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Central Europe: Analysts Foresee Decline In Economic Growth

By Ben Partridge and Jan de Weydenthal

London, 28 August 1998 (RFE/RL) -- Economic analysts in London say that Russia's financial crisis is likely to affect weaker growth across the eastern countries, hitting hardest at those most strongly tied to the Russian economy.

Analysts say the impact of the crisis will vary depending on the extent of each country's financial and trade links with Russia. Eastern countries which trade heavily with Russia are likely to be most affected.

A report in the London Independent newspaper today says: "Those most at risk are the countries still economically yoked to Russia, like Ukraine and Belarus, and other former Soviet republics."

The CIS Countries.

An analysis by a major U.S. investment bank, Salomon Smith Barney, says "the trade linkages between the CIS countries and Russia still are large. The downfall of the ruble and prospects of a decline in Russian domestic demand bodes ill for their export earnings and already weak balance of payments picture, and suggests their currencies may come under serious pressures."

The CIS countries send between 20 to 35 percent of their merchandise exports to Russia, making them highly sensitive to the economic turmoil that has followed the ruble's collapse.

The ruble downfall will hit Russia's trading partners in two ways. First, the fall in the currency means that countries that depend on Russia for export earnings will lose heavily. Secondly, Russian domestic demand for imports will likely slump.

The report says: "IMF and Central Bank figures show (34.8 percent) of Ukraine's exports last year came from trade with Russia. This accounted for about 12 percent of Ukraine's GDP." In Kiev, the ruble crisis forced trade on the foreign currency exchange to be suspended.

Russia accounted for 45.6 percent of Kazakhstan's exports (13.1 percent of GDP), and 22.2 percent of Uzbekistan's exports (5.8 percent of GDP). (The exports of Central Asian countries like Kazakhstan and Turkmenistan are centered on energy products).

The Baltic Countries.

The Baltic states are also exposed significantly to the Russian economy which still accounts for close to a quarter of Lithuanian (23.9 percent) and Latvian (23.1 percent) exports. This accounted for 9.9 percent of Lithuania's GDP and 6.4 per cent of Latvia's GDP.

The London Independent newspaper today said Lithuania may be vulnerable to after-shocks from the Russian crisis because of this reliance on trade with Russia. This is despite the fact it is enjoying 7 percent growth and its currency, the litas, is pegged to the US dollar and 100 percent backed by foreign currency reserves.

Estonia is somewhat less exposed with 16.2 percent of its exports last year going to Russia (8 percent of its GDP).

Central Europe.

The economies of Central European countries are less likely to be seriously affected by the Russian crisis than either the CIS states and the Baltic countries, although short-time effects are certain to be painful. The IMF and Central Bank figures show that Russia accounted for 8 percent of Bulgaria's exports last year (4.3 percent of GDP), 3.6 percent of Romania's exports (0.7 percent of GDP), 3.7 percent of Slovakia's exports (1.7 percent of GDP) and 3.8 percent of Croatia's (0.8 percent of GDP).

For the region's three most important economies -- the Czech Republic, Hungary and Poland -- the importance of the Russian export market has fallen in recent years as they have oriented themselves onto the western markets. The EU has become their major trading region and economic growth in the EU is of far greater importance for their health than developments in Russia. Two-thirds of their exports are now EU-bound.

The Salomon Smith Barney report says Russia accounted for about five percent of Hungary's exports last year, 6.5 percent of Poland's and 3.3 percent of the Czech Republic's. Hungary is potentially the most exposed to the crisis in Russia because its exports to Russia account for 2.5 percent of its gross domestic product, compared with 1.5 percent for Poland and the Czech Republic.

In Hungary, the forint fell to record lows this week due to an outflow of capital, forcing the government to intervene. Local currency values also declined somewhat in Poland and the Czech Republic, but both the Polish zloty and the Czech koruna held ground without the need of central interventions.

The three countries suffered major declines in stocks, however. Hungarian stocks dropped 12 percent in early trading today, following a fall of more than 14 percent yesterday. Polish stocks declined by 6 percent yesterday, reaching their lowest level in two years. Also yesterday, the Czech stocks lost about 7 percent.

In all three countries, shares of companies with trade links to Russia were particularly hard hit. And there is no clear prospect that the situation will change any time soon. The fall of the ruble has made it difficult for Russian trading companies to pay for imported goods. There is a real possibility that trade between Russian companies and those in Central Europe will return again to recently abandoned barter operations.

Analysts are also suggesting that the Russian crisis will force cuts in the projected growth rates in several Central European countries, particularly if growth in the EU, now their key market, suffers as a result of the Russian crisis.

Stanislaw Gomulka, a senior advisor in the Polish Finance Ministry, told Warsaw daily Rzeczpospolita today that Poland's GNP (gross national product) may drop by about one percent to 5.5 percent. Gomulka called for an across the board cut in state expenditures.

Finance Minister Leszek Balcerowicz yesterday said on a television program that the country must accept austerity measures to maintain growth, a call seconded by President Aleksander Kwasniewski himself.

In general, commentators say the Russian crisis, following, as it does, the financial shocks in Asia, is likely to deepen investors' distrust of new so-called emerging markets. The Financial Times notes that all the eastern countries have been hit by these negative sentiments, irrespective of sound economic fundamentals in separate cases.

And, analysts say, forecasts for economic growth across the eastern countries are today being revised downwards.