30 years since the Soviet collapse: looking at the next 30

Article tags EconomyPoliticsEuropeGlobalCountry AnalysisEIU Store

• Economic growth will slow over the next 30 years as some countries reach higher levels of development while others struggle to diversify their economies.
• Population dynamics will be a double-edged sword. A declining and ageing population in Russia will become a strain on the fiscal system and a constraint on growth. Elsewhere, higher birth rates will drive faster growth.
• Climate change will have a potentially calamitous impact on the region, with some countries failing to implement sustainable and green economic policies.

EIU’s long-term forecasts are necessarily more speculative than our medium-term forecasts, but they have the merit of being based on a robust model. We produce long-term forecasts, to 2050, for the seven most developed post-Soviet economies (Azerbaijan, Estonia, Kazakhstan, Latvia, Lithuania, Russia and Ukraine); for others we can extrapolate based on comparison with similar country-types in the region. We consider these countries’ economic prospects by weighing up a range of factors, which, according to our model, are key determinants of long-term growth. These include, among others, initial GDP per worker (measuring catch-up potential); demography (working age relative to total population growth); human capital (measured by schooling and health of workforce); trade (the lagged share of exports and imports in GDP) and openness to trade; the quality of institutions (rule of law, quality of bureaucracy and property rights protection); the regulatory framework (product, credit and labour markets); the external environment (terms of trade and growth of trading partners); geography (location and primary products’ share in exports) and historical legacies (duration of independent statehood). Our long-term model also takes into account climate change and the effects that it will have on economic growth.

The labour market—diverging trends

Demographic trends, which are largely fixed and not especially susceptible to policy interventions, will have a detrimental effect on economic growth in much (but not all) of the region over the next 30 years. According to UN projections, the region’s total population will increase by 5.2% by 2050, from 290.3m in 1995 to 305.4m in 2050. However, only six countries will have registered consistent population growth in the period since independence—Azerbaijan, Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan. Between 2020 and 2050 these countries’ populations will grow by an average of 34.5%. The rest of the region will experience severe population decline, averaging 13.9% in 2020-50, with the worst-affected states being Latvia, Lithuania and Ukraine.

In countries with declining populations we will see population ageing and a significant reduction in the size of the working-age population. In these countries unemployment will decline but labour shortages will slow growth and drive up the price of labour; meanwhile, in countries with extremely rapid population growth such as Tajikistan, unemployment will rise and propel emigration of large numbers of labourers. Russia will be able to offset its negative demographic trends by importing migrant labour from other former Soviet states, but this is likely to mitigate rather than cancel the effects of domestic demographic decline, and the Russian population is projected to contract by 8.4% between 1995 and 2050.

Long-term growth prospects

According to our long-term model, real GDP growth in the region will average 1.8% per year in 2020‑50, slowing from an average of 2.1% in 2020‑35 to an average of 1.6% in 2036‑50. In per capita terms, real GDP will grow on average by 2.1% in 2020‑50, slowing from 2.2% in 2020‑35 to 1.9% in 2036‑50. We expect Estonia and Lithuania to remain outliers not only in terms of average per capita GDP growth over the long term but also in terms of economic reform, innovation and climate policy. Some countries will continue to struggle to advance from their current lowly positions in terms of GDP per head (Tajikistan and the Kyrgyz Republic), but some unlikely ones are set to impress, including Uzbekistan, the South Caucasus states and Moldova. Their lower starting positions will drive faster growth and make them attractive investment destinations for those with emerging-market appetite. Political instability will, however, be a deterrent for domestic and foreign investors alike and will continue to influence growth prospects across the region. There is an upside risk that reforms to tackle structural problems will be more forthcoming than we currently expect, leading to significant improvements in performance.

There will be significant regional variation in growth rates across the long-term forecast horizon. Climate change and negative demographic trends will constrain growth in most post-Soviet countries over the next 30 years. The Baltic states’ growth rate will slow towards 2050, but these countries will continue to outperform the rest of the region, with Estonia and Lithuania nearing Germany’s GDP per head by mid-century. The declining labour force and ageing populations will prevent the post-Soviet states from reaching their growth potential, and will strain fiscal positions. In addition, the oil-exporting countries—Azerbaijan, Kazakhstan and Russia—will face the challenge of the global move towards renewables, which will pose a risk to global oil demand and suppress energy prices. This will become particularly visible towards the end of our long-term forecasting period (2040‑50). Finally, as we discuss below, climate-related crises will further constrain economic growth prospects.

Battling climate change

Climate change could dramatically change the world economy over the course of this century. Policies to mitigate the effects of climate catastrophes are likely to take a more central role. The effects of climate change are likely to be severe for the region, and some troubling trends are already showing. The melting of Arctic ice is seen by some as potentially beneficial for Russia, as this will allow it to expand its Arctic trade route, but rising temperatures will have a serious impact on the rest of the country; forest fires are likely to become more frequent and severe, accelerating the rate of deforestation. The Baltic Sea water levels have been rising at a faster rate than the European average, and although the effects of this are likely to become most visible beyond 2050, they could drive the adoption of some mitigation policies in Russia and the Baltics. At the same time, Central Asia’s current water problems will worsen, adversely affecting the region’s agriculture and electricity production.

Some of the post-Soviet states have joined the global race towards carbon neutrality and have set the ambitious goal of becoming carbon neutral by 2050. The three Baltic states (Estonia, Latvia and Lithuania) share this goal with the rest of the EU and are also joined by the oil and gas giants, Azerbaijan and Kazakhstan. Russia and Ukraine have set their goals for 2060, while the remaining countries have either not finalised their plans or have not set carbon neutrality as part of their long-term policy agenda. The majority of the countries are unlikely to reach carbon neutrality by 2050‑60 owing to their poor infrastructure, limited fiscal capacity and weak political will. However, as global investor interest shifts towards climate- and green-related projects, we expect that investment in renewable energy and climate-conscious initiatives will be forthcoming over the next few decades. The region has the potential to source large amounts of energy from renewable sources such as wind, solar and water. Countries whose current economic model is centred around energy, such as Kazakhstan, Azerbaijan and Uzbekistan, are likely to be more keen on adopting green technologies. Central Asia, with its vast non-arable land and low population density, has the potential to construct large wind and solar farms. However, poor connectivity across the region and relative economic poverty represent major downside risks.

Tue, 04th Jan 2022 Article tags EconomyPoliticsEuropeGlobalCountry AnalysisEIU Store