and continuing into 2015 would lead to a reduction in European real GDP growth by about 0.15 percent overall, but with large variations between countries, the IHS study says. Most affected would be traditional machinery and equipment and chemical products’ exporters such as the Netherlands, Belgium and Germany. Also impacted would be Italy and Spain, as would countries highly dependent on Russian imports, such as Finland.

Additionally, non-European economies stand to suffer from the slowdown. Among these are Argentina, Australia and Brazil, who would suffer from lower world demand for their commodity and manufactured exports, triggering spill-over effects on their own trading partners in Asia and Latin America.

IHS economists developed the scenario in response to heightened tensions brought about by Russia’s annexation of Crimea and its ongoing dispute with Ukraine following the ouster of Ukraine’s president and scheduling of new elections in May.

The scenario was developed by a team headed by Elisabeth Waelbroeck-Rocha, IHS Chief International Economist, and IHS Chief Economist Nariman Behravesh using a new, state-of-the-art IHS Global Link Model. The model enables IHS to quantify the impacts of further degradation of the economic situation in Russia on other countries in Europe and globally.

“While Russia could end up paying a very heavy economic price for its annexation of Crimea and its ongoing conflict with Ukraine, the negative impacts on other parts of the world, notably Europe, will also be hard to avoid,” says Behravesh.

The scenario assumes:

    1.   An erosion of business confidence in Russia, leading to the postponement or outright cancellation of investment projects.
2. Increased outflows of capital from Russia, exerting severe downward pressure on the rouble and forcing monetary authorities to raise interest rates to stem the outflows:
--   Russians shift part of their savings abroad, or into foreign-currency denominated accounts;
-- Inbound foreign direct investment into Russia falls by as much as 50 percent in 2014-15;
-- Higher FDI outflows occur, further worsening the capital balance;
-- The balance of portfolio flows also deteriorates: although not much is expected on the inflow side (portfolio investments into Russia being fairly limited in any case), capital outflows increase as residents move out of rouble assets in anticipation of a depreciation of the rouble;
-- Trade credits and bank lending to Russia are also hard hit: this is the lion’s share of foreign investment in Russia at this time, with 84.0 percent of total foreign investment in the non-financial sector in 2013, according to RosStat, at $143 billion;
-- The “Other Liabilities” account also shrinks, leading to a total impact on the capital account of the balance of payment by USD83 billion in 2014 and USD108 billion in 2015.
3. These capital outflows prompt a depreciation of the rouble by up to 15 percent by end-2014, and trigger a 175-basis-points increase in the Russian Central Bank’s key intervention rate to slow the depreciation; in 2015-16, interest rates remain higher than in the baseline scenario, and only come back to the level in the reference scenario by the end of 2016.

As a consequence, credit conditions tighten significantly and credit costs rise. Private and public sector investments are negatively affected – state-owned enterprises suffer cuts in earnings and find it harder to borrow abroad, defense spending slows because of reduced revenues and projects are either slowed or stretched out, and private sector investors cancel or postpone projects because of higher financing costs and tighter credit conditions.

The scenario also foresees a temporary spike in natural gas prices – 20 percent in Europe and 10 percent in Asia – because of the standoff between Russia, Europe and the U.S. The price shock is short-lived, however, because end-users shift to other sources and types of fuel: increased power generation from coal-fired plants, higher gas imports from Algeria, greater share of renewables, and higher energy conservation. In addition, the scenario foresees a limited diversion of some exports of Russian crude and products to Asia.

The impact of Russia’s slowdown of imports from the rest of the world is one of the main spill-over effects on other countries’ growth. Most impacted are Finland and Romania where real GDP growth is cut by 0.2 percent in 2015. Belgium, the Netherlands, Poland and Slovakia also feel a slowdown in GDP growth.

Least affected in the group is Germany. Machinery and equipment accounted for a large portion of the 48.6 percent of Russia’s total imports in 2013, much of it coming from Germany. However, the impact on German GDP, just 0.10 percent in 2015, reflects Russia’s status as a relatively small trading partner for Germany.

China and Korea’s growth is less affected, by only 0.05 percent. In Asia, the negative impact of Russia’s slowdown is attenuated by the relative improvement in energy price trends compared to Europe. Real GDP in India will be reduced by 0.2 percent; Indonesia by 0.6 percent; and Malaysia by 0.6 percent. There is virtually no effect on Japan’s economy.

Asia also benefits from the trade diversion that occurs. The effects of the slowdown on world commodity prices are expected to remain muted. So, while Russia is a major exporter of steel, there are excess production capacities for steel in China, enabling China’s exports to fill the gap in the market.

Complimentary Media Pass – IHS Forum Berlin

Members of the press can register for a complimentary pass to the IHS Forum in Berlin, held at the InterContinental Hotel Berlin, May 12-14. Please send an email with your name, title and outlet details to [email protected].

Further information and delegate registration is available at http://ihsglobalevents.com/forum/berlin2014

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business landscape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and employs more than 8,000 people in 31 countries around the world.

IHS is a registered trademark of IHS Inc. All other company and product names may be trademarks of their respective owners. © 2014 IHS Inc. All rights reserved.

More Stories By Business Wire

Copyright © 2009 Business Wire. All rights reserved. Republication or redistribution of Business Wire content is expressly prohibited without the prior written consent of Business Wire. Business Wire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
"Avere Systems is a hybrid cloud solution provider. We have customers that want to use cloud storage and we have customers that want to take advantage of cloud compute," explained Rebecca Thompson, VP of Marketing at Avere Systems, in this SYS-CON.tv interview at 18th Cloud Expo, held June 7-9, 2016, at the Javits Center in New York City, NY.
SYS-CON Events announced today that Dataloop.IO, an innovator in cloud IT-monitoring whose products help organizations save time and money, has been named “Bronze Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Dataloop.IO is an emerging software company on the cutting edge of major IT-infrastructure trends including cloud computing and microservices. The company, founded in the UK but now based in San Fran...
SYS-CON Events announced today that Linux Academy, the foremost online Linux and cloud training platform and community, will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Linux Academy was founded on the belief that providing high-quality, in-depth training should be available at an affordable price. Industry leaders in quality training, provided services, and student certification passes, its goal is to c...
20th Cloud Expo, taking place June 6-8, 2017, at the Javits Center in New York City, NY, will feature technical sessions from a rock star conference faculty and the leading industry players in the world. Cloud computing is now being embraced by a majority of enterprises of all sizes. Yesterday's debate about public vs. private has transformed into the reality of hybrid cloud: a recent survey shows that 74% of enterprises have a hybrid cloud strategy.
SYS-CON Events announced today that Super Micro Computer, Inc., a global leader in Embedded and IoT solutions, will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 7-9, 2017, at the Javits Center in New York City, NY. Supermicro (NASDAQ: SMCI), the leading innovator in high-performance, high-efficiency server technology, is a premier provider of advanced server Building Block Solutions® for Data Center, Cloud Computing, Enterprise IT, Hadoop/Big Data, HPC and E...
The unique combination of Amazon Web Services and Cloud Raxak, a Gartner Cool Vendor in IT Automation, provides a seamless and cost-effective way of securely moving on-premise IT workloads to Amazon Web Services. Any enterprise can now leverage the cloud, manage risk, and maintain continuous security compliance. Forrester's analysis shows that enterprises need automated security to lower security risk and decrease IT operational costs. Through the seamless integration into Amazon Web Services, ...
All organizations that did not originate this moment have a pre-existing culture as well as legacy technology and processes that can be more or less amenable to DevOps implementation. That organizational culture is influenced by the personalities and management styles of Executive Management, the wider culture in which the organization is situated, and the personalities of key team members at all levels of the organization. This culture and entrenched interests usually throw a wrench in the work...
IoT is at the core or many Digital Transformation initiatives with the goal of re-inventing a company's business model. We all agree that collecting relevant IoT data will result in massive amounts of data needing to be stored. However, with the rapid development of IoT devices and ongoing business model transformation, we are not able to predict the volume and growth of IoT data. And with the lack of IoT history, traditional methods of IT and infrastructure planning based on the past do not app...
In his session at DevOps Summit, Tapabrata Pal, Director of Enterprise Architecture at Capital One, will tell a story about how Capital One has embraced Agile and DevOps Security practices across the Enterprise – driven by Enterprise Architecture; bringing in Development, Operations and Information Security organizations together. Capital Ones DevOpsSec practice is based upon three "pillars" – Shift-Left, Automate Everything, Dashboard Everything. Within about three years, from 100% waterfall, C...
Fact is, enterprises have significant legacy voice infrastructure that’s costly to replace with pure IP solutions. How can we bring this analog infrastructure into our shiny new cloud applications? There are proven methods to bind both legacy voice applications and traditional PSTN audio into cloud-based applications and services at a carrier scale. Some of the most successful implementations leverage WebRTC, WebSockets, SIP and other open source technologies. In his session at @ThingsExpo, Da...
In the next five to ten years, millions, if not billions of things will become smarter. This smartness goes beyond connected things in our homes like the fridge, thermostat and fancy lighting, and into heavily regulated industries including aerospace, pharmaceutical/medical devices and energy. “Smartness” will embed itself within individual products that are part of our daily lives. We will engage with smart products - learning from them, informing them, and communicating with them. Smart produc...
Due of the rise of Hadoop, many enterprises are now deploying their first small clusters of 10 to 20 servers. At this small scale, the complexity of operating the cluster looks and feels like general data center servers. It is not until the clusters scale, as they inevitably do, when the pain caused by the exponential complexity becomes apparent. We've seen this problem occur time and time again. In his session at Big Data Expo, Greg Bruno, Vice President of Engineering and co-founder of StackIQ...
Why do your mobile transformations need to happen today? Mobile is the strategy that enterprise transformation centers on to drive customer engagement. In his general session at @ThingsExpo, Roger Woods, Director, Mobile Product & Strategy – Adobe Marketing Cloud, covered key IoT and mobile trends that are forcing mobile transformation, key components of a solid mobile strategy and explored how brands are effectively driving mobile change throughout the enterprise.
Containers have changed the mind of IT in DevOps. They enable developers to work with dev, test, stage and production environments identically. Containers provide the right abstraction for microservices and many cloud platforms have integrated them into deployment pipelines. DevOps and containers together help companies achieve their business goals faster and more effectively. In his session at DevOps Summit, Ruslan Synytsky, CEO and Co-founder of Jelastic, reviewed the current landscape of Dev...
Smart Cities are here to stay, but for their promise to be delivered, the data they produce must not be put in new siloes. In his session at @ThingsExpo, Mathias Herberts, Co-founder and CTO of Cityzen Data, discussed the best practices that will ensure a successful smart city journey.