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Europe’s economic Iron Curtain

by Leonid Bershidsky

Bloomberg

The Berlin Wall fell 25 years ago, and the first post-communist countries joined the European Union 10 years ago. The double anniversary should prompt fireworks and banquets, especially considering that most countries in the former communist bloc are growing faster than their more developed neighbors.

However, few people are in the mood to celebrate given that the Ukraine crisis is dragging the region down.

After all these years, the countries formerly under Moscow’s sway are still painfully connected to Russia and to one another. A set of gloomy forecasts released the last week by the European Bank for Reconstruction and Development (EBRD) demonstrates how.

According to the bank, Eastern Europe, including Turkey, Mongolia and all of the former Soviet Union, is expected to grow just 1.3 percent this year, down from a January projection of 2.8 percent.

The new rate is even lower than the 1.6 percent the European Commission expects for its 28 members.

A first look at the data suggests there’s not that much to worry about. The post-Soviet dictatorships of Central Asia are all expected to show healthy growth, ranging from 4.4 percent in Tajikistan to 10 percent in natural-gas-rich Turkmenistan. Mongolia is projected to weigh in with 12.5 percent growth.

Most of Eastern Europe’s EU members are recovering at a good pace by the bloc’s low standards, their predicted growth rates ranging from 1.9 percent in Bulgaria to 3.8 percent in Latvia.

A closer examination, however, reveals that Ukraine, with an expected contraction of 7 percent in 2014 and zero growth next year, and Russia, with flat growth this year and a measly 0.6 percent expansion in 2015, are pulling down the region as a whole.

So perhaps their performance should be separated from that of current and aspiring EU members and the more dynamic, raw-materials based economies of central Asia.

The EBRD, which has extensive knowledge of the region’s economies, clearly doesn’t think so. As it cut its forecasted rates for Russia and Ukraine, it also reduced them for the entire former Soviet Union.

As Russia slows down, remittances from migrant workers to families in Tajikistan, Kyrgyzstan, Moldova and Armenia — which drove growth in those economies — are going to drop off.

In the Baltics, the EBRD fears “signs of contagion such as reduced access to finance for firms with financial linkages to Russian entities.”

These countries have been used heavily by Russian businesses as doorways to EU markets.

The ex-Soviet countries of the Caucasus could be hurt by reduced trade with Russia and Ukraine, and so could Serbia and Montenegro, given their strong economic ties to Russia.

Turkey and Bulgaria may suffer from reduced tourism, traditionally an important sector for both economies, as visitors from Russia and Ukraine fall off.

Then there is the energy issue. If the standoff between the West and Russia continues, Eastern Europe will become a battlefield as Moscow struggles to keep its energy stranglehold on the Baltic states and countries such as Bulgaria. Disruptions in the supply of natural gas are possible if the conflict escalates.

“Under a more negative scenario, the Russian economy would enter recession and output contraction in Ukraine would deepen,” the EBRD said in its report. “Coupled with increased risk aversion in global markets, this would bring growth in the EBRD region to a standstill. At this point, the Russia/Ukraine crisis would start impacting the global economy.”

Looking at Europe as an entity centered in Brussels does not provide the best view of the web of interdependencies born of Moscow’s erstwhile role as the nexus of a huge region.

Few people can correctly place all its countries on a map that stretches from the Chinese and Iranian borders to those of Italy. Politically it may have been liberated in the last 25 years, but economically, it is still weighed down by its Soviet legacy.

A Moscow-based writer, Leonid Bershidsky is a Bloomberg View contributor and the author of three novels and two nonfiction books.