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Eastern Europe Punished in Markets After Opposing Putin

By Ye Xie and Maciej Onoszko
July 31, 2014 2:11 PM EDT 245 Comments
Russian President Vladimir Putin.
Photographer: Andrey Rudakov/Bloomberg
Russian President Vladimir Putin.

Investors are punishing many former Soviet bloc nations for their ties to Russia even as these countries, now European Union members, support sanctions on President Vladimir Putin for his actions in Ukraine.

After the ruble, currencies from eastern Europe accounted for five of the six worst-performing emerging-market exchange rates in July, led by Hungary’s forint and Romania’s leu. Stock indexes in Bulgaria, the Czech Republic and Hungary joined Russia’s among the 10 biggest declining markets in the world this month. Gedeon Richter Nyrt., Hungary’s biggest drugmaker, plunged to a three-month low today after revising down its sales outlook because of the escalating crisis over Ukraine.

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All but one of the 11 former Communist countries now part of the EU condemned Putin’s land grab of the Crimea earlier this year. They walk a tightrope by aligning themselves politically with western Europe while maintaining economic links to Russia. More than half the energy supplies consumed by east European countries comes from Russia, according to Deutsche Bank AG. The 28 EU nations voted unanimously to extend sanctions on Russia this week as a penalty for what they see as Putin’s destabilizing role in Ukraine, even as the trade restrictions also harm them.

“There’s a sense by global investors of why mess around with central and eastern Europe and the geopolitical risks if there are other opportunities out there,” said Ilan Solot, a foreign-exchange strategist at Brown Brothers Harriman in London.

Weaker Currencies

East European nations are lagging behind compared with other developing economies. While MSCI Inc.’s emerging-market stocks index rose to an 18-month high last week, equity markets in Hungary, Poland, the Czech Republic and Romania lost a combined $13 billion in value this month. Asian currencies, including the Indonesian rupiah and the Thai baht, gained against the dollar this month, while Central and Eastern Europe suffered losses. The leu, forint, Polish zloty and Czech koruna all fell by more than 2 percent against the dollar and weakened against the euro.

EU governments agreed this week to bar Russia’s state-owned banks from selling shares or bonds in Europe, restrict the export of equipment to modernize the oil industry and stem export of equipment with military uses. The EU sanctions were followed hours later by U.S. penalties against three Russian banks and a state-owned shipbuilder, adding to restrictions announced two weeks ago.

Poland, the largest of the EU’s eastern members, took the lead on isolating Russia, perceiving its neighbor as a security threat, according to Tsveta Petrova, an analyst with Eurasia Group in New York.

Polish Fears

“Deeply fearful of Russia, Poland has and will continue to be on the side of tougher sanctions against Russia, despite the fact the crisis has already had negative economic consequences for Poland,” Petrova wrote in a report released today.

Polish exports to Russia fell 5.7 percent in dollar terms in the first five months of 2014 compared with the same period last year, according to Poland’s Central Statistic Office.

While Poland has managed to offset that with increased sales to the euro area, “a stronger impact of the sanctions on the euro area’s economy will negatively influence Poland in the medium term,” according to Agnieszka Decewicz, a Warsaw-based economist with Bank Zachodni WBK SA, a unit of Banco Santander SA.

Growth in Poland has lost momentum since accelerating to 3.4 percent in the first quarter, the fastest pace in two years. Its economy probably expanded between 3 percent and 3.3 percent in the second quarter, in part because of the contraction in exports to Russia and Ukraine, the country’s eastern neighbor, Finance Minister Mateusz Szczurek said in a July 28 interview.

Gas Dependence

Poland, the Czech Republic and Hungary import about 70 percent of their natural gas from Russia while Bulgaria and Slovakia are almost 100 percent dependent, according to Ariel Cohen of International Market Analysis Ltd., a Washington-based political risk company focusing on energy and natural resources.

“I won’t be surprised if Russia retaliates” for sanctions, Cohen said.

Hungary’s economy will probably slow to 2.5 percent in 2015 from 2.9 percent this year, according to the central bank’s projections this month. The forint has extended this year’s loss against the dollar to 7.6 percent, the worst performance among 24 emerging-market currencies after the Chilean and Argentine pesos and the ruble.

Sinking Exports

Budapest-based Richter expects total sales to drop as much as 7 percent in euro terms this year, compared with an earlier guidance for a 6 percent decline, Chief Executive Officer Erik Bogsch said in Budapest today. Exports to Russia may fall as much as 10 percent in ruble terms and Ukraine sales may sink 35 percent in dollar terms, according to the company. The stock dropped 2 percent to 3,850 forint in Budapest, the lowest since May 6.

“The region will continue to underperform as long as the Ukraine-Russia conflict is ongoing,” said David Nemeth, an economist at KBC Groep NV’s Hungarian unit.

The former Soviet bloc nations now EU members are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Croatia and Slovenia, which were both part of Yugoslavia. Bulgaria was the only former Soviet satellite that held its tongue when Russia invaded Crimea in February.

Redrawing Borders

The Czech koruna depreciated 3 percent against the dollar in July. The EU sanctions on Russia “should have very limited impact” on the Czech economy, the country’s Economy Ministry said in a statement yesterday.

Russia is Lithuania’s biggest trading partner by an almost two-to-one margin, according to data compiled by Bloomberg.

That didn’t stop Lithuanian President Dalia Grybauskaite from issuing one of the strongest condemnations of Russia after its forces swept into Crimea. The Baltic state plans to join the euro next year. Grybauskaite’s remarks show why the former satellite countries are willing to make economic sacrifices.

Russia is “trying to rewrite the borders after the Second World War,” she said in a March 6 statement. “After Ukraine will be Moldova, and after Moldova will be different countries.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Maciej Onoszko in Warsaw at monoszko@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net Bob Ivry

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