Economic outlook for the Eurasian Economic Union until 2024

_ Jurij C. Kofner, non-residential research fellow, Skolkovo Institute for Emerging Markets Studies; editor-in-chief, analytical media “Eurasian Studies”. First published on: Vienna Institute for Security Policy. Munich, 4 January 2020.

In 2019 we celebrated the first five years of the Eurasian Economic Union (EAEU). To which extent the Union was able to increase the welfare of its citizens and to create a single market for the free movement of goods, services, labor, capital and enterprises the author analyzed in the two following articles:

Five years EAEU: institutions, international rankings, socio-economic development.

Did the EAEU create a common market for goods, services, capital and labor within the Union?

In this analytical note, using and comparing forecast data by the Eurasian Development Bank, the German ifo Institute and the International Monetary Fund (IMF), the author would like to provide an economic outlook for the Eurasian Economic Union for the next five-year period, i.e. up until 2024. Special attention will be given to GDP growth prospects and expected inflation rates, as well as to the three principal external factors, which to a considerable extent influence these indicators: aggregate demand of the EAEU’s main trading partners, trends in international trade and global commodity prices.

Economic development rates


Due to business cycle effects, which coincided with a favorable external climate, the EAEU’s GDP growth rate reached 2.5% in 2018. However, in 2019, as a result of the global economic slowdown, the Union’s economy grew only by 1.5%. According to estimates by the Eurasian Development Bank, economic growth will stabilize again in 2020 at 2.0% and then slightly improve in 2021 at 2.2% (Chart 1, Table 1).

Chart 1. EAEU and EAEU member states GDP growth rate expectations (% change y.o.y., 2018-2021)

Source: EEC Statistics Department, Eurasian Development Bank and author’s calculations.

The IMF gives a similar, yet cautiously more optimistic forecasts and expects the Eurasian economy to grow by 2.1% in 2020, by 2.2% in 2021, again by 2.1% in 2022, and even by 2.3% in 2023. In 2024 it might stabilize back to 2% (Chart 2, Table 2).

Chart 2. EAEU and EAEU member states GDP growth rate expectations (% change y.o.y., 2018-2024)

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Economists queried as part of the World Economic Survey, which is published by the Munich-based ifo Institute on a quarterly basis, expressed similar expectations about the prospects for economic growth in the Eurasian region. According to the study, the annual GDP growth rate over the next 3 to 5 years for the Commonwealth region is expected to be slightly above 2%, for Kazakhstan slightly above 4% and for the Russian Federation at 1.8%.

Reliance on external factors


Between 2014 and 2018 commodity trade with third parties accounted for 86.5% on average of the Union’s total trade in goods. In other words, the EAEU’s economic model is very export-oriented and depends on the business cycle and the consumption level of its main external trading partners.

Economic situation of major trading partners

In 2018, the European Union (50.5% of total exports) was the main buyer of goods exported by the EAEU. Among the countries of the European Union, the most significant were shipments to the Netherlands (10.4%), Germany (7.4%), Italy (5.8%) and Poland (3.8%). The figures for the Netherlands and Poland are likely overstated, as they are rather the first transit countries of Eurasian goods on their way to the main national markets within the European economic zone. 26.7% of goods exported by the EAEU were sold to APEC countries, of which 12.8% to China, 4.2% to South Korea, and 2.8% to Japan and the United States, respectively. The non-EAEU CIS countries have bought 5.2% of goods exported by the Eurasian Economic Union (Chart).

Chart 3. Geographic structure of extra-EAEU exports (in % of total, 2018)

Source: EEC Statistics Department.

Unfortunately, due to increasing politico-economic uncertainties, e.g. Brexit and upheavals in South America, as well as to spreading tit-for-tat protectionism, especially the expanding US-China trade war, the global economy is experiencing a serious cool-down, which might or might not turn into a global financial and economic recession, similar to the one experienced in 2008-2009.

All of the EAEU’s main trading partners are affected by this slowdown. Between 2018 and 2021 the EU’s GDP growth rates are set to contract from 2.2% to 1.6%, and potentially to 1.5% by 2024. China’s economy, the world’s largest, is going to grow not as fast as it used to and will decrease from 6.6% in 2018 to 5.8% in 2021, and possibly to 5.5% in 2024%, which is a trend that many experts observe with anxiety. GDP growth rates in the United States are set to fall from 2.8% in 2018, when it experienced a boom, to 1.8% in 2021 and further to 1.6% in 2024. According to EDB estimates, economic growth in the emerging economies and in South East Asia is going to flatten downward from 5.1% and 4.2% in 2018 to 4.9% and 4%, respectively, in 2021. According to IMF data it might improve again slightly by 2024 (Charts 4 and 5, Tables 3 and 4).

Chart 4. EAEU GDP growth rate in comparison (% change y.o.y., 2018-2021)

Source: EEC Statistics Department, Eurasian Development Bank and author’s calculations.

Chart 5. EAEU GDP growth rate in comparison (% change y.o.y., 2018-2024)

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

International trade

As already mentioned, this deceleration of global economic growth is to a large extent caused by the cooldown in international trade, which itself is under the negative influence of increasing protectionist policies. The average growth rates of world exports, imports and turnover crunched from 3,4%, 4,1% and 3,3% to 1%, 0,8% and -0,8%, respectively, in 2019. In 2020 and 2021 they are set to improve again, yet to a lower than initial level. According to IMF estimates, by 2024 world exports and imports are to resettle at just below 4% (Chart 6, Tables 3 and 5). Moderate global demand will constrain the EAEU’s export potential and consequently its export-oriented performance.

Chart 6. World trade growth rates (% change y.o.y., 2018-2024)

Source: International Monetary Fund, World Economic Outlook Database October 2019, CPB Netherlands Bureau for Economic Policy Analysis.

Global commodity prices

More importantly, as part of this outward orientation the Eurasian Economic Union relies highly on the export of minerals, mainly oil, gas and petroleum products, as well as of metals and metal products, which in 2018 made up ¾ of the Union’s merchandise export structure (Chart 7, Table 6). Therefore, economic development in the EAEU is largely dependent on global prices for traditional energy carriers and raw materials.

Chart 7. Commodity structure of the EAEU’s exports to third parties (in % of total, 2018)

Source: EEC Statistics Department

Duties and exercises on the energy sector contribute to a substantial part of the national budgets of Russia, Kazakhstan and Belarus. Unfortunately, from the viewpoint of their respective finance ministers, prospects are anything but bright. Average world crude oil prices are set to sink from ca. $70 per barrel to ca. $56 per barrel. The price for Russian natural gas payed at the German border is expected to decrease from $7.9 per mln metric British thermal units to $5.7 in 2024, even experiencing a crunch of $4.8 per mln BTUs in 2019 (Chart 8, Table 7). This downward trend is largely due to the global economic cooldown and to oversaturation of the world’s oil and gas markets (Box 1).

Chart 8. Average world oil and gas prices (2018-2024)

Source: Eurasian Development Bank, ifo Schnelldienst 19/2019, International Monetary Fund, World Economic Outlook Database October 2019.

Box 1. World petroleum market and the OPEC+ consensus

At the end of September 2019, the oil price was only $63; it is therefore lower than in spring 2019 or on average in 2018. This is because the global oil market has been structurally over-supplied for some time.

The oil price has been under pressure since autumn 2018, and the current level could only be maintained since OPEC, together with a number of other exporters led by Russia (OPEC+), reduced extraction. The extraction rates agreed in December 2016 were reduced again at the end of 2018 and then extended in July 2019 until at least the end of this year.

Despite the production restrictions on the part of OPEC+, the oil supply remained abundant worldwide, because production in other countries was expanded significantly, particularly in the United States, where unconventional oil and gas reserves have been tapped to a large extent using fracking technology for many years. As a result, worldwide inventories have continued to increase.

The industrial oil storages in the OECD countries are currently at a high level compared to historically customary levels, so that the demand during oil supply contractions can be covered for some time. In addition, strategic reserves are available in many countries to cushion any potential acute shortages.

Last but not least, there is considerable unused production capacity due to the reluctance of OPEC+ to extract more. The majority of this is in Saudi Arabia and would probably not be available at the moment, but there are also significant free capacities in some other OPEC countries which, according to estimates by the International Energy Agency, currently amount to just under 1 million barrels per day. Russia is also likely to be able to significantly increase its oil production in the short term, as the current daily production is around 350 thousand barrels below the previous production maximum.

Source: ifo Schnelldienst 19/2019.

Average world stock traded prices for metals are set to decline as well, reaching in 2021 a minimum of 68.6% as of the price in 2010. Copper prices in particular will drop from $6 528.2 per ton in 2018 to ca. $5 800 per ton in 2021. By 2024 both indexes are likely to stabilize slightly upwards again, but again at a lower than previous average level (Chart 9, Table 7).

Chart 9. Average world metals and copper prices (2014-2024)

Source: Eurasian Development Bank, International Monetary Fund, World Economic Outlook Database October 2019.

After a relative crunch in 2019, average world food prices are expected to increase moderately by 2021 and then to flatten out between 2021-2024 (Chart 10, Table 7).

Chart 10. Average world food prices (in %, 2010=100%, 2018-2024)

Source: Eurasian Development Bank, International Monetary Fund, World Economic Outlook Database October 2019.

Share in the world economy


As a result of these developments, the EAEU’s weight in the global economy is set to contract from 3.7% in 2018 to 3.4% by 2024. As the share of the EU in the world gross product will decrease even faster, the gap between the Eurasian block and the European economy will lessen from 4.4 to 4.3 times. In comparison, China is expected to solidify its position as the world largest national economy by increasing its share in the international economy from 18.7% in 2018 to 21.4% in 2024 (Chart 11, Table 8).

Chart 11. GDP by purchasing power parity share of world total (in %, 2018-2024)

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Inflation


Due to the slowdown, both in the world economy and in the EAEU itself, the average annual inflation rate in the latter is expected to settle at 4.2% in 2020 (from 4.4% in 2018), and further at 4.1% in 2021, using EDB data. The International Monetary Fund generally shares this forecast, expecting the inflation rate to bottom out at about 4% in the period between 2021-2024 (Charts 12 and 13, Tables 9 and 10).

Chart 12. EAEU and EAEU member states inflation rates (CPI % change y.o.y, 2018-2021.)

Source: EEC Statistics Department, Eurasian Development Bank and author’s calculations.

Chart 13. EAEU and EAEU member states inflation rates (CPI % change y.o.y., 2018-2021)

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Moderate and converging consumer price inflation levels is an important component for achieving macroeconomic convergence and stability, which is also a part of the integration commitments outlined in the EAEU Treaty (Articles 62, 63). Interestingly enough, in the EAEU inflation forecasts for 2018-2021/24, using both EDB and IMF input, we see a clear convergence of national inflation rates towards 4 percent, which would be a successful continuation of the price level convention process, which was observed in the previous five-year period, i.e. in 2014-2018. It would also be a welcome downward improvement of the overall price level from 7.5% in 2014-2018, thus, inter alia, making monetary policy more effective. In light of this trend, a common inflation (price stability) target of 4 percent to be conducted by the central (national) banks of the EAEU members states, and proposed by the author in previous papers, would become even more feasible. The only exception is Kyrgyzstan, which in both forecast models shows divergent from the EAEU-average and rising inflationary tendencies towards 5% and above.

Exchange rates


Between 2018 and 2021 all five of the EAEU member states are likely to experience a devaluation trend of their national currencies (in comparison to the $ US), which will help make their exports comparatively more competitive on foreign markets, as well as import substation relatively more attractive to domestic consumers and investors. This depreciation trend seems more pronounced and more in unison for the Union’s core countries – Belarus, Kazakhstan and Russia, and less so for Armenia and Kyrgyzstan. Subsequently, a coordinated exchange rate policy, stipulated in the EAEU Treaty (Article 64), becomes more achievable for the first three, than for the latter two (Chart 14, Table 11).

Chart 14. EAEU member state exchange rate fluctuations (in relation to $US, % change, 2016 = basis year, + = appreciation, – = depreciation, 2018-2021)

Source: EEC Statistics Department, Eurasian Development Bank and author’s calculations.

Country composition


The EAEU’s economic development predominantly depends on the performance of the Russian economy, which in 2018 accounted for 84.3% of the Union’s GDP country composition. The second largest economy in the Union, but still far behind Russia, is Kazakhstan, which made up 10.6% of the EAEU’s GDP. In the next five years this asymmetry will abate only very moderately. Russia’s GDP share in the Union will decrease only to 83.4% by 2022 using EDB estimates and to 83% by 2025 using IMF data. Due to comparatively higher GDP growth rates, Kazakhstan will catch up only slightly, increasing its share in the Union-wide economy to 11.3% by 2022 and to 12% by 2025, based on EDB and IMF estimates, respectively. Belarus’ weight in the EAEU of 4% in 2018 will decrease to 3.9% in 2022 and to 3.5% in 2025. Both Armenia and Kyrgyzstan represent only a marginal share of less then 1% during the whole study period (Charts 15 and 16, Tables 1 and 2).

Chart 15. EAEU GDP country composition (in % of Union total, 2018-2022)

Source: EEC Statistics Department, Eurasian Development Bank and author’s calculations.

Chart 16. EAEU GDP country composition (in % of Union total, 2018-2025)

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Thus, in order to better understand the EAEU’s economic development prospects overall, it is necessary to take a closer glance at the economic outlook of its member states, first of the Russian Federation and secondly of Kazakhstan. Below are excerpts from the Eurasian Development Bank’s Macroreview forecasts from October 2019.

Russia

Russia’s GDP growth is projected to accelerate to 1–1.5% y.o.y. in the second half of this 2019. Investment in fixed capital, improving as the state budget’s capital expenses grow and the effect of the reduction of the policy rate by the Bank of Russia materializes, will be the main factor behind the recovery of economic activity. Consumer activity will remain slack amid an expected slowdown of retail lending growth and weak household income trends. The expected slowdown of the world economy and adherence by Russia to the OPEC+ oil production limitation agreement will continue to constrain net exports of goods and services in the second half of 2019.

Russia’s GDP growth rate over 2019 is estimated at 1.1%. Compared to a previous projection, the EDB reduced its estimated figure by 0.4 pp, which reflects the adverse effect of the greater than expected slowdown of global economic activity and strengthening of the Russian ruble, as well as the less intense implementation of the national projects.

Economic growth is expected to accelerate back to 1.8% in 2020. The beginning of active implementation of the national projects will lead to an expansion of investment demand. The economy will additionally be supported by the easing of monetary policy as the Bank of Russia reduces its policy rate. Consumer activity is expected to gradually recover as households’ incomes grow more quickly. Net exports are expected to be constrained by external demand. In 2021, economic growth will accelerate to 2% as structural reforms are implemented. Compared to a previous projection, 2020 and 2021 GDP growth rates have been revised downward, which largely reflects weaker than previously expected global economic activity. The key mid-term risks for the Russian economy are concentrated in the external sector. In recent months, a global economic recession has become more probable amid mounting trade tensions between the USA and China. The materializing of the adverse scenario will affect Russia’s economic growth mainly through the foreign trade and investment channels (greater capital outflow). The Eurasian Development Bank highlights uncertainty as to the speed and effectiveness of the implementation of the national projects and over how the liquid part of the country’s National Wealth Fund above 7% of GDP will be spent as domestic risk factors.

Box 2. Russia’s economic outlook according to leading German think-tanks

In Russia, the economy was slowed down by an increase in VAT at the beginning of 2019. Although production picked up again in the second quarter, it was only 0.7% higher in the first half of the year than in the same period last year.

After rising to over 5% at the beginning of the year, inflation fell somewhat during the summer months (August: 4.3%) and the central bank cut the key interest rate twice to 7.25%. Further interest rate cuts are expected in the coming months.

In addition, Russian fiscal policy is now expanding. As part of a program for additional investments in infrastructure, health care and the education system that runs until 2024, funds of around 1.5% of gross domestic product have been made available in the current household. Thus, the economic expansion in Russia is likely to intensify further in the forecast period.

However, due to the slowdown in the international economy and the new OPEC+ agreement, which provides for a reduction in oil production, no increase in exports is to be expected for the forecast period. A broad-based recovery in private investment is still not expected.

All in all, gross domestic product is expected to increase by 1.2% and 1.5% respectively in 2019 and 2020, and then by 1.8% in 2021.

Source: Joint diagnosis by: German Institute for Economic Research in Berlin; ifo Institute – Leibniz Institute for Economic Research at the University of Munich e.V. in cooperation with the KOF Economic Research Center at ETH Zurich; Kiel Institute for the World Economy; Leibniz Institute for Economic Research Halle RWI – Leibniz Institute for Economic Research in Essen; in cooperation with the Institute for Advanced Studies in Vienna. Completed in Berlin on September 26, 2019.

The inflation deceleration trend is projected to continue in the second half of 2019. Consumer prices will be affected by slack consumer demand, the ruble strengthening seen in the first semester, and the exhaustion of the VAT increase effect. As a result, the EDB projects that inflation may decrease to 3.5% over 2019. The EDB’s 2019 inflation estimate has been reduced compared to the previous projection due to the lower than projected effect of the VAT increase on goods and services prices, weak economic activity, and the lower contribution of imported inflation due to a stronger ruble exchange rate. In 2020–2021, inflation is projected to be close to the Bank of Russia targets. The acceleration of economic growth will be accompanied by the expansion of production capacity, which will result in a neutral effect from economic activity on the change in consumer prices. The exchange rate will follow its equilibrium path without exerting any upward or downward pressure on inflation.

The mid-term risks remain pro-inflationary. The population’s expectations, which are sensitive to price fluctuations of individual goods, are still unanchored. There remains a likelihood of a pro-inflationary budget policy if the liquid part of the National Wealth Fund above 7% of GDP is used to fund current expenditures. Harsher sanctions rhetoric by Western countries and greater capital outflow, should the global uncertainty mount, may lead to an accelerated weakening of the national currency, which will have an impact on inflation.

In IV of 2019, the Russian ruble to U.S. dollar exchange rate is expected to move near 65 RUB per USD, which will favor a near equilibrium exchange rate as inflation slows down. In the medium term, the Russian ruble is expected to gradually weaken as inflation in Russia remains higher than in her main trade partners. Yet the EDB believes it is fairly likely that the equilibrium rate of devaluation of the national currency will slow down as the potential economic growth rate strengthens, which will cause the negative productivity differential between the country and abroad to narrow. In this situation, less pricing support will be required to keep Russian goods competitive.

The main exchange rate risks emanate from the external sector. A considerable slowdown of the world economy, resulting in particular from the mounting trade tension between the USA and China, may depress commodity prices and investors’ demand for developing markets’ assets. According to EDB estimates developed using the model system implemented at the Bank, the Russian ruble may additionally weaken against the U.S. dollar by some 5% p. a. on average, should such an adverse scenario materialize.

Kazakhstan

Kazakhstan’s GDP growth is expected to accelerate in 2019 as the government implements its measures to stimulate consumption and amid high investment activity. Tenge weakening in real terms will promote the expansion of non-oil exports. In the medium term, GDP growth will slow down as external demand weakens, world energy and metal prices decrease, and the deficit of the republic’s budget narrows.

Inflation is expected to accelerate by the end of 2019 as food prices rise and the tenge weakens somewhat. Grain prices are projected to grow after this year’s lower harvest. Meat appreciation will contribute to inflation as swine fever spreads in China and produces an imbalance in the world markets of meat products. The inflationary environment will additionally be supported by expanding domestic demand. In the medium term, inflationary pressure will weaken as a result of measures taken by the national bank in the fields of monetary (base rate raised to 9.25% in September 2019) and macroprudential policy (tighter retail lending requirements). Consumer price index growth will be held back by weak inflation in the main trade partner countries.

The EDB projects the interbank tenge loan rates to fluctuate around their neutral level, that it estimates at 7.5–8%, in 2019–2021. This rate level if maintained will help keep inflation within the national bank’s target range in the medium term. Tenge weakening will continue in the projection horizon, which results from higher inflation expected in Kazakhstan than in its main trade partner countries. The key risks to the tenge exchange rate emanate from the external sector.

Conclusion


Forecast

During the next five years (2020-2024), the EAEU is likely to grow annually by 2.1% on average, which will be higher than the average value of 0.8% for the first five-year period of the Union (2014-2018). GDP growth will be higher than that of developed regions like the EU and the USA, but it will still be lower than the average growth rate for emerging economies of around 3-5%.

Over the next five years, the Union’s GDP will remain characterized by a high asymmetry in country composition. Despite the relatively high annual GDP growth rates in Kazakhstan of just below 4% on average, its share in the Union economy will increase only slightly from 10.6% in 2018 to 12% by 2025. The EAEU’s economic development will continue to rely predominantly on the performance of the Russian economy, which, albeit growing at a relatively lower annual average rate of 1.8% during the study period, will still account for 83% of Union-wide GDP by 2025.

Since 86.5% of the EAEU’s total trade is foreign trade with third parties, and 3/4 of this foreign trade is made up of mineral products and metals, the potential economic development of the Eurasian Union is highly dependent on three external factors: on the business cycle stage of its main foreign trading partners, on volumes of international trade and on global commodity prices, mainly energy carriers and various metals. Unfortunately, for the next two-to-five years a negative downward trend is expected in all three areas.

Firstly, due to growing global politico-economic uncertainties and increasing national protectionism, especially the expanding US-China trade war, the world economy is experiencing a serious slowdown. Annual GDP growth rates for the EU are expected to decline from 2.2% in 2018 to 1.5% in 2024, that of the China from 6.6% to 5.5%. Only the other emerging economies, such as Turkey or MERCOSUR, are expected to grow a little bit faster by the end of the study period. Secondly and similarly, after experiencing a dip in 2019, world trade is expected to recover only after 2021. However, this will largely depend on whether the world leaders manage to move away from the prevailing belief that political and economic goals can be achieved through sanctions and penalty tariffs. Thirdly, global stock traded prices for oil and gas are forecast to sink by over 20% between 2018 and 2024; and that for metals is expected to experience a serious crunch in 2020-2021, but then to recover again by the end of the period.

However, there are not only bad news. Firstly, over the forecast period (2018-2024), there will be an increase in the convergence of inflation rates between the EAEU member states and their overall decline to a level of 4%, which will be 3.5 percentage points lower than in the previous five-year period (2014-2018). In this regard, only inflation in the Kyrgyz Republic will show a deviation, which can rise from 0.5% to 5% and higher. Secondly, in the next five years, the Union’s core countries may experience a similar depreciation of their national currencies (compared to the $US), while the exchange rates of Armenia and Kyrgyzstan may remain unchanged.

Policy recommendations

Indeed, external circumstances and the future do not look rosy for the Eurasian Economic Union. However, unlike other regions where crisis usually led to a paralysis of integration initiatives, the Eurasian community, on the contrary, has always received a push forward towards deepening integration. This was the case with the global financial crisis in 2008-2009, following which the EurAsEC Customs Union was formed in 2010 and the political and economic crisis in 2014, during which the Eurasian Economic Union was established. Therefore, even now the policy makers of the Eurasian Economic Commission (EEC) and of the national governments can use the situation described above as a chance to make the EAEU’s performance more resilient and effective.

Firstly, by the end of 2019 the EAEU concluded various preferential trade agreements with China, Iran, Serbia, Singapore and Vietnam. Contrary to the global protectionist trend, the EEC should continue and promote its work on concluding free trade agreements with third parties based on the WTO framework, especially with the emerging economies, such as India, South Africa, Turkey and the MERCOSUR countries. This would not only show that the EAEU supports the principles of free trade and multilateralism, but also would help to boost and diversify its exports to third parties, which itself would be aided by the predicted depreciation of the national currencies of Belarus, Kazakhstan and of the Russian Federation.

Secondly, Russia, Kazakhstan and the other member states should understand and use the expected period of low average prices for energy carriers and metals as a negative incentive to diversify and modernize their economies.

Thirdly, the slowdown in global economic growth and the relatively sluggish demand on foreign markets should promote the EAEU to concentrate more on the deepening and on the expansion of its common domestic market.

First and foremost, efforts on removing barriers to internal trade need to be intensified.  Much remains to be done in this area. Between 2016 and 2018 the overall number of registered obstacles didn’t decrease, but indeed increased by over 15%. Secondly, more priority should be given to industrial corporation between the member states and to a more comprehensive digitalization agenda. This can be backed by the anticipated depreciation of the Russian ruble, Kazakh tenge and Belarusian ruble, which can aid in Union-wide import-substation, by making domestic products from these countries relatively cheaper than foreign imports. Due to the importance of the Russian economy for the Union’s overall performance, special attention should be given to Moscow’s fiscal expansion program, which by 2024 should provide funding of around $40 bln or 1.5% of the country’s GDP, as well as to the principle of inclusivity and free access of the other EAEU member states to Russia’s market, especially in state procurement, industrial localization and the agro-food sector. A possible orientation benchmark by 2024 could be to increase intra-EAEU trade to 20% of total trade (from 13.5% in 2018). Within the internal trade structure, the combined share of food products, chemical products and machinery should be increased to 60% (from 45.2% in 2018).

On the external contours of the Union, various formats for deepening trade and economic cooperation should be offered to the neighboring post-Soviet states, including the possibility of accession of Tajikistan and Uzbekistan, which would increase the overall size of the common domestic market to 226 mln people.

Fourthly, and in general, the EEC leadership and the national governments should follow a philosophy of „multi-speed integration“, offering both member states and partner countries around the Union various formats for cooperation of different integration depths depending on their national interests and on the level of macroeconomic convergence.

Indicators of the last five years show a clear trend of inflation rate decrease and convergence, as well as of an exchange rate synchronization for the three core states of the EAEU – Belarus, Kazakhstan and Russia. A likely continuation of this trend in the next five years might suggest for the central (national) banks of these countries the possibility to set a common inflation target of 4%, as well as to conduct a coordinated monetary and exchange rate policy, potentially even introducing a Eurasian virtual transfer currency for accounting and clearing purposes.

Last, but not least, special attention needs to be given to the improvement of the investment climate, to the liberalization of the service sector and to creating a better judicial and institutional environment in the EAEU. According to the above-mentioned ifo World Economic Survey, the main economic problems facing the Commonwealth region are corruption (94.3%); a lack of innovation (92.3%) and low international competitiveness (86.4%).

Appendix


Data tables

Table 1. EAEU and EAEU member states economic outlook and country composition (2018-2022)

2018 2019
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.)
ARM 30.4 0.6 5.2 32.0 0.7 6.5
BLR 188.6 4.0 3 194.3 4.0 1.2
KAZ 500.1 10.6 4.1 520.6 10.7 4.2
KGZ 24.9 0.5 3.5 25.8 0.5 4
RUS 3986 84.3 2.3 4077.7 84.1 1.1
EAEU 4730 100.0 2.5 4850.3 100.0 1.5
2020 2021 2022
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP country structure (in % of EAEU total) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total)
ARM 34.1 0.7 4.8 35.7 0.7 5.6 37.7 0.7
BLR 196.6 4.0 1.5 199.5 4.0 1.5 202.5 3.9
KAZ 542.5 11.0 3.5 561.5 11.2 3.4 580.5 11.3
KGZ 26.8 0.5 3.6 27.8 0.6 3.1 28.6 0.6
RUS 4122.5 83.7 1.8 4196.7 83.6 2 4280.7 83.4
EAEU 4922.5 100.0 2.0 5021.2 100.0 2.2 5130.1 100.0

Source: EEC Statistics Department, EDB Macroreview reports October 2019 and author’s calculations.

Table 2. EAEU and EAEU member states economic outlook and country composition (2018-2024)

2018 2019
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.)
ARM 30.4 0.6 5.2 32.0 0.7 6.0
BLR 188.6 4.0 3.1 194.4 4.0 1.5
KAZ 500.1 10.6 4.1 520.6 10.7 3.8
KGZ 24.9 0.5 3.5 25.8 0.5 3.8
RUS 3986.0 84.3 2.3 4075.9 84.1 1.1
EAEU 4730.0 100.0 2.5 4848.6 100.0 1.4
2020 2021
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP country structure (in % of EAEU total) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.)
ARM 33.9 0.7 4.8 35.5 0.7 4.5
BLR 197.3 4.0 0.3 197.9 3.9 0.1
KAZ 540.5 11.0 3.9 561.7 11.2 3.7
KGZ 26.7 0.5 3.4 27.6 0.6 3.8
RUS 4120.1 83.8 1.9 4197.1 83.6 2.0
EAEU 4918.5 100.0 2.1 5019.9 100.0 2.2
2022 2023
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.)
ARM 37.1 0.7 4.5 38.8 0.7 4.5
BLR 198.1 3.9 0.1 198.3 3.8 0.0
KAZ 582.5 11.4 3.3 601.8 11.5 5.3
KGZ 28.7 0.6 4.6 30.0 0.6 3.4
RUS 4282.9 83.5 2.0 4370.7 83.4 1.9
EAEU 5129.4 100.0 2.1 5239.6 100.0 2.3
2024 2025
GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP country structure (in % of EAEU total) GDP by PPP (in $ bln) GDP country structure (in % of EAEU total) GDP growth rate (y.o.y.)
ARM 40.6 0.8 4.5 42.4 0.8
BLR 198.3 3.7 -0.4 197.6 3.6
KAZ 633.7 11.8 3.5 656.1 12.0
KGZ 31.0 0.6 3.4 32.0 0.6
RUS 4455.7 83.1 1.8 4537.9 83.0
EAEU 5359.3 100.0 2.0 5466.1 100.0

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Table 3. World GDP growth rate and world trade growth estimations (2018-2021)

GDP growth rate (y.o.y. change, in %)
2018 2019 2020 2021
EU27 2.1 1.4 1.4 1.6
Germany 1.5 0.5 0.7 1.4
Italy 0.7 0.1 0.6 0.9
USA 2.9 2.3 1.7 1.8
South East Asia 4.2 3.9 4.0 4.0
China 6.6 6.2 5.9 5.8
Japan 0.8 1.1 0.6 1.0
South Korea 2.7 1.9 2.4 2.4
Latin Americaa 1.3 0.8 1.9 2.3
Turkey 2.6 0.7 1.8 2.2
Emerging Economiesb 5.1 4.6 4.8 4.9
EAEU 2.5 1.5 2.0 2.2
World 3.2 2.7 2.6 2.7
Volume of world tradec 3.3 -0.8 0.7 2.4

Source: ifo Schnelldienst 19/2019, International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations. aWeighted average from Brazil, Mexico, Argentina, Colombia, Chile, Peru. Weighted with the 2018 gross domestic product in US dollars. bRussia, Turkey, China, India, Indonesia, Thailand, Malaysia, Philippines, Latin America. cCPB Netherlands Bureau for Economic Policy Analysis.

Table 4. World GDP growth rate estimations (% change y.o.y., 2018-2024)

2018 2019 2020 2021 2022 2023 2024
EU27 2.2 1.5 1.6 1.7 1.6 1.6 1.5
Germany 1.5 0.5 1.2 1.4 1.3 1.2 1.2
Italy 0.9 0.0 0.5 0.8 0.7 0.6 0.6
USA 2.9 2.4 2.1 1.7 1.6 1.6 1.6
ASEAN5 5.2 4.8 4.9 5.2 5.2 5.3 5.3
China 6.6 6.1 5.8 5.9 5.7 5.6 5.5
Japan 0.8 0.9 0.5 0.5 0.5 0.5 0.5
South Korea 2.7 2.0 2.2 2.7 2.9 2.9 2.9
Latin Americaa 1.0 0.2 1.8 2.4 2.6 2.8 2.7
Turkey 2.8 0.3 3.0 3.0 3.0 3.5 3.5
Emerging Economiesb 4.5 3.9 4.5 4.8 4.8 4.8 4.8
EAEU 2.5 1.4 2.1 2.2 2.1 2.3 2.0
World 3.6 3.0 3.4 3.6 3.6 3.6 3.6

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Table 5. World export and import of goods (% change y.o.y., 2014-2024)

2018 2019 2020 2021 2022 2023 2024
Exports 3.4 1.0 3.2 3.6 3.7 3.8 3.8
Imports 4.1 0.8 3.5 4.0 3.9 4.0 3.9

Source: International Monetary Fund, World Economic Outlook Database October 2019.

Table 6. Commodity structure of the EAEU’s exports to third parties (in % of total, 2014-2019)

2014a 2015 2016 2017 2018 2019b
Food products and agricultural raw materials 3.5 4.3 5.5 5.3 5.1 5.2
Mineral products 73.3 65.6 60.7 62.7 67.2 67.0
Chemicals and chemical products 5.0 6.5 6.7 6.0 5.6 6.0
Wood and pulp and paper products 2.0 2.6 3.2 3.0 2.9 2.9
Textiles, Textile Products and Shoes 0.2 0.2 0.3 0.3 0.2 0.2
Metals and metal products 7.7 9.7 10.4 10.6 9.6 9.2
Machines, equipment and vehicles 2.8 3.2 4.2 3.8 3.0 3.2
Other products 5.5 7.9 9.0 8.3 6.4 6.3
Total 100.0 100.0 100.0 100.0 100.0 100.0

Source: EEC Statistics Department. aEurasian Single Economic Space (only Belarus, Kazakhstan, Russia), bJanuary-September.

Table 7. World prices for energy carriers, metals and food products (2018-2024)

2018 2019 2020 2021 2022 2023 2024
Eurasian Development Bank estimates
Average annual oil price(Urals, $ per barrel) 63.6 60.7 58.9
Metals priceindex (in %, 2010=100) 78.9 78.4 77.8
Average annual gold price ($ per ounce) 1402.5 1539.8 1561.6
Average annual copper price ($ per ton) 5972 5789 5842
Food prices (in %, 2010 index = 100) 86.7 87.3 87.6
ifo Institute estimates
Average annual oil price(Brent, $ per barrel) 71.0 64.3 63.8 65.1
International Monetary Fund estimates
Average annual oil price (simple average of three spot prices: Brent, West Texas, Dubai Fateh, $ per barrel) 68.3 61.8 57.9 55.3 54.6 54.7 55.3
Russian natural gas border price in Germany ($ per mln metric British thermal units of gas) 7.9 4.8 6.0 6.0 5.8 5.7 5.7
Commodity food and beverage price index (in %, 2010=100) 96.4 93.0 95.8 97.3 98.0 98.1 98.1
Commodity metals price index (2010=100) 70.1 73.1 68.6 69.1 69.7 70.3 70.8
Annual average copper (CIF European ports, $ per metric ton) 6529.8 5990.8 5850.6 5902.1 5947.7 5984.5 5995.5

Source: EDB Macroreview reports October 2019, ifo Schnelldienst 19/2019, International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Table 8. GDP by purchasing power parity share of the world economy (in % of world total, 2018-2024)

2018 2019 2020 2021 2022 2023 2024
EU27 16.3 16.1 15.8 15.5 15.2 14.9 14.6
USA 15.2 15.1 14.9 14.7 14.4 14.1 13.9
ASEAN5 5.5 5.6 5.7 5.8 5.9 6.0 6.1
China 18.7 19.3 19.7 20.2 20.6 21.0 21.4
South Korea 1.7 1.6 1.6 1.6 1.6 1.6 1.6
Latin America 7.5 7.3 7.1 7.1 7.0 6.9 6.9
Turkey 1.7 1.7 1.6 1.6 1.6 1.6 1.6
Emerging Economies 59.2 59.7 60.3 61.0 61.8 62.5 63.3
EAEU 3.7 3.6 3.6 3.5 3.5 3.4 3.4
World 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Table 9. EAEU and EAEU member state inflation rate estimations (CPI, in %, 2018-2021)

2018 2019 2020 2021
ARM 1,8 1,2 2,7 3,9
BLR 5,6 5,1 5,1 4
KAZ 5,3 5,9 5,4 5,1
KGZ 0,5 2,6 3,5 5,9
RUS 4,3 3,5 4 4
EAEU 4,4 3.9 4.2 4.1

Source: EEC Statistics Department, EDB Macroreview reports October 2019 and author’s calculations.

Table 10. EAEU and EAEU member state inflation estimations (CPI, in %, 2018-2024)

2018 2019 2020 2021 2022 2023 2024
ARM 1.9 1.5 3.3 3.8 4.1 4.3 4.1
BLR 5.6 5.0 4.5 4.2 4.0 4.0 4.0
KAZ 5.3 5.7 4.7 4.6 4.4 4.0 4.0
KGZ 0.5 4.0 5.1 5.0 5.0 5.0 5.0
RUS 4.3 3.8 3.7 4.0 4.0 4.0 4.0
EAEU 4.4 4.0 3.8 4.1 4.0 4.0 4.0

Source: International Monetary Fund, World Economic Outlook Database October 2019 and author’s calculations.

Table 11. EAEU member states nominal exchange rates to the $US (year average, 2018-2021)

2018 2019 2020 2021
AMD per USD 483 480 478 484
BYN per USD 2.037 2.098 2.190 2.281
KZT per USD 345.0 383.0 400.7 422.5
KGS per USD 68.8 69.8 69.9 69.9
RUB per USD 62.5 65.0 65.8 67.7

Source: EEC Statistics Department, EDB Macroreview reports October 2019 and author’s calculations.

Country forecasts for Belarus, Armenia and Kyrgyzstan

Excerpts from the respective EDB Macroreview reports from October 2019.

Belarus

The economic growth rate of Belarus is expected to increase to 1–1.5% y.o.y. in the second half of 2019, which will result in the closure of the negative output gap by the year’s end. The improvement of agricultural output after the sector’s decline in 2018 will be the main factor behind the recovery of economic activity. Consumer demand will be temporarily supported by the salary rise in the state budget-funded sector. Investment activity may increase by the end of the year as major projects are implemented (construction of the BelNPP), but its contribution to economic growth will be limited due to high import intensity. Foreign trade operations will continue to hinder output trends, particularly due to the effect of the strengthening of the Belarusian ruble’s real effective exchange rate.

The overall 2019 GDP growth rate is estimated at 1.2%. As compared to previous projections, the EDB lowered its estimate by 0.3 p.p. to reflect the adverse effect of the contamination of the Druzhba oil pipeline and the greater than expected slowdown of external demand (mainly in Russia).

The economic growth rate of Belarus is expected to accelerate to 1.5% y.o.y. in 2020–2021. The key factor will be the recovery of Belarusian exports as the national currency weakens and becomes less overvalued. Investment demand will be supported by the implementation of a number of major projects, including the construction of BelNPP, expansion of production capacity in the chemical industry, and modernization of transport infrastructure. Consumer activity is expected to decelerate as wages and retail lending growth slows down gradually. A downward revision of the estimates of economic growth in 2020–2021 compared to previous projection reflects weaker than expected global economic activity (particularly in Russia). It is still uncertain whether and how Belarus will be compensated for the losses from the implementation of the tax maneuver in Russia. The tax maneuver leads to an increase in the oil import price for Belarus while lowering customs duties on oil products that the country exports. According to EDB calculations, the fiscal reserves accumulated are sufficient to compensate for the shortfall in the government’s budget’s income in 2020, but additional fiscal consolidation may be required later on. This may result in a slowdown of economic growth to 0.5–1% in the long run.

Recent months have seen a global economic recession becoming much more probable against a background of increased trade protectionism. The materializing of this adverse scenario will affect Belarusian economic growth via the foreign trade channel, for the Belarusian economy is quite open.

Inflation in Belarus is projected to slow down in the second half of this 2019. The new grain harvest reaped in 2019 will have an effect on food price trends and cause food inflation growth to gradually decelerate. Disinflationary influence is expected from the external sector, mainly as inflation decreases in Russia. Wage trends will continue to put some pressure on prices. In this connection the Eurasian Development Banks expects 2019 inflation to be 5.1%, which is near the national bank’s target (not more than 5% y.o.y. in December 2019). Compared to a previous projection, the EDB’s 2019 inflation estimate has been reduced by 0.6 pp. The revision is due to both weak economic activity resulting from lower than expected economic growth, and a smaller contribution from imported inflation, with the Belarusian ruble being stronger and price growth decelerating sharply in Russia.

In 2020–2021, inflation is projected to fluctuate near the national bank’s targets. The impact of economic activity is expected to be near-neutral. Wages’ inflationary pressure is projected to peter out in the second half of 2020 as their growth decelerates. The mid-term risks remain weighted towards the pro-inflationary side. The population’s expectations, sensitive to price fluctuations of individual goods, stay unanchored. There remains a probability of accelerated fuel price growth in the domestic market as imported Russian oil appreciates. There is also a risk of wages rising at a higher rate than assumed in the projection’s base scenario.

The Belarusian ruble may devalue at a higher rate if the Belarus budget is not compensated for its losses from the tax maneuver. The decrease in the long-term rate of growth of the Belarusian economy under the adverse scenario will cause the negative differential of productivity within the country and abroad to widen. In this situation, greater pricing support will be required to keep Belarusian goods competitive.

Armenia

For Armenia, a 6.5% GDP growth over 2019 is projected, driven by consumer demand expansion as wages and the bank lending growth rate increase, as well as by factors on the supply side, namely an agricultural and mining output recovery. In 2020, GDP growth will be lower than in 2019 as the effect of the comparison base, resulting from the low harvest and ore mining output drop in 2018, is exhausted. Nevertheless, the economy will continue to grow at a fairly high rate of some 5% per year. This will be facilitated by the implementation of the state’s investment climate improvement initiatives and by the increase of public spending envisaged by the draft budget for 2020. For 2021 the GDP growth rate is estimated to be 6%.

In the medium term, Armenia’s economic growth is expected to be close to its potential level at some 5%. Economic growth will be driven by labor productivity and investment demand. In addition to Armenia’s traditional areas of investment (mining and metallurgy, the agro-industrial sector, and construction), a growing share of investment may go to relatively small sectors, e. g. the textile and apparel industry. Structural reforms implemented by the government may serve to increase the economy’s potential growth in the long run.

Inflation is estimated to stay below the central bank’s target range in the second half of 2019 and will be 1.2% over the whole year. For 2020 inflation is estimated to be 3%. By the end of 2021, inflation will approach the middle of the central bank target range (4+/-1.5%), driven by increasing domestic demand as both wages and lending grow.

The dram to U.S. dollar exchange rate is expected to be stable in the medium term. A balanced balance of payments and an increasing inflow of foreign investment will keep the national currency stable.

Kyrgyzstan

Notwithstanding the high growth indicators of the first half of 2019, economic activity in the Kyrgyz Republic will moderate in the second half. The Eurasian Development Bank expects the Kumtor mine to produce 33.4% less gold in the second half of 2019 than a year before, which will be reflected in a slowdown of GDP growth. In the following years, the mine’s output is expected to gradually decline. Given Kumtor’s significance for the economy, its performance will be a key factor in determining the country’s GDP growth. Sustained positive rates of growth in the main trade partner countries will support growth in the medium term via the remittance and export revenue channels. The decrease of remittances from Russia, resulting from the 100 thousand rubles’ limit on the dispatch of money to Kyrgyzstan imposed by the Bank of Russia, is expected to be short-lived. Foreign currency inflow to KGZ from labor migrants working in Russia will recover in the medium term as alternative ways of remitting cash are mastered.

According to EDB projections, in the medium-term inflation will continue to approach the national bank’s target range. A brisker rise in grain prices is expected as cereals imported from Kazakhstan appreciate after a lower harvest in 2019. The appreciation of meat prices amid the spread of swine fever in China and the rise of excises in early 2020 and 2021 under the EAEU’s mid-term plan to harmonize their tobacco excise policies will contribute to inflation. The EDB expects the increase in customs tariffs on imports of personal vehicles from 1 January 2020 as part of the unification of the KGZ tariff policy with the EAEU Customs Code to have a limited effect on the consumer price index in the country. Inflation will be held back by cheaper oil and a weak inflation background in the trade partner countries. No shocks that might accelerate domestic price growth are expected from the foreign exchange channel, either.

In the projection period, the national bank is expected to keep to its foreign exchange rate policy, including the smoothening of sharp fluctuations of the Kyrgyz som to U.S. dollar exchange rate. Consequently, barring additional shocks, the exchange rate will probably keep within the 69–70 KGS per USD range.

Literature and sources

  1. ifo Institute (2019). ifo World Economic Survey November 2019. // https://www.ifo.de/en/publikationen/2019/article-journal/ifo-world-economic-survey-november-2019
  2. ifo Institute (2019). ifo Schnelldienst 19/2019. // https://www.ifo.de/publikationen/2019/zeitschrift-einzelheft/ifo-schnelldienst-192019
  3. Kofner J. (2019). Five years EAEU: institutions, international rankings, socio-economic development. Vienna Institute for Security Policy. // https://www.institutfuersicherheit.at/five-years-eurasian-economic-union-challenges-accomplishments-and-prospects/
  4. Kofner J. (2019). Did the EAEU create a common market for goods, services, capital and labor within the Union? Vienna Institute for Security Policy. // https://www.institutfuersicherheit.at/did-the-eurasian-economic-union-eaeu-create-a-common-market-for-goods-services-capital-and-labor-within-the-union/
  5. Eurasian Development Bank (2019). EDB Macroreview. Republic of Armenia 10’2019. // https://eabr.org/upload/iblock/53d/EABR_Macroview_RA_10_2019_EN.PDF
  6. Eurasian Development Bank (2019). EDB Macroreview. Republic of Belarus 10’2019. // https://eabr.org/upload/iblock/364/EABR_Macroview_RB_10_2019_EN.PDF
  7. Eurasian Development Bank (2019). EDB Macroreview. Republic of Kazakhstan 10’2019. // https://eabr.org/upload/iblock/aec/EABR_Macroview_RK_10_2019_EN.PDF
  8. Eurasian Development Bank (2019). EDB Macroreview. Kyrgyz Republic 10’2019. // https://eabr.org/en/analytics/ceg-quarterly-reviews/october-2019-kyrgyz-republic-trends-and-forecasts/
  9. Eurasian Development Bank (2019). EDB Macroreview. Russian Federation 10’2019. // https://eabr.org/upload/iblock/29f/EABR_Macroview_RF_10_2019_EN.PDF
  10. International Monetary Fund World Economic Outlook database October 2019. // https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx
  11. Eurasian Economic Commission statistics department database. // http://www.eurasiancommission.org/ru/act/integr_i_makroec/dep_stat/union_stat/Pages/default.aspx

* The views expressed in the article are solely that of the author and may not represent that of Skolkovo, the Higher School of Economics and IIASA.

Source: https://www.institutfuersicherheit.at/

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