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Russia: Financial Problems Not Hurting Eastern Capital Investment

Washington, 28 January 1999 (RFE/RL) -- The global organization of commercial financial firms, the Institute of International Finance (IIF), says that Russia's continuing difficulties and the new problems in Brazil are not expected to hurt private investment flows into the other countries of Central and East Europe this year.

The institute, in a new report on capital flows into emerging market economies, says it estimates private capital going into the region in 1998 amounted to $40.5 billion and that this figure will grow to around $42.2 billion this year. That's still far below the record over $67 billion of private capital that flowed into Central and East Europe in 1997.

The institute includes Bulgaria, the Czech Republic, Slovakia, Hungary, Poland, Romania, Russia and Turkey into what it calls "emerging Europe" for purposes of its report.

The institute's Director of Comparative Country Analysis and Research, Kevin Barnes, says Russia's unilateral default and devaluation last August did have a "sharply negative impact on confidence and flows" around the world:

Barnes says the Russian action had a very, very major impact because it was the first generalized moratorium and effective default. Its effect was so vast because it was the first crisis of the 1990s where IMF support was not able to prevent things from going wrong.

Still, says the institute, the impact in 1999 specifically on the other countries of Central and Eastern Europe is not expected to be very much. While investors and lenders remain "wary" about new commitments in all emerging markets, they are not avoiding the more advanced economies of East and Central Europe.

Private capital flows into the region, other than into Russia, are expected to remain stable with some increases. More importantly, the institute says, the price (interest charge) that countries like the Czech Republic, Poland and Hungary have had to pay for European bonds (called the spread) has increased only marginally.

Russian bonds and other instruments, in imminent risk of default if not already in default, carry spreads that are "extremely high." Interestingly, Turkey has felt the brunt of Russia's problems, having to pay markedly higher spreads or interest rates to borrow on European bond markets.

Direct foreign investment in the countries of East and Central Europe is expected to remain stable as well in 1999, totaling around $10 billion. Foreign direct investment in Poland was sharply higher in 1998 compared to 1997 and the institute says that increased privatization receipts from foreign investors and the prospect of further structural reforms should lead to even greater increases in 1999 and beyond.

The IIF says that increased integration with the European Union (EU) will also push direct investment upwards in the coming years.

The institute says new direct investment in Russia, however, is "likely to be minimal" in 1999 because of the continuing difficulties.

The institute estimates that Russia's economic output this year will fall another 15 percent but output in Poland and Hungary will continue to grow at around five percent and growth in the Czech Republic should resume after an output fall of two percent in 1998.