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Russia: Crisis Brings Fragmentation In Transition Region

Prague, 11 September 1998 (RFE/RL) -- The impact of the Russian financial crisis has been felt in varying degrees throughout the transition region of the East.

Stock markets have tumbled, currencies have dipped, and foreign investment has suffered. But despite the short term dislocation, economic analysts in West Europe say there is a positive side to the turmoil -- at least for some of the region's most advanced economies.

London-based emerging markets analyst Charles Robertson, of ING Barings, puts it this way:

"There is the beginnings of a decoupling, the beginnings of a view of Central Europe as something separate from Russia and Ukraine. This is proven by the fact that the National Bank of Poland has been able to cut interest rates, and that in the Czech Republic we expect interest rate cuts soon. Normally at a time of volatility you would expect national banks to be keeping interest rates stable or even increasing them. And yet so confident are the Czechs, the Poles, and to a lesser extent the Hungarians that they don't feel the need to do this."

Robertson says this is a sure sign that foreign investors are not going to flood out of those three countries. He says investors are now finally recognizing that the three countries have undergone a huge trade turnaround away from Russia, and that what happens in Germany and the other European Union countries is now much more important to Central Europe.

But beyond the favored few countries lie others which are likely to suffer greater fall-out from the Russian crisis and accompanying world uncertainty. Robertson names Romania and Bulgaria in this connection:

"In Romania you have still got large budget deficits, widening current account deficits, you have got a government which has failed to put in place all reforms that everyone had hoped for, and which it promised would be put in place. In Bulgaria it is taking time for confidence to return. They are getting there, they have a stable currency, the currency board system is working effectively. But at the moment when people are worrying about emerging markets in general, I think foreign investors are more interested in countries which look stable and safe and are backed by good fundamentals."

Another economist, the Industrial Bank of Japan's chief analyst in Europe Eckhard Schulte, agrees with that assessment. He lists the countries which have nothing or little to fear as Poland, Hungary, the Czech Republic, and possibly Slovenia, Croatia and Slovakia. He places the Baltic republics in a slightly less favorable category. Then below the Baltics, in a still less favorable category, he ranks Romania, Bulgaria, Ukraine, Belarus and Central Asian republics. He explains:

"What will be the case is that we will see a further fragmentation in the region. The shaky countries like Ukraine, Belarus and the former Soviet republics like Kazakhstan and Uzbekistan are really suffering. On the other hand investors are turning more and more to Poland, Hungary and the Czech Republic."

Schulte notes that a number of the transition economies are less industrially developed, and less market-oriented, than those -- for instance -- of South East Asia. He says that in a scenario where world economic growth would falter, such economies would quickly suffer. He says continued expansion of the global economy is needed so that these countries can fill the additional demand capacity. Without that, the risk is that the weakest countries would fall out first. Schulte says the lessons to be learned from Russia are that key reforms must be carried through quickly but not precipitously so as to maintain price and exchange rate stability. Maintaining investor confidence is of key importance. Otherwise, if capital is withdrawn, or direct investment is low, then the path to a market economy is made even more difficult than it already is.