Turmoil in Europe
The impact of the Russia-Ukraine conflict on CEE

  • Russia’s invasion of Ukraine could be a watershed moment for Europe’s political and
    economic landscape.
  • Comprehensive sanctions could affect CEE’s trade with Russia and also domestic sectors
    in which Russian investment is important, such as energy and metals. Sanctions are already
    leading to higher commodity prices and lower commodity imports from Russia
  • Russian countersanctions and other measures are likely to impact CEE through the ban on
    food exports (with Turkey hardest hit), RUB payments for Russian gas (with the Balkans the
    most at risk), potential spillovers on risk appetite from Russia’s capital controls.
  • If Russia continues to export oil and gas to Europe, we expect its economy to shrink by
    around 12% this year (peak-to-trough of around 20%), with a muted rebound in 2023 akin to
    stagnation. In EU-CEE1 and in the Western Balkans, GDP is expected to grow by around
    2.3% in 2022 and by 3.6% in 2023. The direct impact of the conflict on GDP growth is
    estimated at 1.5-3pp in 2022 and up to 1.5pp in 2023. Turkey could grow by around 4% this
    year and 3.8% in 2023.
  • We expect CEE to gradually reduce its dependency on Russian hydrocarbons with help from
    NextGenerationEU (NGEU). CEE governments might help households and companies
    weather higher commodity prices by incurring larger budget deficits. However, a new
    common EU fund might be needed to fight rapid price increases.
  • If the EU stops importing oil and gas from Russia, the Russian economy could shrink by
    around 20% this year and fail to rebound in 2023. In such a scenario, EU-CEE and the
    Western Balkans would probably fall into recession.
  • Inflation could reach 30-year highs due to rapidly rising commodity and food prices, and
    supply-chain bottlenecks. We expect inflation to end this year at or above 10% in Central
    Europe, at around 35% in Russia and at close to 60% in Turkey. Inflation targets could be
    missed again in 2023 amid persistent supply shocks.
  • We expect rates to be hiked to 6% in Hungary and Poland, 4.75% in Czechia, 4% in Romania
    and 2% in Serbia. Central banks are likely to intervene in FX markets to avoid depreciation
    above EUR-HUF 380, EUR-PLN 4.80 and EUR-RON 5.00 (with the NBR probably relaxing
    this stance if the conflict in Ukraine ends).
  • Liquidity management and FX interventions could keep interbank interest rates above 5%
    and push forward implied interest rates into double digits in times of stress. Thus, we see
    little scope for positioning against CEE currencies, especially in Romania and Serbia.
  • In our view, the main political consequences of the conflict in Ukraine are the following:
    1. Russia is likely to drift further away from the West, both economically and politically;
    2. Relations between Turkey and NATO are likely to improve; 3. Poland could become more
    engaged in European affairs and regional politics, moving closer to the EU. NGEU money
    could be unblocked for both Poland and Hungary; 4. Hungary could become more isolated
    in the EU and in the Visegrad group; 5. Serbia might be forced to choose between the EU
    and Russia; 6. The EU could increase its involvement in the political crisis affecting Bosnia-
    Herzegovina; 7. Economic shocks might fuel political instability in Slovenia and Romania;
    8. Despite support from EU-CEE, Ukraine is unlikely to become an EU member any time

Source: UniCredit Research - CEE Quarterly, 30 March 2022, Executive summary


1  EU-CEE includes Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia, all CEE countries that are members of the EU.
2 Our current inflation and monetary-policy outlook is laid out in the EEMEA Special Topics – CEE: High time for rate hikes, published on 16 September.