enough to bring investment in the year to within 4 percent of its pre- pandemic projection. This improvement was not region-wide, however, amid rising borrowing costs and elevated political tensions and policy uncertainty, with investment contracting in 2021 in Bulgaria, Belarus, Georgia, Kyrgyz Republic, and Montenegro (World Bank 2022d). As a result, investment in 2021 was at least 10 percent below pre- pandemic projections in some economies in Central Europe, Eastern Europe, the South Caucasus, and Western Balkans.

Russia’s invasion of Ukraine in February 2022 halted the economic recovery. The ensuing war has had far-reaching consequences for investment in ECA and regional supply chains, given many countries’ economic linkages with Russia and Ukraine (figure 8.E). The invasion has caused a fresh plunge in investor confidence, as well as capital outflows, tighter financing conditions, higher inflation, and currency depreciations. The war has also dampened regional trade and investment by weighing on external demand from the euro area, as well as Russia. FDI inflows, which recovered to some extent in 2021 in many ECA economies, have become more muted and are likely to remain so (UNCTAD 2022). Although FDI inflows are largely from the EU, some countries in the South Caucasus, Eastern Europe, and Central Asia have relied heavily on Russia as a financing source.<sup>7</sup> Investment has thus been hit by Russia’s invasion of Ukraine through multiple channels. Regional value chains have been interrupted, as many ECA economies depend heavily on both Russia and Ukraine for imports of key commodities and intermediate goods (Winkler, Wuester, and Knight 2022). The war has also pushed up inflation, prompting policy rate hikes in advanced economies and in most of ECA’s economies, driving global and domestic borrowing costs higher. Moreover, limited fiscal space, which was narrowed by policies to support activity during the pandemic and the resulting increases in government debt, has made it more difficult to take countercyclical policy action and maintain public investment plans.

As a result of the invasion and associated sanctions, investment in ECA is estimated to have contracted by 3.2 percent in 2022 and projected to continue shrinking at 1.6 percent in 2023. While the contraction in 2022 was only about one-fifth as steep as during the global financial crisis, it was far steeper than the pandemic-induced contraction of 2020. Unlike 2020, when the fall in investment was region-wide, most of the contraction in 2022 is accounted for by Ukraine, Belarus and Russia. Investment growth in ECA excluding these three countries is estimated to have remained positive in 2022, at 1.4 percent, and is projected to remain at that pace in 2023. In 2023, investment is projected to be nearly 15 percent below pre-pandemic projections in ECA and nearly 9 percent below these projections in ECA excluding Ukraine, Belarus, and Russia (figure 8.F). Regional investment is expected to pick up beyond 2023, owing to reconstruction efforts in Türkiye following two devastating earthquakes in February 2023.

# 6.3 Regional investment needs

> 7 Russia accounts for about one-third of FDI inflows in Armenia and Belarus and about one-fifth of FDI inflows in the Kyrgyz Republic and Moldova.