Ex-Soviet Giants Limp Into 2010 With Fragile Recovery

MOSCOW, Russia -- Bloodied by the economic crisis, the three major economies of the former Soviet Union are finally turning the corner but recovery in 2010 is likely to be fragile and vulnerable to external shocks.

Farmers harvest grain north of Kiev in August.

Kazakhstan, Russia and Ukraine are expected to post respectable growth in 2010 after enduring a dire 2009 but this will largely be due to the favourable base comparison they will have with this year, economists said.

All three countries were badly hit by the global slump due to weaknesses in their economies and while the recovery will help end the slowdown, much more radical reform work needs to be done in the long term.

"Recovery is expected to be sluggish," the International Monetary Fund said after its December staff visit to Russia, the biggest economy in the former Soviet Union.

Predicting 3.5 percent growth in Russia in 2010, it said this largely reflected base effects and a turn in the cycle of inventories, which were emptied during the slowdown.

"Underlying domestic demand is likely to be subdued as bad loans in the banking system are expected to weigh on credit growth," the IMF said.

The government has warned of an 8.5 percent contraction for Russia this year, a ghastly statistic after the country enjoyed five years of pulsating growth on the back of the high price of oil, its main export.

Reform meanwhile has been slack -- the privatization programme was largely mothballed from 2004 while labour productivity is one third that of the United States.

Tom Mundy, strategist at Renaissance Capital in Moscow, said the external environment will remain crucial for Russia and the withdrawal of fiscal stimulus packages abroad, especially in China, could also hit its markets.

Meanwhile, like any major emerging economy, a worry cloud for investors in Russia is the risk of an external shock such as the recent announcement by Dubai World it was seeking a debt restructuring which roiled markets globally.

At present, the biggest risk would be any financial meltdown in Greece, which is suffering severe budgetary problems, Mundy said.

"A sovereign default or a repeat of the Dubai situation is the biggest risk on the horizon. There is no real relation at all between Russia and Dubai -- it's just that investors start selling emerging market risk."

Ukraine's government meanwhile announced Friday it expected at least three percent growth in 2010 after a contraction of 12 percent in 2009, according to the Interfax Ukraine news agency.

The country, dependent on exports for half of its Gross Domestic Product, was hit like Russia by the collapse in external demand and slump in raw materials prices .

But the problems were compounded by a problem unique to Ukraine -- an extraordinary soap opera of bickering between the president and prime minister ahead of January's presidential elections.

The political problems, along with populist wage and pension changes that have stretched the budget further, have led the IMF to so far withhold the next 3.8 billion dollars tranche of a 16.4 billion dollar standby credit.

"The recovery in Ukraine has not started yet. Ukraine has suffered a lot from this policy mess," said Alexei Moiseev, economist at Renaissance Capital.

"Once a new government is elected, it will have to pull back the populist measures (made) in the run-up to the election. They have to do this."

The future of the IMF credit remains up in the air and while economists brush off fears of a sovereign default for the moment, the country remains hugely vulnerable to any external shocks such as a meltdown in Greece.

Kazakhstan, like Russia a major exporter of oil and gas, was hit badly by the slump in commodities prices due to the economic crisis.

But this was aggravated by a major crisis in its banking system which had expanded wildly and was too exposed to the property market which collapsed during the crisis.

The IMF forecasts a two percent contraction in growth in 2009 followed by a fragile recovery to two percent growth in 2010.

According to Moissev, reform of the agricultural sector in Kazakhstan also remains a major priority for reform as it employs 30 percent of the population but accounts for just three percent of GDP.

Source: AFP