Russia’s crisis to deepen but contagion to remain limited

The deepening downturn in Russia will depress aggregate growth across Emerging Europe this year but the outlook for most countries will be shaped more by developments in the euro-zone than it will by events in Russia or Ukraine. Exports to the euro-zone are likely to remain extremely weak, but most countries in Emerging Europe are now less vulnerable to a potential re-escalation of tensions in Greece than they were a few years ago. At the same time, domestic drivers of growth are starting to return. Fiscal austerity is easing and the sharp fall in oil prices will boost real incomes and allow central banks to keep policy loose. The upshot is that while Russia’s economic problems are likely to deepen over the course of 2015, growth in the rest of the region should remain relatively resilient.