Russian-Ukrainian crisis: impact still manageable for CEE

Russian sanctions have thus far brought no great havoc to Central Europe. Hence, the fairly strong decline of demand from Russia has not reversed the positive trend of overall export growth in most European countries. The contribution of foreign trade in Q2 of 2014 was only slightly negative and was often due to strength in imports.

Poland most exposed to the current sanctions.

The latest economic statistics understandably do not yet reflect the latest batch of sanctions imposed by both the EU and Russia. Hence, August and September data will likely indicate another deterioration of exports to Russia, reflecting the impact of the new sanctions and, above all, the deteriorating performance of the Russian economy. The Czech Republic’s vulnerability to the sanctions imposed thus far is fairly small – the shares in the sectors concerned (arms, dual‐use items and technologies, oil technologies, meat, dairy products, vegetables and fruit) are limited. The position of Poland is less enviable. It exports a great deal of fruit and vegetables– more than 7% of its overall exports to Russia. Even so, this will not affect the Polish economy to a great extent. Of course, there may be more to come. We foresee new sanctions and, more threatening, another deceleration of Russian growth, even a recession.

Czech Rep. and Hungary vulnerable to new specific sanctions

What may be the consequences of such developments? The Czech economy would be most severely affected if Russian sanctions would expand to cars and a wider range of engineering products. Cars make up more than a quarter of all Czech exports to Russia – over CZK 30 bn in 2013.
Hungary would be most affected by restrictions on pharmaceutical products, which also make up approximately a quarter of all Hungarian exports to Russia.

Poland, unlike the Czech Republic and Hungary, is fortunate in this respect, because its exports to Russia are not overly concentrated in any one sector. However, Poland’s share of exports to Russia in total exports is by far the greatest, much more than in case of Hungary and Czech Republic.
Indeed, almost 9% of all Polish exports goes to Russia. Therefore, a sensitivity analysis indicates a greater vulnerability of Poland to another drop in the Russian growth pace.

Poland susceptible to new deceleration of the Russian growth.

According to our forecasts (structural VAR analysis), a shock from the Russian growth deceleration by 1.5 percentage point y/y would reduce growths of the Czech Republic and Hungary by ‘only’ 0.1‐0.2 %‐points in the forthcoming quarters, while Poland’s growth would shrink by 0.4‐0.5 %‐points (see the graphs below). Notwithstanding Poland’s increased sensitivity, analyses as a whole indicate that all Central European economies should withstand Russia’s moderate recession without great problems. To threaten the Czech recovery, the Russian economy would have to fall much more. A drop in the Russian economy by approximately 8% y/y might return the Czech economy to a shallow recession (around ‐ 0.5% y/y). Such a drop is not imminent, at least not at the moment