TheEconomistMay7th 2022 31
EuropeBearingthebrunt
W
hen russiainvaded Ukraine, many
eastern European countries re
sponded with hawkish resolve, fearing
they could be next. Their governments
pushed for the euto cripple Russia’s econ
omy and dug deep into their own pockets
(some deeper than western counterparts)
to send Ukraine weapons and aid. Coun
tries in the eu’s east have taken in most of
the 5.6m refugees who have fled the war.
But doing the right thing does not come
cheap, and the economic fallout of being
frontline states is starting to show.
Trade was the first victim. Russia has
been a big export market for some econo
mies in the region. Trade with Russia ac
counted for 6% of gdpin Latvia and Lithua
nia in 2021 and 1.5% in Poland and Slovakia.
In 2021 Russia received roughly a tenth of
noneuexports from Poland and the Baltic
states. Most such links are probably sev
ered for good, but they see that as a price
worth paying. “It is Poland’s key political
interest that the West does not return to
doing business with Russia,” said Piotr
Arak, head of the Polish Economic Insti
tute, a government thinktank in Warsaw.
Direct trade is only part of the story.
Eastern eustates have become integrated
into western supply chains. Their econo
mies, especially those of the Czech Repub
lic, Hungary and Slovakia, are heavily ori
ented towards exports to Germany. So a hit
to German industry, such as a cutoff of
Russian gas, would badly hurt its suppliers
in the east.
Energy imports are especially thorny.
Slovakia and Hungary, which got 96% and
58% of their oil from Russia last year, say
any euoil embargo should be phased in
gradually. Other countries are better pre
pared. The Baltic states ended Russian gas
imports in April and now rely on liquefied
natural gas (lng) imported via ships. Po
land has embargoed Russian coal and, like
most countries, rejected Russia’s demand
to pay for gas in roubles. In response Gaz
prom, which supplies 40% of the country’s
gas, halted deliveries to Poland (and Bul
garia) last week. But Poland, too, has an al
ternative gasimport plan through its own
lngterminal and new pipelines to the gasgrids of Norway and Lithuania.
Shunning Russian energy means high
er prices. That will be especially painful in
Europe’s poorer east. Inflation was already
higher in eastern Europe before the war; in
April it reached double digits in many
countries. In some, consumer energy bills
are fixed by regulation, delaying the pain.
In Slovakia, for instance, prices will only be
updated in January. But “the prospect of a
100% increase in household gas prices has
not sunk in yet,” says Michal Horvath, the
central bank’s chief economist.
In Poland inflation hit 12.3% in April, a
headache for the ruling party, which faces
elections next year. Government largesse
is partly at fault for costofliving increas
es, and Mr Arak thinks voters will blame it:
“In communist times the government
would introduce higher prices, often
sparking mass protests. For the majority of
Poles it remains clear that the state is re
sponsible for maintaining price levels.” To
soften the blow, the government has cut
valueadded tax on food, gas, fuel and fer
tiliser. It dubs an upcoming economic
package an “antiPutin shield”.
Central banks will have to act, too, nota
bly by raising interest rates. But that will
have unpleasant consequences. In Poland,
where about 90% of loans to households
and businesses have variable rates, mort
gageholders are heavily exposed. Banks
have already tightened credit standards
considerably. Along with inflation, rocket
ing house prices and sagging business conThe states hit hardest by war in Ukraine favour the toughest response
→Alsointhissection
32 AustriacoolsonRussia
33 SpywareinSpain
33 RussiamenacesMoldova
34 Odessadefiesthewar
36 Charlemagne:Macron2.0Eastern Europe’s economies