The Economies in Transition: The Recovery Project LINK, New York 2011 Robert C. Shelburne Economic Commission for Europe

The Economies in Transition: The Recovery Project LINK, New York 2011 Robert C. Shelburne Economic Commission for Europe

EiT growth was similar or above developing countries pre-crisis, but significantly below post-crisis. Downside risk: eurozone crisis EiT Advanced Developing and Emerging 10.000 8.000 Real GDP Growth PPP Basis 6.000 4.000 2.000 0.000-2.000-4.000-6.000-8.000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Real GDP Growth in Europe, 2000-2012 SEE-6 EECCA-11 Russia NMS-12 EU-15 (Old) 12.0 10.0 Real GDP Growth Rate 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

SEE Quarterly GDP Y-O-Y Albania fyr of Macedonia Serbia 8 6 4 2 0-2 -4-6 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2

CIS: Quarterly GDP Y-O-Y Armenia Georgia Kazakhstan Russia Ukraine 10 8 6 4 2 0-2 -4-6 -8-10 -12-14 -16-18 -20 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2

Comparison of Severity of Crisis Using Time Annual Average 2003-2007 GDP Growth Annual Average 2007-2011 Total 2007-2011 SEE-6 5.3 0.6 2.6 3.5 EECCA-11 9.5 3.1 12.8 2.67 Russia 7.6 1.3 5.2 3.33 EiT (-T) 7.8 1.9 8 ~3 (2.9) NMS 5.8 1.3 5.4 ~3 (3.1) ECA (-T) 7.2 1.8 7.2 3 Years Lost due to Crisis EU (15 Old) 2.5-0.3-1.1 5 Emerging & Developing 8 5.6 24.5 ~1

Level of GDP in 2011 Compared to 2007

The Great Recession: Bigger than 1998 currency crisis but insignificant compared to transition crisis Russia- Crises Compared 225 Real GDP Index 200 175 150 125 100 75 50 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years After Shock Transition 1998 Currency Great Recession

300 250 200 150 100 50 0 Real GDP in 2011 Compared to 1989 Uzbekistan Azerbaijan Poland Belarus Albania Slovak Republic Kazakhstan Slovenia Czech Republic Armenia Estonia Hungary Romania Kyrgyz Republic Bulgaria Lithuania Russia The fyr of Macedonia Croatia Latvia Montenegro BiH Serbia Tajikistan Georgia Ukraine Moldova Turkmenistan Turkey Real GDP 2011 vs 1989

Convergence in Wider-Europe 2000-2011 Total Growth 2000 to 2011 4.5 4 3.5 3 2.5 2 1.5 1 SEE CIS ADV NMS 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 Per Capita Income PPP 2000

1.2 1 0.8 0.6 0.4 0.2 0 EECCA (CIS) & SEE Are Slowly Converging to Eurozone Per Capita Income World Eurozone 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 EECCA/Eurozone EECCA/World SEE/Euro Area 17 SEE/World 1998 Relative GDP Per Capita PPP

The EiT Account for 4.6% of World GDP, EiT+NMS+T=8.3% 3.5 Share (%) of World GDP PPP 3 2.5 2 1.5 1 0.5 1998 2011 1998 2011 1998 2011 1998 2011 1998 2011 0 Russia EECCA-11 SEE-6 NMS Turkey

Unemployment in the CIS 18 16 14 12 10 8 6 4 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f Armenia Azerbaijan Georgia Kazakhstan Kyrgyz Republic Moldova Russia Ukraine

Unemployment in South-East Europe: Over 10% in All, Largely Structural 40 35 Unemployment Rate 30 25 20 15 10 5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f Albania Croatia Montenegro Bosnia and Herzegovina The former Yugoslav Republic of Macedonia Serbia

25 20 15 10 5 0 Unemployment in the NMS Monthly 20008-2011 Baltics& Slovakia Czech, Romania, Slovenia 2008M01 2008M03 2008M05 2008M07 2008M09 2008M11 2009M01 2009M03 2009M05 2009M07 2009M09 2009M11 2010M01 2010M03 2010M05 2010M07 2010M09 2010M11 2011M01 2011M03 2011M05 2011M07 Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia

Relationship between Change in GDP and Unemployment in ECE Economies, 2009 vs 2008

16 14 12 10 8 6 4 2 0-2 Inflation in SEE 4 of 6 Fixed to Euro (solid), 2 flexible (mixed) Albania Bosnia and Herzegovina Croatia Montenegro Serbia TfYR of Macedonia 2007M05 2007M07 2007M09 2007M11 2008M01 2008M03 2008M05 2008M07 2008M09 2008M11 2009M01 2009M03 2009M05 2009M07 2009M09 2009M11 2010M01 2010M03 2010M05 2010M07 2010M09 2010M11 2011M01 2011M03 2011M05 2007M01 2007M03 Inflation Over Previous Year

35 30 25 20 15 10 5 0-5 Inflation in the CIS; back to 5-15% Armenia Azerbaijan Belarus Georgia Kazakhstan Kyrgyzstan Moldova Russia Tajikistan Ukraine Belarus Currency Crisis 2007M05 2007M07 2007M09 2007M11 2008M01 2008M03 2008M05 2008M07 2008M09 2008M11 2009M01 2009M03 2009M05 2009M07 2009M09 2009M11 2010M01 2010M03 2010M05 2010M07 2010M09 2010M11 2011M01 2011M03 2011M05 2007M01 2007M03

Inflation in the ECE: Higher growth is associated with higher inflation SEE NMS Advanced ECE EECCA 20.0 18.0 16.0 14.0 Inflation 2011 12.0 10.0 8.0 6.0 4.0 2.0 0.0-4.0-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Real GDP Growth 2011

1.2 Exchange Rates: General Nominal Depreciations vs US$ But Russia has had inflation of over 30% Depreciation / Appreciation 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 2008M01 2008M042008M07 2008M10 2009M012009M04 2009M07 2009M102010M01 2010M04 2010M072010M10 2011M01 2011M04 Albania Armenia Azerbaijan Belarus Bosnia and Herzegovina Croatia Georgia Kazakhstan Kyrgyzstan Moldova, Republic of Montenegro Russian Federation Serbia Tajikistan The fyr of Macedonia Turkmenistan Ukraine Uzbekistan

1.2 1.1 1 0.9 0.8 0.7 0.6 Real Trade-Weighted Exchange Rates (BIS) Jan 2008=1 Bulgaria Croatia Latvia Russia United States Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Jan-04 Apr-04 Jul-04

Current Accounts: Reduced Imbalances in the EiT & NMS Russian Surplus & NMS/SEE Deficits Reduced NMS 10 ECCAA-11 Russia SEE-6 Current Account Per Cent of GDP 12 10 8 6 4 2 0-2 -4-6 -8-10 -12-14 -16 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

FDI: Solid Growth Pre-crisis, But Down 50% Post-crisis FDI Inward Stock FDI Inflows Per Cent Increase 2000 to 2010 2008 2009 2010 Per Cent Change 2008 to 2010 2000 2010 SEE-6 5.7 76.4 1,245 12.6 7.8 4.1-67 Turkey 19.2 181.9 847 19.5 8.4 9.1-53 Russia 32.2 423.2 1,214 75.0 36.5 41.2-45 EECCA-11 23.0 188.3 720 33.4 27.3 22.9-31 EiT 80.1 869.7 986 140.5 80.0 77.3-45 NMS 103.1 639.4 520 64.1 28.4 28.5-56 ECA 183.2 1,509.1 724 204.6 108.4 105.7-48

Russian Capital Flight: Net Private Capital Outflows 100 75 50 US $ Billions 25 0-25 -50-75 -100-125 -150 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Net Private Capital Flows

8_2011 700 600 500 400 300 200 100 0 Russia s International Reserve Assets 10_2008 12_2008 2_2009 4_2009 6_2009 8_2009 10_2009 12_2009 2_2010 4_2010 6_2010 8_2010 10_2010 12_2010 2_2011 4_2011 6_2011 Wealth Fund Reserve Fund CB Assets 8_2008 6_2008 2_2008 4_2008 Billions of US $

70 60 50 40 30 20 10 0 Trade in the CIS: Solid Growth in 1st Half of 2011 Exports Imports Armenia Belarus Kazakhstan Kyrgyzstan Moldova Russia Tajikistan Ukraine CIS Azerbaijan Per cent Change Q1-2 2011/Q1-2 2010

Geographical Distribution of Trade of ECA Economies Share of Exports Going to Each Sub-Region Based upon 2008 Trade Exports To (Across) \ From (Down) Russia CIS-11 SEE-6 NMS-10 Adv EU ROW Russia 14.9 0.7 14.0 45.6 24.8 CIS-11 15.1 8.5 0.8 8.0 41.7 25.9 SEE-6 2.4 1.2 28.6 15.5 44.3 8.0 NMS-10 4.5 3.5 2.5 20.0 60.0 9.5

Trade Developments WTO Accession (10 EiT not members) Membership for Russia is imminent-the rush before Putin Good progress is being made for BiH EU-Ukraine Association Agreement may be concluded by end of 2011 Belarus-Kazakhstan-Russia customs union moving forth with additional initiatives, ie economic space EU Eastern Partnership (with Bel, Ukr, Mol, Arm, Aze, Geo) going nowhere; objective was to be trade and visa liberalization. Political problems as CIS becomes less democratic. EU Accession: Croatia in 2013, Montenegro & FYRM are candidates, Serbia maybe by year end. All have visa free travel to Schengen area except Kosovo. CEFTA increasing integration & promoting EU accession Dependence on foreign capital should/must decline. Promoting export-led growth requires supply-side policies (R&D, vocational education) and macro policies (raising domestic private savings, reducing public dis-saving, controlling credit growth and avoiding housing booms).

Government Fiscal Position: The end of Russian surpluses and larger deficits in SEE Government Surplus/Deficit % of GDP 10 8 6 4 2 0-2 -4-6 -8 Russia EECCA minus Russia SEE-6 (Ex Turkey) 2006 2007 2008 2009 2010 2011 2012 2013 2014

Eurozone Crisis Has Not Infected the EiT While the US and several Eurozone economies have recently had sovereign credit rating downgrades, there have been upgrades in the Czech Republic, Hungary, Latvia, Romania, Serbia. Nevertheless SEE likely to impacted by negative developments in Greece and NMS by financial turmoil in eurozone, as a result growth for 2012 likely to be lower

1200 1000 800 600 400 200 0 Yield Spreads Have Remained Moderate Despite Eurozone Crisis 2006Q4 20 07Q1 20 07Q2 20 07Q3 20 07Q4 20 08Q1 20 08Q2 20 08Q3 20 08Q4 20 09Q1 20 09Q2 20 09Q3 20 09Q4 20 10Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 B ulgaria Hungary Lithuania Poland Croatia Serbia1 Turkey Georgia Russia Ukraine EMBI Yield Spread

90 80 70 60 50 40 30 20 10 0 Debt Service Percentage of Exports of Goods, Services, Income Kosovo Macedonia, fyr Serbia Turkey Armenia Georgia Kazakhstan Kyrgyzstan Moldova Russia Tajikistan Ukraine Bulgaria Lithuania Source:WB BiH Debt Service Percentage of Exports, 2009

50 45 40 35 30 25 20 15 10 5 0 Remittances: Percentage of GDP in 2006, 2008, 2010 Armenia Azerbaijan Belarus BiH Bulgaria Croatia Georgia UNMIK/Kosovo Kyrgyzstan Lithuania Macedonia, FYR Moldova Montenegro Romania Serbia Tajikistan Ukraine 2006 2008 2010 Albania Remittances % of GDP

2009 2010 2011e 30,000 25,000 20,000 15,000 10,000 5,000 0 Russian Remittances, 1995-2011 Total Outflows CIS Outflows Total Inflows CIS Inflows 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1995 Millions US $

Non-Performing Loans: Reasonable Threat and Little Improvement What constitutes excessive NPL? Sweden in 1990s had NPL of 12% which required 5 of 7 banks to be rescued 40 35 30 25 20 15 10 5 2009 2010 2011 Percentage of NPL 0 Bulgaria Hungary Latvia Lithuania Poland Romania Albania BiH Croatia Macedonia, fyr Monenegro Serbia Belarus Kazakhstan Moldova Russia Ukraine IMF Data: 2011 latest available

Foreign Currency Loans Remain a Vulnerability Percentage of Loans Denominated in Foreign Currency 80 70 60 50 40 30 20 10 0 Hungary Poland Bulgaria Romania Albania Croatia Serbia

Croatia: Bank Credit to the Private Sector: 3/4 in Foreign Currency

Change in Net Borrowing of Household Sector in Hungary

Financial Sector Development Financial sector still underdeveloped in central Asia: many have no bank account Related party lending (RPL) has been and remains widespread in the CIS Created problems during crisis as solvency of banking system was uncertain Recent problem in Russia with VTB purchase of Bank of Moscow 41% of all Russian loans in 2010 were RPL Bank lending is rebounding, but credit growth muted. As in the advanced economies, SMEs still not able to get credit

IMF Credit, Outstanding and Undrawn for ECA GRA-General Resources Account, PRGT- Poverty Reduction Growth Trust GRA PRGT Total O uts tand ing Av ailable Undrawn Albania 8.1 24.1 32.2 0.0 Bosnia & Herzegovina 338.2 0.0 338.2 676.0 U NMIK/Kosovo 18.8 0.0 0.0 7 4.0 Serbia 1,3 67.7 0.0 1,36 7.7 0.0 T he fyr of M acedonia 197.0 0.0 197.0 216.0 Turkey 2,9 66.7 0.0 2,96 6.7 0.0 SEE 4,896.5 24.1 4,901.9 966.0 Armenia 402.9 106.7 509.7 158.0 Azerbaijan 0.0 22.2 22.2 0.0 Belarus 2,2 69.5 0.0 2,26 9.5 0.0 Georgia 577.1 92.2 669.3 0.0 Kyrgyz Republic 0.0 11 2.6 11 2.6 5 7.0 Moldova 80.0 22 9.8 30 9.8 15 0.0 T ajikistan 0.0 78.3 78.3 26.0 Ukraine 9,2 50.0 0.0 9,25 0.0 7,75 0.0 EE CC A 12,5 79.5 64 1.9 13,22 1.4 8,14 1.0 Hungary 7,6 37.0 0.0 7,63 7.0 0.0 Latvia 982.2 0.0 982.2 539.0 Poland 0.0 0.0 0.0 19,16 6.0 Romania 10,5 69.0 0.0 10,56 9.0 3,09 1.0 NMS 19,188.2 0.0 19,188.2 22,796.0 E it Tota l 17,4 76.1 66 6.0 18,12 3.3 9,10 7.0 E CA Total 36,6 64.3 66 6.0 37,31 1.5 31,90 3.0

Per capita Income and Government Effectiveness, late 2000s 70,000 60,000 EECCA NMS OTHER SEE Expon. (OTHER) R 2 = 0.6524 GNI per capita (PPP $) 50,000 40,000 30,000 20,000 10,000 0 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Source: UNECE MDG 2011 Report Government effectiveness index

EiT Longer Run Economic Objectives/Considerations Increase the size of high-technology sectors and innovation Increase foreign investment inflows Frozen conflicts in Caucasus and central Asia limits attractiveness of the regions Need to increase the size of the tradeables sectors Liberalization progress has slowed down Energy exporters need to diversify to Asian markets Demographic problems are especially acute for an emerging market

Main Lessons for EiT from the Global Financial Crisis Limit the overall level of exposure to external capital markets, especially portfolio and bank loans Limit the domestic growth of credit to reasonable levels Limit the degree of foreign currency denominated loans Consider the benefits of exchange rate flexibility Minimize government fiscal deficits Diversity production and exports; develop manufacturing and services sectors Develop and improve the governance of domestic financial systems Although those economies with a large export sector were more exposed, limiting trade integration is not a recommendation