London (AFP) - Russia's economy will contract next year as a result of the crisis with Ukraine, the EBRD development bank forecast on Thursday after slashing its prediction for growth.

Ukraine's economy will meanwhile contract faster than expected, in turn weighing on other emerging economies in the region, the European Bank for Reconstruction and Development said in its latest outlook report.

Russia's economy will contract by 0.2 percent in 2015, the EBRD said after predicting in May that it would expand by 0.6 percent next year.

The bank, founded in 1991 to help ex-Soviet bloc countries such as Russia and Ukraine make the transition to free-market economies and democracy, maintained its forecast of zero Russian growth for this year.

"The Russian economy will come under pressure both from Western sanctions and the sanctions that Moscow has imposed on the West in response," the EBRD said.

The United States and European Union last week hit Russia with tough new sanctions over Moscow's "unacceptable behaviour" in Ukraine.

In some of the toughest measures yet to punish the Kremlin for allegedly fomenting the insurgency, Washington targeted Russia's top bank Sberbank -- which holds the deposits of nearly half all Russian savers -- and leading energy and technology companies.

Moscow has meanwhile threatened to bar EU airlines from its airspace, and has drawn up a list targeting imports of consumer goods and second-hand cars from the West.





- Ukraine contraction -





The EBRD added that Ukraine's economy is predicted to shrink by 9.0 percent this year, more than May's forecast for a contraction of 7.0 percent. Gross Domestic Product is set to come in at minus 3.0 percent in 2015, the London-based institution added.

"The escalation of military turbulence in eastern Ukraine is weighing heavily on the economy and its external financing needs," said the bank.

Fierce gunbattles erupted around the Ukrainian rebel stronghold of Donetsk on Wednesday, with two civilians killed just a day after lawmakers in Kiev held out an offer of self-rule to the pro-Russian separatists.

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Almost 2,900 people have been killed and at least 600,000 forced from their homes across the war-battered east, according to UN figures.

"As a result of the disruption to production and trade, agricultural losses and a partial military mobilisation, Ukraine would see a sharp contraction of nine percent in 2014," the EBRD said.

"A smaller contraction of three percent is expected for 2015 as the economy continues to adjust with the support of an IMF programme, complemented by assistance from donors and international financial institutions."

The International Monetary Fund earlier this month warned that Ukraine may need an extra $19 billion (14.5 billion euros) in assistance should it fail to quell the brutal pro-Kremlin uprising by the end of next year.

The global lender recently released the second $1.39-billion tranche of its $17.1-billion lifeline despite "major uncertainties" and on the assumption that the ex-Soviet country's Western allies would be ready to pitch in with extra assistance if asked.





- Neighbours hit -





Elsewhere, the crisis "is weighing on the economies of the EBRD region, with only a modest recovery expected in 2015 after a sharp slowdown in growth this year", the bank added in its report.

Its region of investment -- including mainly former communist nations across Central and Eastern Europe but which now comprises also Turkey and emerging economies in north Africa and the Middle East -- is expected to grow by a combined 1.3 percent in 2014, down from 2.3 percent last year. It is forecast to grow by 1.7 percent in 2015.