| Businessweek | - |
Investors
are punishing many former Soviet bloc nations for their ties to Russia
even as these countries, now European Union members, support sanctions
on President Vladimir Putin for his actions in Ukraine.
Bloomberg News
Eastern Europe Punished in Markets After Opposing Putin
Russian President Vladimir Putin. Photographer: Andrey Rudakov/Bloomberg
Investors are punishing many former
Soviet bloc nations for their ties to Russia even as these
countries, now European Union members, support sanctions on
President Vladimir Putin for his actions in Ukraine.
After the ruble, currencies from eastern Europe accounted
for five of the six worst-performing emerging-market exchange
rates in July, led by Hungary’s forint and Romania’s leu. Stock
indexes in Bulgaria, the Czech Republic and Hungary joined
Russia’s among the 10 biggest decliners in the world this month. All but one of the 11 former Communist countries now part of the EU condemned Putin’s land grab of the Crimea earlier this year. They walk a tightrope by aligning themselves politically with western Europe while maintaining economic links to Russia. More than half the energy supplies consumed by east European countries comes from Russia, according to Deutsche Bank AG. The 28 EU nations voted unanimously to extend sanctions on Russia this week as a penalty for what they see as Putin’s destabilizing role in Ukraine, even as the trade restrictions also harm them.
“There’s a sense by global investors of why mess around with central and eastern Europe and the geopolitical risks if there are other opportunities out there,” said Ilan Solot, a foreign-exchange strategist at Brown Brothers Harriman in London.
Weaker Currencies
East European nations are lagging behind compared with other developing economies. While MSCI Inc.’s emerging-market stocks index rose to an 18-month high last week, equity markets in Hungary, Poland, the Czech Republic and Romania lost a combined $8.8 billion in value this month. Asian currencies including the Indonesian rupiah and the Thai baht gained against the dollar this month, while Central and Eastern Europe suffered losses. The leu, forint, Polish zloty, Czech koruna and Bulgarian lev all fell by more than 2 percent against the dollar and weakened against the euro.EU governments agreed this week to bar Russia’s state-owned banks from selling shares or bonds in Europe, restrict the export of equipment to modernize the oil industry and stem export of equipment with military uses. The EU sanctions were followed hours later by U.S. penalties against three Russian banks and a state-owned shipbuilder, adding to restrictions announced two weeks ago.
Poland, the largest of the EU’s eastern members, took the lead on isolating Russia, perceiving its neighbor as a security threat, according to Tsveta Petrova, an analyst with Eurasia Group in New York.
Polish Fears
“Deeply fearful of Russia, Poland has and will continue to be on the side of tougher sanctions against Russia, despite the fact the crisis has already had negative economic consequences for Poland,” Petrova wrote in a report released today.Polish exports to Russia fell 5.7 percent in dollar terms in the first five months of 2014 compared with the same period last year, according to Poland’s Central Statistic Office.
While Poland has managed to offset that with increased sales to the euro area, “a stronger impact of the sanctions on the euro area’s economy will negatively influence Poland in the medium term,” according to Agnieszka Decewicz, a Warsaw-based economist with Bank Zachodni WBK SA, a unit of Banco Santander SA.
Growth in Poland has lost momentum since accelerating to 3.4 percent in the first quarter, the fastest pace in two years. Its economy probably expanded between 3 percent and 3.3 percent in the second quarter, in part because of the contraction in exports to Russia and Ukraine, the country’s eastern neighbor, Finance Minister Mateusz Szczurek said in a July 28 interview.
Gas Dependence
Poland, the Czech Republic and Hungary import about 70 percent of their natural gas from Russia while Bulgaria and Slovakia are almost 100 percent dependent, according to Ariel Cohen of International Market Analysis Ltd., a Washington-based political risk company focusing on energy and natural resources.“I won’t be surprised if Russia retaliates” for sanctions, Cohen said.
Hungary’s economy will probably slow to 2.5 percent in 2015 from 2.9 percent this year, according to the central bank’s projections this month. The forint has extended this year’s loss against the dollar to 6.9 percent, the worst performance among 24 emerging-market currencies after the Chilean and Argentine pesos and the ruble.
“The region will continue to underperform as long as the Ukraine-Russia conflict is ongoing,” said David Nemeth, an economist at KBC Groep NV’s Hungarian unit.
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