Economies in emerging Europe, Central Asia and North Africa could slide back to pre-pandemic gross domestic product (GDP) levels in the event of an abrupt halt of Russian gas exports, the European development bank warned on Tuesday.

The European Bank for Reconstruction and Development (EBRD) also sees a worse economic downturn in Ukraine, as it said the economy is set to contract by almost one-third this year in the wake of Russia's invasion.

Many countries in the EBRD’s region of operation, which covers some 40 economies stretching from Mongolia to Slovenia and Tunisia, depend on Russian gas and a sudden ceasing of supplies would lower output per capita by 2.3% this year and 2% in 2023, according to the lender’s latest report.

"Europe is discussing to stop purchases of hydrocarbons from Russia," chief economist Beata Javorcik told Reuters. "There is also the possibility that Russia would stop supplying its gas."

The lender estimates that economies across its region grew 6.7% last year following a 2.5% contraction in 2020, when COVID-19 roiled the global economy and financial markets.

But Moscow has already shut off gas flows to Poland and Bulgaria, and markets are focused on the impact of an EU embargo on Russian oil as well as how gas will be paid for by deadlines later this month via a Russian payment mechanism.

Tuesday's forecasts were announced as the EBRD opened its annual conference in the Moroccan city of Marrakech.

Ceasing gas flows would deal the biggest blow to EU member economies with both significant gas imports from Russia and a large dependence on gas in their energy mix, such as the Czech Republic, Hungary and Slovakia, the EBRD warned.

A sudden stop is not the EBRD’s base case scenario, which assumes for its calculations a continued delivery of gas. Though even then, expansion is now expected to be more sluggish than the lender estimated in March, with growth forecasts trimmed to 1.1% from 1.7%, chiefly due to a larger-than-previously-expected contraction in Ukraine.

"Projections are subject to major downside risks should hostilities escalate or should exports of gas or other commodities from Russia become more restricted," the bank cautioned.

It noted that "in addition to the impact of high food, energy and metals prices, some economies in the EBRD regions are further affected through trade, tourism and migration-remittance links to Russia."

Growth for Turkey, the single biggest recipient country of EBRD funds, is set to "remain muted" at 2% in 2022 and 3.5% next year, partially due to government spending ahead of a June 2023 national election.

Price pressures

EBRD economists also cut their 2023 outlook to 4.7% from the 5% estimate in March, citing price pressures.

"Recent increases in food and energy prices added to inflationary pressures, which were already high owing to the rebound in global demand as COVID-19 restrictions were being phased out," the report found.

Runaway inflation has heaped pressure on poorer economies such as North Macedonia, Morocco, Egypt and Jordan, where food represents more than 25% of the consumer price index. Average inflation in the EBRD regions reached 11.9% in March 2022, approaching levels last seen at end-2008.

Ukraine’s GDP is forecast to contract 30% in 2022 instead of a 20% annual decline expected in March shortly after Moscow's military offensive. The EBRD sees Ukraine's economy rebounding by 25% in 2023, up from its March forecast of 23%.

A Russian blockade has severely hurt Ukraine's key agricultural sector as the country is a major exporter of wheat and sunflower oil. The war has also put a brake on Ukraine's deliveries of cables imported by European carmakers.

The economy of sanctions-hit Russia is expected to shrink by 10% and stagnate in 2023, in unchanged estimates from March.

"Nine years of growth would be wiped out," Javorcik added, as she emphasized that the major impact of sanctions on Russia over Ukraine will be seen in the medium and long terms.

"Russia is being cut off from the global knowledge pool, and that is the biggest cost."

Moscow calls its actions in Ukraine a "special operation." It casts the war as a battle against dangerous "Nazi"-inspired nationalists in Ukraine – an allegation Kyiv and its allies say is nonsense.

Russian ally Belarus, which has been hit also by Western sanctions, would see its economy contract 4% this year, the EBRD said.

In March, it had forecast a 3% contraction for Belarus, which borders Ukraine and Russia.

Following the invasion, the EBRD in April suspended access to financing and expertise for Russia and Belarus.

The lender, which has repeatedly condemned Russia’s invasion of Ukraine, also announced that it would close its Moscow and Minsk offices.

In March, the bank unveiled a 2-billion-euro ($2.1 billion) "resilience" package to help citizens, companies and countries affected by the war in Ukraine, including those hosting refugees.

The London-based lender – which invests alongside the private sector – has not undertaken any new investment projects in Russia since 2014, when Moscow invaded and then annexed Crimea.

Founded in 1991 to help former Soviet bloc countries switch to free-market economies, the EBRD has since extended its reach, including to countries in the Middle East and North Africa.