Page 42 - BNE_magazine_02_2020

42 I Eurasia bne February 2020
The economies of Russia, Ukraine, Belarus and Kazakhstan (KRUB) remain joined at the hip, but all are expecting inflation and prime interest rates to fall in 2020.
How interconnected are the economies of Russia, Ukraine, Belarus and Kazakhstan?
Inflation and rates outlook for 2020 Ben Aris in Berlin
In 1991 the Soviet Union broke
apart and created 15 independent countries. But over the last three decades, while these countries are politically independent, the economies of Russia, Ukraine, Belarus and Kazakhstan (KRUB) remain joined at the hip. The trade, labour and financial markets are still tightly tied, so a crisis or sanctions imposed on Russia directly affects the other economies. VTB Capital (VTBC) has tried to assess just how tightly tied the economies remain
today in a report.
“Russia is a significant trading partner and/or important labour market for the
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other three countries. Our estimates suggest that economic changes in Russia produce visible spillovers. Based on the historical breakdown of our Bayesian Panel VAR model, we calculate that the shocks related to Russian macroeconomic variables account for, on average, 37% the of FX, inflation
and interest rate volatility for Belarus, and around 30% for Ukraine and Kazakhstan,” Alexander Isakov, chief economist at VTB Capital, said in a note.
The most direct channel for shocks to be transmitted is the currency. As all the countries of the Former Soviet Union (FSU) continue to trade heavily with
each other they all keep significant amounts of rubles in their reserves and changes in ruble prices directly cause changes in the balance of payments of all five countries. According to VTBC estimates, a +10% one-off shock in $-RUB exchange rate values leads to $-BYN, $-UAH and $-KZT changing 3.9%, 2.5%, 4.1% respectively, on
a 12-month horizon, according to VBTC calculations.
Due to the break in relations between Ukraine and Russia after the annexation of the Crimea in 2014 when the two countries effectively closed their borders, Ukraine is now the least