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Russia: Devaluation Hits Trade Partners Hardest

London, 20 August 1998 (RFE/RL) -- Financial analysts in London say the effective devaluation of the Russian ruble will have a mixed impact on the Eastern and Central European economies but will hit hardest on countries with large trade links with Russia.

The analysts say the devaluation is likely to have the biggest impact on the CIS and other countries that still conduct much of their trade with Russia. But it will have a much more limited impact on countries like Poland, the Czech Republic and Hungary, where economies have become geared to the West, particularly to the EU.

Analysts say the ruble devaluation will impact on Russia's traditional trade partners in two ways. First, it will lead to reduced Russian domestic demand for imported goods. Second, it will lead to a drop in export earnings for countries that trade heavily with Russia, leading to deepening balance of payments difficulties. This could have a "knock-on" effect by destabilizing national currencies.

A survey by the major U.S. investment bank, Salomon Smith Barney, says economic activity in Ukraine, the Baltic states, and Bulgaria, are "expected to suffer significantly given their large trade links with Russia, boding ill for the stability of their currencies."

A breakdown of figures from the IMF and Central Banks show that in the Baltic countries 16.2 percent of Estonia's exports, 23.1 percent of Latvia's and 23.9 percent of and Lithuania's went to Russia in 1966.

The figures for the CIS countries show that 33.1 percent of Armenia's total exports went to Russia in 1996, Kazakhstan 45.6 percent, Ukraine 34.8 percent and Uzbekistan 22.2 percent.

In contrast, the CEEC countries are far less dependent on Russian markets. The importance of Russian demand for their exports has fallen significantly since the 1991 collapse of the Soviet Union.

According to the Deutsche Bank, Russia accounted for only 2.3 percent of exports from the Czech Republic last year and less than four percent of Poland's exports. As a result, the ruble devaluation will have only a "limited" effect on their economies.

The Salomon Smith Barney report estimates that for the Czech Republic, Hungary and Poland, the importance of Russian exports has dwindled today to just 3-6.5 percent of their export share.

The report says: "Of these three countries, Hungary is the most exposed, as its trade with Russia amounts to 2.5 percent of its GDP, compared with 1.5 percent for the Czech Republic and Poland.

The report says: "The EU has become the major trading region for these states and economic growth in the EU is of far greater importance for their economic health. Indeed, two thirds of their exports are now EU bound. So long as EU growth holds up, the three countries should continue to experience solid export growth."

However, analysts say that if the Russian economic crisis has a "knock-on" effect on the EU, leading to reduced growth, this will affect all the Central and East European countries.

What about other CEEC countries? How dependent are they on Russia? IMF and Central Bank figures for 1997 show that exports to Russia (as a share of total exports) were: Bulgaria 8 percent, Croatia 3.8 percent, Romania 3 percent, Slovakia 3.7 percent.

Analysts say the CEEC countries may suffer some competitiveness losses in third markets as a result of the ruble devaluation as their goods will be more expensive. But, on the plus side, the Central European countries, Bulgaria, Romania and the Baltic states are "not exposed to the Russian banking sector to any significant degree."

In conclusion, analysts agree the crisis in the Russian financial markets adds to the ongoing turmoil caused by Asia's economic problems and could cause investors to be more wary about investing in emerging markets, particularly in the CEEC region.

Tim Bond, of Britain's Barclays Capital, says the collapse in Russia creates a risk of a global recession and it will make it more expensive for the developing countries to borrow money.

And the Salomon Smith Barney report says countries that are particularly vulnerable to the Russian crisis, and likely to be the first to feel "negative headwinds" are those suffering from "weak economic and financial fundamentals." It says: "Thus many of the CIS countries are in a vulnerable position, particularly Ukraine and the Baltic states -- but also Romania."