Could a severe recession in Russia derail central and eastern European economies?
Vladimir Putin has long been a master at exploiting Europe's internal divisions. Yet by continuing to play hardball over Ukraine, Russia’s president has achieved something few Western politicians have attained before him: unite all 28 EU nations around a common foreign policy goal. This rare feat transpired last December, when the union’s most Russophile members, dropping their longstanding reservations, endorsed the continuation of sanctions targeting some of the country’s key men and industries.
The change may be rooted in the belief that the potential costs of such action will amount to less than originally feared. This bears some truth: the EU’s exports to Russia only represented 0.7% of its GDP in 2013. This limits the impact of both self-imposed trade restrictions and Moscow’s retaliatory measures. With oil prices now hovering around $50 a barrel, Russia is also less likely to threaten cutting off European gas deliveries, for fear of losing much needed revenues and pushing its largest customers to adopt other fuels.
The sanctions game has clear losers, however. The burden of the embargo is not distributed equally across the EU: eastern European member states exported an average 2.0% of their GDP to Russia in 2013. Admittedly, most of them have done a remarkable job at reorienting their economies westwards since 1998, when a currency crisis in Russia sent tremors across the region. But with their neighbour’s economy deteriorating fast – the rouble lost 47% of its value in the last quarter and the central bank predicts a 4.5% drop in GDP for 2015 – some are now looking rather vulnerable.
Take Hungary. True, its economic ministry this week boasted a 3.2% economic growth prognosis for 2014. The Hungarian forint lost 6% last year and has dropped a further 1.4& since the beginning of 2015 – an ominous trend considering the country’s high level of foreign exchange debt and damaged banking sector. Shares in domestic companies returned a negative 26.9% in 2014, signalling capital outflows largely attributed to Russia’s economic woes. Strategic investment ties, such as a €6bn nuclear deal sealed last month, could also be in danger.
Slovakia, meanwhile, could soon see its growth engine start petering out. Its exports to Russia amounted to 3.6% of GDP in 2013, mainly supported by its car and agriculture industries. Croatia, whose economy hasn’t grown since 2008, can ill afford to see its food exports further curtailed. Even Poland, the region’s economic powerhouse, is feeling the chill. It sold 56% of its 2013 apple crop to its Eastern neighbour, which now imposes an import ban on the fruit. Its industry is a major supplier to Germany’s Mittelstand, the country’s manufacturing core, where diving sales to Russia are causing serious trouble.
Most CEE nations are in a sounder position than they were before the financial crisis, so Russia's wobbles probably won’t tip them back into recession. As the economic costs of sanctions start to mount, however, the EU may find it increasingly difficult to hold together its first truly complete coalition.