Part 1: War in the Region
Western Balkans, which will mobilize funding to support competitiveness and inclusive growth, as well as the green and digital transitions. Although the share of economic output directly tied to Russia and Ukraine is relatively small for the Western Balkans as a whole, a few countries remain vulnerable to shocks from Russia, including Montenegro, for 11 percent of its FDI, and Serbia, for 5 percent of its exports and 5.4 percent of its imports in 2021. However, the more acute risks for the Western Balkans stem from possible disruptions in the supply of natural gas and oil. The subregion receives 67 percent of its natural gas imports from Russia, with Bosnia and Herzegovina, North Macedonia (via Bulgarian pipeline), and Serbia completely reliant on Russia for their natural gas supply. Available stock, however, varies, with limited storage capacity in smaller countries, such as Bosnia and Herzegovina, a constraining factor for supply, while in Serbia storage capacity helps mitigate the supply shock in the near term. A sustained decline in Russia’s supply of gas would prompt both a spike in prices and industrial constraints. Concerns about natural gas disruptions have already spurred increases in wholesale electricity prices, which have increased significantly alongside broader European electricity prices. Much like in Central Europe, indirect spillovers from the Russia-Ukraine conflict pose substantial risk for the Western Balkans, particularly if the conflict triggers a slowdown in the euro area. The Western Balkans is heavily reliant on the euro area as a destination for 63 percent of its exports, while more than half of the subregion’s FDI and nearly two-thirds of its remittances are sourced from the euro area.
Risks to the Regional and Global Outlook from Russia’s Invasion of Ukraine The war could set the stage for a much sharper global growth slowdown. Risks remain heavily skewed to the downside, which are being magnified by rising inflationary pressures, tightening macroeconomic policy, and slowing trade growth. If negative risks materialize—perhaps from prolonged or intensifying conflict—the outlook could be markedly weaker than envisioned, the economic scarring more significant, and the potential for trade and investment fragmentation higher. Energy embargos could materially deteriorate the outlook, especially for the euro area—ECA’s largest trading partner—and Russia, which would further damage ECA’s economy. Surging commodity prices are likely to push millions into poverty and worsen food insecurity and could trigger social unrest. The outlook remains vulnerable to financial stress, which could be triggered by confidence shocks, further geopolitical turmoil, and protracted policy uncertainty. The pandemic also continues to pose considerable downside risks to the regional outlook given trailing vaccination rates relative to advanced economy peers in Europe. It is thus critical to renew vaccine campaign efforts, particularly for vulnerable populations—including refugees—that could be hard hit by the spread of new COVID-19 variants. The war, which has already exerted a large confidence shock, could generate a prolonged period of heightened policy uncertainty. Sustained conflict could dampen business confidence and investment—a key driver of potential
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