Knock-on effects of Russian crisis vary

Date: 24/09/1998

By Chris Johnstone

As the Czech Republic relived the crushing of the Prague Spring 30 years ago in August, Russia was again invading.

Not literally, of course, but the images of the tottering Moscow regime and crumbling rouble vied with US President Bill Clinton's sexual misdemeanours to overshadow the somewhat low-key commemoration of the day Czechoslovakia was occupied by its Warsaw Pact neighbours.

Russia's threatened collapse produced a round of emphatic statements from the capitals of central and eastern Europe that it would not affect their moves to hitch themselves to the EU and further develop their market economies.

Some went even further and argued that the Russian crisis should act as a catalyst for the Union to get the applicant countries on board more swiftly.

The EU's only comment in response to that view so far has been to stress that the candidates' prospects of Union membership should not be damaged and that the timetable for enlargement should not be affected.

This synchronised distancing from Moscow's meltdown by diplomats and politicians created the suspicion that governments had something to hide.

Yet this is not so. Most central and eastern European countries (CEECs) have hardly looked in their rear-view mirrors since they cut their slavish links with Moscow from 1990 onwards.

The trade ties between Russia and the Comecom countries were already in decline during the twilight days of Soviet dominion, as Mikhail Gorbachev moved to end the system under which satellite states benefited from cheap oil and gas.

The end of empire, signified in trade terms by the termination in January 1991 of the Mutual Economic Assistance Council, which governed business relations within the bloc, brought in its wake an astonishing change in the flow of goods and services. Almost overnight, trade between the Soviet Union and its satellites halved.

The downward trend in commerce between former master and servants has continued ever since.

Less than 6&percent; of the Czech Republic's imports now come from Russia, which in turn takes 3&percent; of its exports. Although Russians are still to be seen in the spa towns of Bohemia and on the streets of Prague, their country is a bit-player in the Czech economy.

The EU now accounts for 60&percent; of the republic's exports and imports, with most of the balance taken up by its immediate eastern neighbours.

Russia absorbs only 4&percent; of Hungary's exports. Even Bulgaria, an immediate neighbour which was once so close to the former Soviet Union that it even suggested becoming part of it, conducts just 7&percent; of it trade with Russia.

Given these facts, the financial markets' view of east and central Europe's exposure to risk as a result of Russia has not been entirely rational.

The Hungarian and Polish currencies were both buffeted by the crisis as large financial institutions took fright and moved funds out of the region.

The Budapest government was forced to tighten its monetary policy by further restricting the room for the forint to devalue in an attempt to reassure speculators that its economy and currency were still an attractive long-term bet.

Conversely, however, the Czech currency actually strengthened against most major currencies during the crisis as some traders switched into the crown, seeing it as a safe and attractive haven in a storm.

Elsewhere, some of Russia's immediate neighbours - less insulated against the rouble devaluation and downturn in demand - are feeling the pinch.

Latvia, in the waiting room for EU membership, has asked the Union to increase its quota for exports of fish products now that its main market, Moscow, has disappeared. Demand for the Baltic States' dairy products has also dwindled.

However, the biggest threat to the candidate countries is not sectoral and direct, but sweeping and indirect. It is the fear that inward investment from the EU and especially Germany, whose banks and businesses have some of the highest exposures in Russia, might dry up as companies get cold feet about anything east of Berlin.