The Baltics’ Allied Antipathy Allowance

Baltic stock markets in the EU and NATO revisited their post-War and communist Russian legacies as Western sanctions were triggered on Ukraine territory seizure, as Estonia and Latvia have one-quarter that minority population and Lithuania joins the three in total gas import reliance. MSCI components were largely offsetting, with Lithuania’s gain 5 percent although 20 percent of exports go to Russia. Output will contract 1.5 percent after last year’s 3.5 percent growth, and the government has set aside a special trade diversification fund to shift strategy. Estonia’s 8.5 percent fall came amid minimal commercial exposure to Moscow and regulatory reassurance that the Nordic-bank dominated sector was healthy. Latvia’s entanglement was more serious with overlapping transport, tourism and services links that could provoke 10 percent GDP decline. Offshore financial ties to oligarch depositors rose in the aftermath of last year’s Cyprus crash, with non-resident accounts at half the total estimated at almost EUR 9.5 billion according to the IMF. The central bank pledged greater clarity and enforcement with foreign customers in adopting the euro this year, and relations were immediately scrutinized after penalties were imposed by the West against the Rotenbergs as Putin loyalists with a local bank unit. Balkan countries are also in the crosshairs topped by Bulgaria, with total energy import dependence and 25 percent of visitors from the main CIS sources. The exchange is up over 20 percent on the MSCI Frontier through Q1, but the current account may slip into deficit as the fiscal gap hits 2 percent of GDP. Officials intend to refinance a $1 billion sovereign bond as banks continue to grapple with a near 20 percent bad loan ratio. Romania shares a border with Ukraine but the EU takes 75 percent of exports and the IMF has provided a backup EUR 4 billion credit line. Monetary easing brought a record low 3.5 percent benchmark in February as presidential elections are again scheduled in nine months with repeated coalition splinter. Privatization offerings may boost the Budapest exchange off slightly through March on modest foreign capital outflows.

Central Europe is on the front lines with Poland most at risk though business and financial services, although domestic consumption should sustain a 3 percent GDP increase. Public debt has been erased after private pension bond transfer, and a $30 billion IMF flexible facility is in place. Hungary’s ratings outlook was upgraded with balance of payments surpluses as the Orban administration is favored for a second term despite punitive banking policies including special taxes and forced foreign currency mortgage conversions. State giant OTP has 15 percent of assets in Russia and Ukraine, and contingent aid would worsen the 80 percent of GDP debt ratio, but foreign owners have maintained their one-third local bond position throughout the prime minister’s tenure. The Czech Republic and Slovakia are implicated through auto assembly and the OECD and a new president respectively urge fresh models to restyle the partnership.