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East-West crisis to overshadow EBRD meeting 25 years after Cold War

Suma Chakrabarti, President of the European Bank for Reconstruction and Development (EBRD), address an audience during the bank's 2013 Annua
Suma Chakrabarti, President of the European Bank for Reconstruction and Development (EBRD), address an audience during the bank's 2013 Annua

By Marc Jones and Christian Lowe

LONDON/WARSAW (Reuters) - A quarter century after the Cold War ended, the European Bank for Reconstruction and Development will cut its growth forecasts this week as a new East-West standoff over Ukraine hurts many post-communist economies.

The EBRD, created in 1991 originally to invest in the former Soviet bloc countries of eastern Europe, opens its annual meeting on Wednesday as shockwaves rock even economies far from the center of the crisis in Crimea and eastern Ukraine.

The confrontation is nowhere as serious as the Cold War, when East and West targeted each other with nuclear missiles, but the EBRD is still worried about the consequences.

"We all talk about the impact on Ukraine and eastern Europe but it is also very serious for Central Asia," EBRD head Suma Chakrabarti said before the three-day meeting in Warsaw. "Some of these countries are very fragile."

In recent years, the EBRD has expanded its reach beyond eastern Europe and ex-Soviet central Asia to include Mongolia, Turkey and the economies affected directly or indirectly by the Arab Spring such as Morocco, Egypt, Tunisia and Jordan.

But Russia remains its biggest market by far and economic problems were growing there well before Moscow annexed Crimea from Ukraine in March, drawing retaliatory sanctions from the United States and European Union.

EBRD funding in Russia slumped last year to 1.8 billion euros from 2.6 billion in 2012 due to what the development bank termed "difficult investment conditions".

Western sanctions have targeted a limited number of Russian individuals and companies, and Chakrabarti has said there has been no pressure so far from the EBRD's main shareholders - G7 governments - to reduce its investments in Russia.

NEW FORECASTS, NEW COUNTRIES

However, the Russian economy is slowing sharply with capital flowing out partly due to fears the West will tighten sanctions.

At the start of 2014, the EBRD projected Russian growth at 2.5 percent. But two weeks ago the International Monetary Fund cut its forecast to 0.2 percent and the EBRD's revised estimate, to be announced at the meeting, is likely to be similar.

Financial markets have given central and eastern Europe a turbulent time over the last six months, with currencies, stocks and bonds all flung around by the uncertainty.

Despite a recent emerging markets rebound, Russian stocks are down 20 percent since November and even those in Poland and Hungary have slipped 7-8 percent. All are badly underperforming the MSCI's main emerging market index which is down just 1 percent.

Projections for Turkey, the other big economy in the EBRD's fold, are also likely to be cut, while the slow pace of recovery in euro zone countries - big investors in central and eastern Europe and consumers of its goods - will cut into the region-wide forecast which was already an unspectacular 2.7 percent in January.

While EBRD leaders are highlighting the wider effects of the crisis, analysts say they need to encourage governments in the region to keep reforming and investors to keep putting their money there.

"The issue that the EBRD is really facing is that they have been pushing this line that convergence may have been radically altered by the events in periphery Europe," said Nomura emerging market economist Peter Attard Montalto. "They need to define a new argument that is going to keep countries on the reform path and investors interested in these economies."

TOUGHER APPROACH

At the meeting the EBRD will outline a new, tougher approach for dealing with countries which renege on reform promises, while taking in two new countries, Cyprus and Libya.

EBRD signaled what could be in store on Monday when it signed a new anti-corruption agreement with Ukraine under which it and the Organisation for Economic Cooperation and Development will install monitors in the country.

"We at the EBRD have come to the conclusion that we need to be at the forefront in our relationship with governments in our region to push the cause of structural reform more strongly than (has) perhaps been done in the past ten years," Chakrabarti said at a recent event.

Central and eastern Europe have problems beyond the effects of the Ukraine crisis.

Lending by the local subsidiaries of Austrian, Italian, German and Greek banks is slowing in parts of the region as their parents retrench following the euro zone crisis. Levels of bad loans are also high, notably in the ex-Yugoslav states, Bulgaria and Romania.

Political strains are also widespread, including the risk that Poland will relax fiscal discipline before elections next year's election. Hungary's policies remain under scrutiny while the collapse of Slovenia's government last month has triggered a crisis.

Cyprus will become the first of the euro zone bailout countries to get EBRD aid, with up to 700 million euros of funding over the next six years expected to be agreed. Libya will also take its first step towards similar assistance.

(Reporting by Marc Jones; editing by David Stamp)

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