How much the economies of Central and Eastern Europe will be affected

How much the economies of Central and Eastern Europe will be affected

The economies of Central and Eastern Europe will be hardest hit by the conflict in Ukraine. The main reasons – proximity, dependence on Russian resources, the influx of refugees from Ukraine and many logistical problems caused by the war.

When Russia invaded Ukraine, most Eastern European states strongly opposed the invasion, fearing that the next ones would be targeted. Those governments have been pushing for tougher sanctions on the Russian economy and have been forced to put their hands in their pockets (even deeper than Western states) in order to send weapons and aid to Ukraine.

Moreover, they received most of the 5.6 million Ukrainian refugees fleeing the war. Doing well is not cheap, and the economic impact for frontline states is beginning to be felt, comments The Economist. The EU has set aside € 17 billion in aid to states involved in receiving, hosting and helping refugees.

Trade was the first victim

Russia was by far an important export market for some economies in the region. Trade with Russia accounts for 6% of Latvia’s gross domestic product (GDP) and Lithuania’s GDP in 2021 and 1.5% of Poland’s and Slovakia’s GDP. In 2021, the Russian market absorbed a tenth of exports outside the European Union from Poland and the Baltic states. Most of these links have probably been compromised forever, but these states understand that it is a price worth paying.

“Poland’s key political interest is that the West does not return to business as usual with Russia,” said Piotr Arak, director of the Polish Economic Institute, a think tank in Warsaw.

But direct trade is only part of the story. Eastern European countries are part of the Western supply chains. The economies of the Czech Republic, Hungary and Slovakia, in particular, have massive exports to Germany. Therefore, a blow to German industry, such as the disruption of Russian gas, will also severely affect the East.

Energy imports remain the most thorny issue. Slovakia and Hungary, which are 96% and 58% dependent on Russian crude oil, respectively, argue that any oil embargo should be applied gradually. Other countries are better prepared. The Baltic states have stopped importing gas from Russia since April and are now relying on liquefied natural gas (LNG) brought from Asia.

Poland has imposed a embargo on Russian coal and, like most countries, has rejected Russia’s request to pay for ruble gas imports. In response, Gazprom, which supplies 40% of Poland’s gas needs, recently stopped deliveries to Poland and Bulgaria. However, the Poles have an alternative plan to import gas through their own LNG terminal and through the new pipelines connected to the Norwegian and Lithuanian networks.

The abandonment of supply in Russia comes with even higher prices, which will be felt more acutely by the poorer Eastern European states. Inflation is already higher in these states than the pre-war level in Ukraine. In April, this economic indicator reached double digits in many of those countries. As a countermeasure, energy bills have been capped by special regulations, which delays the impact.

In Slovakia, for example, prices will not be updated until January 2023. However, the threat of a 100% increase in gas prices for households has not passed, said Michal Horvath, chief economist at the National Bank of Slovakia.

In Poland, inflation reached 12.3% in April, which creates additional problems for the ruling party, which has an election ahead of it next year. During the communist era, the government controlled prices. Most Poles still believe that the state is responsible for maintaining prices, says Piotr Arak.

To further mitigate the impact, the Polish government has reduced VAT on food, fuel, gas and fertilizers and is promoting the next economic aid package as the “anti-Putin shield”.

Resilience of Central and Eastern European economies

In turn, central banks need to act by raising interest rates. But it is a measure that comes with unpleasant consequences. In Poland, where about 90% of loans to individuals or companies have variable interest rates, it makes those customers with mortgages highly exposed. Banks have already tightened lending criteria.

And in addition to the threat of inflation, the rise in property prices and the collapse of business confidence could be the preconditions for a perfect storm, says Adam Czerniak, director of a research firm in Warsaw, Polityka Insight. In addition, rising interest rates and economic decline will translate into higher public debt, especially in countries such as Hungary, where public debt is already very high.

Expenditure on helping refugees will also fuel inflation. On the real estate market, at the end of February, rents increased by more than 30% in Warsaw. Poland’s population has grown by 8% since the beginning of the war, with the arrival of Ukrainian refugees, which also put pressure on public services – health and education, in particular, which were not in the best shape even before this challenge. Fortunately, non-governmental organizations (NGOs) and citizens have managed to make up for the shortcomings of public systems through their efforts.

The economic costs of the war for Eastern Europe will therefore be huge, but it seems that they will not soften the decision of these countries to condemn the war in Russia. The economic impact can be managed. The resilient Polish economy did not go through a three-decade recession until the COVID-19 pandemic, notes Wojciech Kopczuk of Columbia University in New York.

The Baltic states suffered the most from the financial crisis before joining the Eurozone (2014), remarks Morten Hansen of the Stockholm School of Economics in Riga. People absorbed the impact, because it was a necessary step in the project of greater integration with the West. In the case of the current economic crisis, it is clear that they will endure it, no matter how difficult, in order to secure their independence and sovereignty.

The full side of the glass

A forecast made by Statista in March 2022 indicates an increase in Poland’s GDP by about 4.2% this year, adjusted down from 4.8% before the war. In the pessimistic scenario, which takes into account the prolongation of the conflict in 2023, and therefore more Western sanctions against Russia, the Czech Republic’s GDP will increase by almost 1.3% in 2023, much less than the 4% projection previously estimated. of war.

The economic growth of the 11 Central and Eastern European Member States will slow down by an average of 2-3% this year, according to the Scope Ratings forecast in Berlin, which has adjusted its projection from 4.6%, quotes the regional publication SeeNews . Inflation rates in countries such as Bulgaria, Croatia, Romania and Slovenia will rise sharply this year. It is an effect of war, sanctions, the rupture of supply chains, all at once putting pressure on the prices of goods and raw materials. Moreover, the risk of prolonged inflation will put pressure on exports throughout the region, Scope added.

The war and the post-war period also brought economic benefits to Eastern Europe. Bulgaria aims to be a regional energy hub, Poland aims to benefit from Ukraine’s reconstruction efforts. “No Western country has such close intergovernmental ties with Ukraine as Poland,” said Oktawian Zajac of Boston Consulting Group.

“The reaction of the whole of Central and Eastern Europe to the crisis in Ukraine will define the region for decades to come,” said Sona Muzikárová, chief economist at a think tank in Bratislava, Globsec Policy Institute. The fact that he did not give in to the pressure of the painful economic crisis caused by the war demonstrates the unitary and necessary response to the aggression of one state against another state.

This article appeared in issue 140 of . magazine.

PHOTO: Getty