Impact of oil price decrease on European and Central Asia Market

March 4, 2015


According to Mizuho Kida, a contributor of World Bank website, the collapse in global oil prices is good news for the Europe and Central Asia (ECA) region, as a large majority of the region’s countries are net fuel importers. Analysis contained in the latest Global Economic Prospects (GEP) suggests that a 45 percent decline in crude oil prices (as projected in the Commodity Markets Outlook) would improve the trade balance of these net oil importers in the region by some 1.8 percent of GDP on average, and by much more for large net importers. However, as the GEP goes on to explain, benefits to net importers are likely to be more nuanced than the pure terms of trade effects. The ultimate effects are harder to estimate and vary across countries.

The growth impact of the declines in global oil prices depends on, among other things, whether governments allow the price reductions to be passed on to consumers or increase fuel taxes or cut subsidies. How much of the windfall to governments or consumers will be spent and how much will be saved? And how much of the extra spending will leak abroad via imports?

As the largest oil importer in the ECA region, Turkey is expected to benefit the most. Its gains will result not only from the direct impact on import bills, but also from indirect impacts, through a smaller current account deficit and lower inflation. A recent World Bank report suggests that a 45 percent decline in oil prices would reduce Turkey’s current account deficit by 1.8 percent of GDP, and inflation by 1.4 percentage points. Lower inflation would boost real household incomes and support private consumption, while a narrower current account deficit and lower inflation would boost investor confidence and support capital inflows. This, could raise Turkey’s real GDP by 0.9 percent in 2015.

In contrast, the biggest casualties from the collapse in oil prices are large net exporters in the region, especially Russia. With oil and natural gas accounting for 70 percent of Russia’s export receipts and nearly half of federal government revenues, lower oil prices compound the external, fiscal, and financial strains from sanctions imposed by the United States and the European Union over the crisis in Ukraine. The large depreciation of the ruble, which lost almost half of its value against the US dollar in 2014, has helped cushion tax and export revenue losses in ruble terms. But with capital outflows already running at 4 to 5 percent of GDP and access to international capital markets severely limited, an external financing gap will likely emerge this year in the absence of real adjustment in aggregate demand. According to the latest consensus, the Russian economy is forecast to contract 4 percent this year.

As a result, some net importers of oil may not benefit as much as one might think, because of their exposure to Russia and other oil exporters through trade, investment, and remittances ties. In Belarus, for example, the recession in Russia and the depreciation of the Russian ruble will reduce manufacturing exports and investment. Armenia, the Kyrgyz Republic, Moldova, and Tajikistan are all vulnerable to dislocations in the Russian labor market because of the importance of remittances from Russia. Moreover, historically, declines in oil prices have tended to be accompanied by lower prices in other commodities. Cheaper metal, mineral, and agricultural commodity prices will weaken the net terms of trade gains in many non-energy exporting countries in the Commonwealth of Independent States. Even among the Central and Eastern European countries, where direct exposure to Russia (or other oil exporters in the region) is limited, there could be potential negative spillovers, by adding to deflationary pressures which make deleveraging more difficult (Albania, Bulgaria, Romania), or by increasing financial market volatility, raising external financing risks (Turkey, Hungary).