ISA Region Report
East Europe
March 2016 Edition
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Table of Contents
Current Events:
Economic Outlook:
• Recent Political Events
• Recent Economic Events
• Other Recent Events
• Economic Overview
• GDP Growth Forecasts
• Keys to Regional Economic Growth
• Inflation Forecasts
• Regional Exchange Rate Forecasts
• Labor Force Overview
• Foreign Investment Outlook
• Key Regional Economic Issues
• Regional Economic Risk Outlook
Political Outlook:
• Regional Political Overview
• Recent Elections or Government Changes
• Upcoming Elections
• Key Regional Disputes or Conflicts
• Potential Conflicts
• Regional Military Outlook
• Key Regional Political Issues
• Regional Political Risk Outlook
Demographic & Environmental Outlook:
• Population Overview
• Population Characteristics
• Leading Urban Centers
• Key Demographic Issues
• Key Environmental Issues
• Regional Demographic and Environmental Risk
Outlook
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Current Events and Recent Changes
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East Europe: Recent Political Events and Changes
Key Political Events and Changes:
• Russia carried out large scale military exercises near to its
border with Ukraine, once again raising tensions between
Russia and Ukraine.
• Ukraine’s Economy and Trade Minister Aivarus
Abromavicius resigned in order protest against the slow pace
of reform in Ukraine.
• Tensions between Russia and Turkey remained very high in
as Russia moved to exclude Turkey from the conflict in Syria.
In addition, Turkey accused a Russian fighter jet of violating
its airspace.
• Russia introduced a proposal for a ceasefire in Syria.
However, the United States accused Russia of delaying the
proposed ceasefire start to give Syrian government forces the
opportunity to make more territorial gains at the expense of
rebel forces.
• Poland’s President Andrzej Duda approved a new
surveillance law that will allow the government and the
police to increase their monitoring of communication in
Poland.
• Serbia’s Prime Minister Aleksandar Vucic announced that
he would call for early parliamentary elections in the coming
months, with polls suggesting that his Serbian Progressive
Party (SNS) was in a strong position to easily win these
early elections.
• NATO invited Montenegro to join that organization, despite
strong opposition from many political leaders in that country,
as well as Russia.
• In Latvia, the Unions of Greens and Farmers agreed to
form a new coalition government with the center-right Unity
party and the right-wing National Alliance.
• After months of negotiations, a new coalition government
led by the right-wing HDZ party was formed in Croatia. The
centrist Most party joined with the HDZ to form the new
government, which is led by the new Canadian-educated
Prime Minister Tihomir Oreskovic, who struggles to speak
Croatian.
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East Europe: Recent Economic Events and Changes
Key Economic Events and Changes:
• Russia’s economy contracted by 3.8% year-on-year in the
fourth quarter of 2015 as lower oil prices and international
sanctions continued to slow Russia’s economy.
• Russia’s economy suffered from the fact that oil prices
continued to trend downwards in early 2016, falling to levels
well below those forecast by the Russian government.
• The International Monetary Fund (IMF) warned that its
$17.5 bailout of Ukraine was in jeopardy unless it did more to
reduce corruption.
• Serbia’s economic growth rate slowed to 1.3% year-onyear in the fourth quarter of 2015.
• Belarus’ economy contracted by 3.9% year-on-year in the
fourth quarter of 2015. Moreover, Belarus’ recession
appeared likely to continue deep into 2016.
• The Lithuanian government announced new plans to
reduce gas imports from Russia and to increase gas
imports from Norway. By the end of this year, Norway is
expected to export more natural gas to Lithuania than
Russia.
• Economic growth rates in Central Europe remained strong
thanks to stronger levels of domestic demand and an
improvement in many key West European export markets.
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East Europe: Other Recent Events and Changes
Other Key Events and Changes:
• Large numbers of migrants continued to enter southeastern
Europe via Turkey, despite the onset of winter. Migrants
making their way north through the Balkans were forced to
deal with severe winter weather along their way.
• A major outbreak of swine flu erupted in Ukraine, resulting
in at least 150 deaths.
• All religious symbols, including Islamic headscarves, were
banned in courts and other legal offices in Bosnia. This led
to protests by thousands of Bosnian Muslim women.
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Regional Political Outlook
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Croatia: Most Recent Elections
Parliamentary Elections – November 2015
Summary of the Last Elections:
Results:
The conservative HDZ-led Patriotic Coalition won the
largest share of the vote in November 2015’s
parliamentary elections.
• This Patriotic Coalition won 33.5% of the popular vote and
59 of the 151 seats in the parliament, a significant increase
from their share in 2011’s elections.
The governing center-left SDP-led Croatia is Growing
coalition finished in a close second place in these
elections.
• The center-left coalition won 32.3% of the popular vote and
57 of the 151 seats in the parliament, a loss of 16 seats from
the previous election.
Given the fact that the country’s two main political
coalitions both failed to win a majority of the seats in the
parliament, the third-place finisher in these elections,
the independent Most (Bridge) coalition emerged as the
kingmakers.
• Most won 13.2% of the popular vote and 19 of the seats in
the parliament.
• After the election, Most attempted to form a grand coalition
including all of the country’s major political parties.
Source: National
election authority
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Poland: Most Recent Elections
Parliamentary Elections – October 2015
Summary of the Last Elections:
Results:
After eight years in power, the center-right Civic
Platform party suffered a crushing defeat in October
2015’s parliamentary elections.
• These elections marked the final step in the conservative
Law and Justice party’s return to power, after that party won
the Polish presidency earlier in the year.
• Meanwhile, the political left in Poland remained all but nonexistent as Polish politics continued to move sharply to the
right.
The Law and Justice party dominated these elections
and became the first party in post-Communist Poland to
win an outright majority in the parliament.
• The Law and Justice party won 37.6% of the popular vote
and 235 out of the 460 seats in the parliament, 101 more
than in 2011’s elections.
• In contrast, the Civil Platform won just 24.1% of the vote
and 138 seats in the parliament, 59 less seats than in 2011.
• The right-wing Kukiz 15 party (founded by former punk rock
musician Pawel Kukiz) finished in third place with 8.8% of the
vote and 42 seats in the parliament.
Source: Polish
election authority
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Estonia: Most Recent Elections
Parliamentary Elections – March 2015
Summary of the Last Elections:
Results:
The Reform Party retained its position as both the
largest party in the parliament and the senior member of
the governing coalition following March 2015’s
parliamentary elections in Estonia.
• Nevertheless, the Reform Party’s share of the vote fell to
27.7% and the number of its seats in the parliament fell from
33 to 30.
• The Center Party, which enjoys much of the support of
Estonia’s large Russian minority, finished in second place
with 24.8% of the votes and 27 seats in the parliament.
• Two of Estonia’s leading parties, the center-left Social
Democrats and the center-right IRL, both suffered major
losses in 2015’s parliamentary elections.
• In contrast, two new parties, the liberal Free Party and the
Conservative People’s Party, both entered the parliament for
the first time.
These elections were dominated by Estonia’s
deteriorating relationship with neighboring Russia in the
wake of Russia’s intervention in the conflict in Ukraine.
• The issue of the economy played a much lesser role than
normal in these elections, due in large part to the fact that
the economy was in the midst of a recovery at the time of the
elections.
Source: National
election authority
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Bosnia and Herzegovina: Most Recent Elections
Presidential and Parliamentary Elections – November 2014
Presidential Election Results:
Parliamentary Election Results:
Source: National
election authority
Ethnic divisions once again dominated Bosnia’s national elections. Nationalist
candidates once again won the races for the three seats in the presidency and
nationalist parties once again dominated the country’s parliamentary elections.
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Ukraine: Most Recent Elections
Parliamentary Elections – October 2014
Summary of the Last Elections:
Results:
Ukraine held early parliamentary elections in October
2014, just two years after the previous parliamentary
elections.
• These elections were held as pro-Russian militants were in
control of a significant portion of eastern Ukraine and after
Russia had annexed Crimea.
October 2014’s parliamentary elections resulted in a
major shift in the country’s political landscape.
• Pro-Western parties such as the Petro Poroshenko Bloc,
the People’s Front and Fatherland won the largest share of
the vote in these election.
• Nationalist parties such as the Self Reliance party and the
Radical Party also performed well in these elections,
although the nationalist Svoboda party failed to reach the 5%
threshold to qualify for representation in the parliament.
• Meanwhile, the Opposition Bloc represented those parties
that were opposed to the Euromaiden protests, including the
former ruling party, the Party of Regions, won the fourthlargest shares of the seats in the parliament.
Source: National
election authority
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Romania: Most Recent Elections
Presidential Elections – November 2014
In a major surprise, the main candidate of the political
opposition, Sibiu mayor Klaus Iohannis won 2014’s
presidential election.
• Mr. Iohannis defeated the heavy favorite, Prime Minister
Victor Ponta, by a margin of 54.4% to 45.6% in the second
round of voting in this presidential election.
• All pre-election polls had shown that Prime Minister Ponta
enjoyed a sizeable lead over Mr. Iohannis in terms of voter
intentions.
• However, Mr. Iohannis won a large majority of the votes
that were cast by Romanians living outside of the country,
and this had not been considered by most pollsters in
Romania.
Prime Minister Ponta lost the election due in large part
to the higher levels of dissatisfaction with his PSD
party.
• Moreover, he was unable to capitalize on the improving
economic situation in Romania at the time of the 2014
presidential election.
Source: National
election authority
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Bulgaria: Most Recent Elections
Parliamentary Elections – October 2014
Summary of the Last Elections:
Results:
Early parliamentary elections were held in Bulgaria in
October 2014 after the previous Socialist-led
government resigned earlier that year.
• This followed a long period of political gridlock that led to
major anti-government street protests in Bulgaria in 2013 and
2014.
The Citizens for European Development of Bulgaria
(GERB), won the largest share of the vote in October
2014’s early parliament elections.
• GERB win 84 out of the 240 seats in the parliament and
32.7% of the popular vote.
• In contrast, the Socialists paid the price for the poor
performance of the previous government and won just 39
seats in the parliament and 15.4% of the vote.
For the first time in the country’s history, eight political
parties qualified for representation in the parliament by
winning at least four percent of the popular vote.
• These newly-qualified parties include the center-right
Reforming Bloc, the nationalist Patriotic Front, the populist
Bulgaria Without Censorship party and the center-left
Alternative for Bulgarian Revival (ABV).
Source: National
election authority
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Latvia: Most Recent Elections
Parliamentary Election – September 2014
Summary of the Last Elections:
Results:
The ethnic Russian Harmony Center party won the
largest share of the vote of the 2014 parliamentary
elections, winning 28.4% of the popular vote and the
most seats in the parliament.
• However, the party’s number of seats in the parliament fell
from 31 to 24 amid rising tensions between Latvia and
Russia.
• These elections took place in the wake of the war in
Ukraine and Latvian-Russian relations were at the forefront
of this election campaign.
Overall, the center-right coalition consisting of the Unity
party, the Union of Greens and Farmers and the National
Alliance won 61 of the 100 seats in the parliament,
enabling the coalition to remain in power.
• Two other newly-created parties, the Latvian Association of
Regions and the For Latvia From the Heart party, both
qualified for representation in the parliament for the first time
by winning more than 6% of the vote.
Source: National
election authority
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Slovenia: Most Recent Elections
Parliamentary Election – July 2014
Summary of the Last Elections:
Results:
The Party of Miro Cerar (SMC) won the early
parliamentary elections in Slovenia that took place in
mid-2014.
• The center-right party was the political platform of the
lawyer Miro Cerar and was created just one month before
these elections.
• The party won 34.5% of the popular vote and 36 of the 90
seats in the parliament.
• Miro Cerar became Slovenia’s most popular politician in a
short time thanks to his opposition to the privatization of the
country’s state-owned telecoms firm and its largest airport.
The Slovenian Democrats Party (SDS) finished a distant
second with 20.7% of the vote and 21 seats in the
parliament.
• The DeSUS party of pensioners finished third with ten seats
in the parliament, while a host of other parties won small
numbers of seats in the parliament.
Source: National
election authority
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Ukraine: Most Recent Elections
Presidential Election – May 2014
Summary of the Last Elections:
Results:
Ukraine held a presidential election amid the crisis in
2014 that had seen Russia annex the region of Crimea
and pro-Russian militias take control of a number of
areas of eastern Ukraine.
• Voting was unable to take place in many areas of eastern
Ukraine due to the resistance of pro-Russian militias.
• However, Russian President Vladimir Putin did announce
that he would recognize the results of this election.
Billionaire businessman Petro Poroshenko won a
comprehensive victory in May 2014’s presidential
election in Ukraine.
• Mr. Poroshenko won 54.7% of the vote, enough to avoid te
need to face a run-off election.
• Former Prime Minister Yulia Tymoshenko finished a distant
second with just 12.8% of the vote.
• Far-right nationalist political parties had been expected to
perform much better, but in the end, these parties won a very
small share of the vote.
Source: National
election authority
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Hungary: Most Recent Elections
Parliamentary Election – April 2014
Summary of the Last Elections:
Results:
As expected, the right-wing opposition Fidesz party
swept to another comprehensive victory in April
2014’s parliamentary elections in Hungary.
• Fidesz managed to barely hang on to their two-thirds
majority in the parliament, winning 133 of the 199 seats in
the parliament.
• This will enable the Fidesz-led government to retain its
ability to change the country’s constitution without the
support of the political opposition.
Despite the formation of an alliance of leftist political
parties led by the Socialists, the political left suffered
another crushing defeat in the 2014 parliamentary
elections.
• The leftist alliance won just 38 seats in the parliament.
• Meanwhile, the far-right Jobbik party finished in third
place, winning 21% of the vote and 23 of the 199 seats in
the parliament.
Source: National
election authority
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Serbia: Most Recent Elections
Parliamentary Elections – March 2014
Summary of the Last Elections:
Results:
The Progressive alliance led by the Serbian Progressive
Party (SNS) emerged as the big winner in 2014’s early
parliamentary elections.
• These elections were called amid rising tensions within the
previous coalition government that consisted of the SNS and
the Socialist Party (SPS).
In these elections, the SNS emerged as the dominant
power in the country, becoming the first party ever to
win an absolute majority of the seats in Serbia’s
parliament on its own.
• The SNS received 48.4% of the popular vote and won 158
of the 250 seats in the parliament, paving the way for a new
government led by SNS leader Aleksandar Vucic.
Meanwhile, the Socialists maintained their share of the
vote from the previous election by winning 13.5% of the
vote and 44 seats in the parliament.
• The nationalist Democratic Party (DSS) finished a distant
third with 6.0% of the vote and just 19 seats in the
parliament.
• The only other non-ethnic party to qualify for representation
in the parliament was the alliance of parties led by former
President Boris Tadic.
Source: National
election authority
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Czech Republic: Most Recent Elections
Parliamentary Elections – October 2013
Summary of the Last Elections:
Results:
After the fall of two prime ministers in a short period in
mid-2013, early parliamentary elections were held in
October 2013.
• This political turmoil had cost many of the country’s
traditionally leading parties much of their support and allowed
for the rise of new parties.
• Moreover, voters were dismayed with the recent scandals
that had dogged the government in the months before the
elections.
Due to the fact that seven parties qualified to enter the
parliament in the wake of these elections, there were
fears that the Czech political system would return to
gridlock.
• The Social Democrats won the largest share of the vote,
even after they lost six of their seats in the parliament.
• The new ANO party led by the businessman Andrej Babis
finished a surprising second, winning 47 seats.
• Another big winner in these elections were the
Communists, who finished third with 33 seats in the
parliament.
• Meanwhile, the Civic Democrats suffered severely from the
scandals involving former Prime Minister Petr Necas and lost
37 of the seats that they had held in the parliament.
Source: National
election authority
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Key Regional Disputes in Central and Southeast Europe
Kosovo
•Key Issues – Serbia, along with most of its allies, has not recognized Kosovo’s declaration of independence in 2008.
•Outlook – International forces will remain in Kosovo for the foreseeable future, but ethnic-Albanians will not accept anything
short of independence.
Bosnia
•Key Issues – Bosnia remains divided into two separate entities that hardly work together and the longer this separation
continues, the more difficult it will be to ever reunite the country.
•Outlook – International peacekeepers will remain in Bosnia for many years to come as the country would likely
disintegrate back into chaos if they were to leave in the near future.
Macedonia’s Albanian Minority
•Key Issues – Ethnic Albanians comprise nearly one-third of Macedonia’s population and many call for greater autonomy or
even outright secession.
•Outlook – The likelihood of an all-out conflict between ethnic-Albanian separatists and government forces remains very
high and this would destabilize neighboring Albania and Kosovo as well.
Central Europe’s Hungarian Minorities
•Key Issues – Nearly three million ethnic Hungarians live in the countries that surround Hungary, a legacy of the First
World War. Hungary’s former Status Law was designed to give these ethnic Hungarians the same rights as Hungarian
citizens, but this angered its neighbors.
•Outlook – Nationalism is still a strong force in Hungary, but it will continue to be subdued by Hungary’s ongoing
integration with the West.
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Key Regional Disputes in the European CIS
Chechnya
•Key Issues – The ongoing low-level war in between Russian forces and Chechen separatists has exposed the risks facing
Russia in the Caucasus and has highlighted the deterioration of Russian military capabilities.
•Outlook – The war will continue, though Russia will step up efforts to destroy the last remnants of the rebel forces.
Meanwhile, regional unrest will grow in the areas near Chechnya, threatening Russia’s control.
Russia’s Other Minorities
•Key Issues – Vast areas of Russia are populated by the country’s hundreds of ethnic minorities, many of whom are
seeking independence or greater autonomy from Moscow.
•Outlook – In many ways, Russia remains an empire, controlling vast territories gained over the past four centuries. As
the Russian population continues to decline, Moscow’s control over these territories will become ever more precarious.
Ukraine’s East-West Divide
•Key Issues – Western Ukraine is heavily oriented towards Central Europe and has many Catholics, whereas Eastern
Ukraine has close ties with Russia and is primarily Orthodox.
•Outlook – Russia’s intervention in Crimea in 2014 and that region’s secession from Ukraine have raised tensions between
Russia and Ukraine to their highest levels since the collapse of the Soviet Union.
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Regional Military Outlook
Balance of Power in the Region
Russia’s military dominance over East Europe has come
crashing down over the past 15 years.
• Today, NATO’s expansion into Central Europe, the Balkans
and the Baltic States has reduced Russian influence in favor of
that of the United States and West Europe.
The military forces of the region are adapting to their new
roles with NATO.
• Meanwhile, the Russian government is seeking to rebuild
Russian military strength, but lacks the economic might to do
so.
Outlook
Source: SIPRI
The West, led by the United States, has pushed its military
influence to the eastern border of Russia and will play the
dominant military role in the region.
• Meanwhile, Russia will seek to rebuild its military influence in
other areas of the former USSR such as Central Asia and the
Caucasus.
• Ukraine will prove a contentious issue as the Yushchenko
government seeks to move its military alignment towards
NATO and away from Russia.
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Potential Conflict – The Caucasus Region
Russia’s control over the strategically important
Caucasus region is increasingly tenuous.
• Russia gained control over the region in a power struggle
with Persia and the Ottoman Empire in the 18th and 19th
centuries.
• Like the Balkans, the region is a mix of ethnic and religious
groups that have a long history of disputes.
Following the dissolution of the Soviet Union, three
Caucasus states became independent, while the others
remained inside the Russian Federation.
• These states, stretching from the Black Sea to the Caspian
Sea, having varying degrees of loyalty to Moscow.
• The separatist movement in Chechnya broke out into a fullscale war in the 1990s that has threatened to spread to
neighboring republics to its east and west in recent years.
• In 2008, Russia and Georgia fought a war that resulted in a
major defeat for Georgia and the potential permanent loss of
South Ossetia and Abkhazia.
Peace is hard to find in the Caucasus region, but the situation is likely to become worse
over the next few years. As Russia struggles to maintain a grip on the region, it will be
interesting to watch the reaction of Iran and Turkey.
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Potential Flashpoint: Russia-Ukraine
Flashpoint Summary
The breakup of the Soviet Union
ended more than a millennium of
near-continuous unity between
Russia and Ukraine. For Russia,
no loss during the collapse of the
USSR was greater than that of
Ukraine, and Russian revanchists
see the re-absorption of Ukraine
into Russia as a prerequisite for
Russia once again becoming a
global power.
For Russia, the continuing political
in-fighting inside Ukraine presents
an opportunity to re-establish
Russian influence there.
Moreover, many areas of Ukraine,
such as the Crimean Peninsula or
the eastern industrial heartlands of
the country, contain a majority of
people who wish to be a part of
Russia, not Ukraine.
Potential Outcomes
Main Actors
Russia
• Russia believes that it needs the
Ukraine to be a great power once
again. Also, Russia fears that
growing Western influence in
Ukraine could permanently pull
Kiev from Moscow’s orbit.
Ukraine
• Ukraine’s deep political divisions
will give Russia a pretext to
intervene in Ukraine. Western
Ukraine, home of Ukrainian
nationalism, is hostile to any
closer ties with Moscow.
European Union
• The EU has hesitated to
establish significant ties with
Ukraine due to fears of offending
Russia, but Central European EU
members favor Ukraine.
Global Implications
Maps
Central Europe
• Central European countries see
Ukraine as a buffer state between
Russia and themselves and fear
the return of Russian military
forces to their borders.
Energy Politics
• Russia has cut off gas supplies
to Ukraine at strategic times in
recent years and this has led to
gas shortages in many areas of
Europe, spurring European efforts
to find new energy supplies.
Russia’s Near-Abroad
• Russia will continue to move to
re-establish a leading role, if not
outright hegemony, over the
countries within its near-abroad.
Ukraine will likely prove the most
difficult test for Russia in this
endeavor.
• Ukraine’s current government continues to strengthen ties with Russia in the wake of the 2013 strategic partnership agreement between the two
countries.
• A nationalist-Ukrainian government orders Russia to leave its naval bases in the Crimean Peninsula, leading to a Russian-backed uprising in the Crimea
that is backed by Russian military forces, leading to a Russian invasion of areas of Ukraine with large pro-Russian majorities.
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Potential Flashpoint: Cyprus
Flashpoint Summary
Although Cyprus peacefully
declared independence from the
United Kingdom, Greece and
Turkey in 1960, efforts by Greek
Cypriot nationalists wanting to
reunite with Greece led to a coup
d'état in 1974.
Turkey then invaded under the
pretext of protecting Turkish
Cypriots, establishing the Turkish
Republic of Northern Cyprus in the
northern third of the island.
With the discovery of oil and
natural gas reserves in the
“Leviathan Field” off the southeastern coast of Cyprus, tensions
have risen between the Republic
of Cyprus and Turkey.
Potential Outcomes
Main Actors
Global Implications
Republic of Cyprus
• The Republic of Cyprus is
seeking to reestablish sovereignty
over the whole island
Cypriot Oil and Natural Gas
• Cyprus has the potential to be a
new source of oil and gas for
energy-hungry Europe.
Turkish Republic of Northern
Cyprus
• The Turkish Republic of Cyprus
claims sovereignty over the
northern third of the island and is
recognized as a state by Turkey.
EU Membership
• The issue of Cyprus has been
the biggest obstacle facing
Turkey’s potential membership in
the European Union.
Turkey
• Turkey demands that the island
be reunified before any drilling or
exploration for oil and gas is
conducted by the Republic of
Cyprus.
Maps
Turkey’s Rising Power
• Turkey’s power and influence in
the Middle East and Southeastern
Europe is clearly on the rise.
European Union
• Cyprus’ EU membership has
strained relations between the EU
and Turkey.
• Turkey’s growing power and influence forces Greek Cypriots to take a closer look at steps to reduce fears of Greek domination of a unified Cyprus,
paving the way for a peace deal.
• Rising tensions between Turkey and Greece lead to clashes in Cyprus that could lead to a wider war.
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East Europe: Political Risk Outlook
Current Political Risk Ratings:
Political Risk Outlook:
• Political risk levels vary greatly across East Europe.
• In Central Europe, political risk levels have fallen sharply over
the past two decades and now rank among the least risky
countries in the world.
• In the Balkans, political risk levels remain high due to weak
governments and the risk of internal unrest in places such as
Bosnia and Macedonia.
Low Risk………………High Risk
• ISA Risk Ratings
–
–
–
–
–
0.0 to 1.9 = Low Risk
2.0 to 3.9 = Low to Moderate Risk
4.0 to 5.9 = Moderate Risk
6.0 to 7.9 = Moderate to High Risk
8.0 to 10 = High Risk
• In Russia, political risk levels remain high due to the threat of
terrorism and separatists movements in Chechnya and other
regions.
• The war in eastern Ukraine and Russia’s intervention in that
war has raised political risk levels in that region to new highs.
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Regional Economic Outlook
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East European Economic Overview
East Europe can effectively be divided into three
distinct economic regions.
• Central Europe includes the wealthiest countries in the
region and this sub-region’s economies have been
integrated into the European Union’s economy.
• Southeast Europe includes a number of countries where
growth has been delayed by political instability, but as
stability takes hold, many of these economies will begin to
see much more foreign investment.
• The former Soviet Union has a number of economies
that have remained focused on supplying their domestic
markets.
–Russia is the dominant economy in this sub-region and
the rest of this sub-region has close economic ties with
Russia.
Source: ISA
Economic Forecasts,
Per Capita GDP at PPP
Most of East Europe will realize economic growth over the next decade. Central
Europe’s economies will continue to close the wealth gap with West Europe. Southeast
European countries such as Serbia and Romania will receive increasing FDI. Russia
will continue to develop along the lines of large Latin American economies like Brazil.
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Central European Economic Growth Outlook
Source: ISA
Economic Forecasts,
national statistics
Central European economies were hit hard by the economic crisis in Europe,
particularly the region’s manufacturing sector that is dependent upon exports to West
Europe. However, growth as returned in 2014 and 2015 as export demand in Germany
and outside of Europe have risen.
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Southeast European Economic Growth Outlook
Source: ISA
Economic Forecasts,
national statistics
After a period of strong economic growth between 2001 and 2008, economic growth
rates have fallen dramatically in recent years. With export growth likely to remain weak
over the next few years, economic growth in Southeast Europe will not return to precrisis levels.
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Baltic States Economic Growth Outlook
Source: ISA
Economic Forecasts,
national statistics
Economic growth in the Baltic States collapsed between 2008 and 2010 as the region’s
economies overheated and the global financial crisis hit the region particularly hard.
Growth returned in recent years, easily exceeding that of most of the rest of the
European Union.
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European CIS Economic Growth Outlook
Source: ISA
Economic Forecasts,
national statistics
Russia’s economic growth rate has trended downwards in recent years and growth in
Russia is forecast to remain weak over the course of the forecast period. In Ukraine,
the economy has been devastated by the recent conflict in that country.
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East European Economic Growth Summary
Key Factors
Export growth remains the key to
economic growth in Central and Eastern
Europe.
Russia and much of the former USSR have
failed to diversify their economies as other
regions have.
Foreign investment is flowing into Central
Europe and is beginning to grow in
Southeast Europe as well.
The region will continue to
see uneven growth
between those countries
with diversified
economies and those
reliant upon one or two
sectors.
The recent economic crisis exposed the
weaknesses of many of the region’s less
diversified economies.
Central and Southeast Europe will benefit from increasing integration with the economy
of West Europe and will realize relatively stable growth over the forecast period.
Elsewhere, growth will remain inconsistent with large fluctuations throughout the
remainder of the decade.
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Central European Inflation Outlook
Source: ISA
Economic Forecasts,
national statistics
Inflation rates have fluctuated greatly in recent years, alternating between inflationary
peaks in 2008 and 2011 and periods of near deflation in many countries in this region.
Looking ahead, inflation rates are forecast to remain very low across all of Central
Europe, although current deflationary pressures will slowly ease.
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Southeast European Inflation Outlook
Source: ISA
Economic Forecasts,
national statistics
All of the countries in Southeast Europe are having success in controlling inflation after
a decade of wild fluctuations in the inflation rates of Romania, Serbia and Bulgaria. In
2014 and 2015, deflationary pressures emerged in a number of Southeast European
countries, including Bulgaria and Croatia.
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Baltic States Inflation Outlook
Source: ISA
Economic Forecasts,
national statistics
Inflation rates fell sharply in recent years, with deflationary pressures emerging in all
three countries in this region. Looking ahead, inflation rates are forecast to rise
slightly in the coming years.
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European CIS Inflation Outlook
Source: ISA
Economic Forecasts,
national statistics
Inflationary pressures in Russia and the European CIS rose sharply in previous years
as food prices remained very high. The worst inflationary pressures were found in
Belarus, where the collapsing currency led to soaring inflation rates. The recent
conflict in Ukraine let to higher inflation rates in that country, as well as in Russia.
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East European Key Exchange Rates Against the US Dollar
(1 US$ = Local Currency)
Source: ISA
Economic Forecasts,
OANDA
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Central European Unemployment
Source: ISA
Economic Forecasts,
national statistics
Unemployment rates rose in much of Central Europe as the recent downturn resulted in
major job losses in many industries in the region. Unemployment will remain high over
the near-term, but it has begun to decline and will continue to do so later in the forecast
period as the size of the region’s working-age population shrinks.
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Southeast European Unemployment
Source: ISA
Economic Forecasts,
national statistics
Unemployment remains high across all of Southeast Europe, with the level of
unemployment rising in a number of countries in the region in recent years. As
working-age populations in the region shrink and foreign investment increases, these
unemployment rates will be significantly reduced.
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Baltic States Unemployment
Source: ISA
Economic Forecasts,
national statistics
Unemployment rates rose dramatically in the wake of the recent economic as all of the
region’s economies shed jobs as the severe recession had a major impact on the
region’s labor market. In recent years, unemployment rates have fallen in all three
countries in the region, but not to pre-crisis levels.
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European CIS Unemployment
Source: ISA
Economic Forecasts,
national statistics
Overstaffed state-owned enterprises continue to keep unemployment rates artificially
low in most areas of the former Soviet Union. As these firms are slowly reformed,
unemployment across the region will rise, despite a rapid decline in the working-age
population.
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Foreign Investment in Central Europe
Source: UNCTAD
In 2013, foreign investment inflows in Central Europe fell to their lowest level in more
than two decades. It rebounded in 2014, thanks to a surge in investment in Poland, the
region’s healthiest economy.
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Foreign Investment in Southeast Europe
Source: UNCTAD
The economic crisis of recent years led to a sharp decline in foreign investment inflows
into Southeast Europe as the region lost its export competitiveness. Moreover, the
weakness of key export markets in West Europe has made this region a less attractive
investment destination.
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Foreign Investment in the Baltic States
Source: UNCTAD
Per capita FDI levels remain fairly high in the Baltic States, which are attracting
significant foreign investment from Scandinavia in the information technology sector
and other high-tech industries. However, the recent economic struggles have deterred
many foreign investors from investing in the region over the past few years.
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Foreign Investment in the European CIS
Source: UNCTAD
Foreign investment in Russia had been concentrated in the country’s natural resource
sectors. Economic sanctions and the war in Ukraine have led to a major decline in
foreign investment in Russia and Ukraine in recent years, adding to the economic woes
facing these countries.
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Regional Foreign Investment
Source: UNCTAD
Per Capita FDI inflows in Central and East Europe are among the highest in the world
as manufacturers continue to invest heavily across the region. While countries in
Central Europe are unlikely to realize major increases in foreign investment, some
countries in other areas of the region have much room for growth.
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The Automotive Industry in East Europe
East Europe has one of the world’s fastest
growing automotive industries.
• The region has become a vital manufacturing center
for vehicles and components destined for all of
Europe.
• Central Europe has been at the forefront of the
automotive revolution in the region and is now
completely integrated into the West European
automotive industry.
• Meanwhile, Russia remains isolated, with most
production destined for sale on the domestic market.
• Eight of the world’s ten largest automakers have
assembly operations in the region.
Automotive markets in the region are also
showing healthy growth.
• The car parc of Central Europe already closely
resembles that of West Europe.
Central Europe’s automotive industry plays a role similar to that of Mexico in North
America by being a low-cost, high-quality center of production. Growth will continue
throughout the region, with new foreign investment in the industry continuing.
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East Europe: Economic Risk Outlook
Current Economic Risk Ratings:
Economic Risk Outlook:
• East European economic risk levels are low by emerging
market standards.
• Central Europe’s economic risk levels have fallen
significantly, but an over-reliance upon the stagnant West
European market remains a major risk.
• Balkan economic risk levels remain higher, but could fall if
foreign investment continues to increase and political
stability is strengthened.
Low Risk………………High Risk
• ISA Risk Ratings
–
–
–
–
–
0.0 to 1.9 = Low Risk
2.0 to 3.9 = Low to Moderate Risk
4.0 to 5.9 = Moderate Risk
6.0 to 7.9 = Moderate to High Risk
8.0 to 10 = High Risk
• Russian economic risk levels remain higher due to the
lack of economic diversification and the government’s
growing control of the economy there.
• The trade war between Russia and the West has served
to raise economic risk levels in both Russia and in many
other countries in the region.
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Demographic and Environmental Outlook
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East Europe Population Trends
Working-Age Population
Total Population
250,000,000
350,000,000
300,000,000
200,000,000
250,000,000
150,000,000
200,000,000
100,000,000
150,000,000
100,000,000
50,000,000
50,000,000
Source: US Census
Bureau
Source: US Census
Bureau
0
2000
0
1950
1970
1990
2010
2030
2010
2020
2030
2040
2050
2050
Working-Age
Non-Working-Age
The decline in the working-age population will have major repercussions for the region
as the ratio of working-age people to non-working-age people declines continuously
over the forecast period. As a result, the retirement age in the region will have to be
extended, while imported labor will increasingly be in demand.
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East Europe Population Trends by Country
Total Population
Contribution to Regional Population
Growth (2000-2050)
350,000,000
Russia
300,000,000
Ukraine
250,000,000
Poland
200,000,000
Romania
150,000,000
Bulgaria
Hungary
100,000,000
Czech Rep.
50,000,000
Source: US Census
Bureau
Belarus
0
1950
1970
1990
2010
2030
2050
Serbia-Mont.
Others
Russia
Romania
Czech Republic
Others
Ukraine
Serbia-Montenegro
Hungary
Poland
Belarus
Bulgaria
-50%
Source: US Census
Bureau
-40%
-30%
-20%
-10%
No region in the world is experiencing the level of population decline as East Europe.
Russia and Ukraine alone will see their collective populations decline by nearly 30
million people by 2050. This will have a major impact upon the economies and social
structures in the region.
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0%
East Europe Ethnic Composition
Slavic ethnic groups account for
more than 80% of East Europe’s
people, but this share is declining.
Russians account for nearly 40% of
the region’s population, but have
one of the lowest birth rates.
Ukrainians and Poles are the second
and third largest ethnic groups in
the region.
Largest Ethnic Groups
Russian
Ukrainian
Polish
Romanian
Hungarian
Belarussian
The fastest growing ethnic group in
East Europe are the Albanians.
Czech
Source: CIA
Serb
In Russia, non-Slavic ethnic groups
are growing, while Slavic groups
continue to see their numbers fall.
0
50,000,000
100,000,000
150,000,000
East Europe’s demographic decline includes all leading ethnic groups. In countries
where these groups predominate, the overall population is declining rapidly. However,
in countries with the few ethnic groups (i.e. Albanians) the are still growing, the balance
of the population is shifting in favor of these groups.
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East Europe Religious Composition
Various Eastern Orthodox groups
predominate in the former USSR
and the eastern Balkans.
Roman Catholics form the majority
in Central Europe, particularly in
Poland.
East Europe’s Muslim population is
found predominantly in the former
Ottoman regions and in Russia.
Largest Religious Groups
Orthodox
Catholic
Muslim
Protestant groups are making
significant inroads in many areas in
East Europe, not only the Baltics.
The Muslim share of the population
will continue to grow as the birth
rate among Muslims is higher.
Protestant
Source: CIA
0
50,000,000
100,000,000
150,000,000 200,000,000
Religion plays as much of the national identity role in East Europe as anywhere else in
the world, as evidenced in Bosnia. This will allow religion to continue to play an
important role in many areas of this region for many decades to come, as opposed to
the gradual decline in religion’s influence in West Europe.
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East Europe Language Composition
Russian is the largest language in
the region and the leading second
language in many CIS countries.
Each of the eight new Central
European EU members is bringing a
new language to that body.
English is easily the most spoken
extra-regional language in East
Europe.
Largest First Languages
Russian
Polish
Ukrainian
Romanian
Serbo-Croat
Hungarian
German is also widely spoken in
many areas of Central Europe.
Belarussian
Source: CIA
Czech
Albanian will be the fastest growing
language in the region, in line with
Albanian population growth.
0
50,000,000
100,000,000
150,000,000
Russian dominated East Europe during the communist era, but has receded
significantly in most of the region. English, meanwhile, is spreading rapidly as the
leading second language in the region, as no other local language is widely spoken
throughout the region.
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Largest Cities in East Europe
Source: World
Gazetteer
Moscow is the only city in East Europe to rank among the world’s largest fifty cities and
is easily the largest city in the region. Outside of the former Soviet Union, the relative
smaller size of the region’s larger cities highlights the fractious nature of the region
throughout its history.
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Key Demographic Issue in East Europe
The Lack of Young People
Total Population
Ages 0 to 14
70,000,000
Source: US Census
Bureau
East Europe has the lowest birth rate of any major
region in the world.
• Nearly all countries in the region have birth rates too low
to replenish the population.
• Furthermore, emigration continues to reduce the number
of younger East Europeans.
60,000,000
The lack of young people in East Europe is having a
variety of consequences.
• Educational facilities will continue to shrink.
• The demographic footprint of the region is changing
rapidly, with elderly people making up a larger share of
the population.
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
2000
2010
2020
2030
2040
2050
East Europe’s dramatically low birth rate will bring major changes and challenges to an
already fragile region. Moreover, the likelihood of a major increase in the East
European birth rate is highly unlikely over the next few decades.
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Top Environmental Issues in East Europe
Industrial Pollution
Water Pollution
The Legacy of
Chernobyl
East Europe suffers from some of the world’s worst examples of industrial pollution.
• Central European countries have seen a major improvement in this area as these
countries strive to meet EU environmental regulations.
• The countries of the former Soviet Union and the Balkans continue to suffer from
low environmental standards and hazardous practices.
A large number of the waterways in East Europe suffer from pollution from industrial
run-off, chemicals and other pollutants.
• The cyanide spill in the Tisza and Danube Rivers was an example of the risks facing
most rivers and streams in East Europe.
• Many waterways in the region are devoid of life.
A large segment of southern Belarus and an area of northern Ukraine remain
uninhabitable due to high radiation levels.
• There are fears the further damage can be done if the sarcophagus covering the
power plant collapses, as is possible.
• Numerous other Chernobyl-style reactors are still in use in the region.
East Europe has suffered tremendous environmental damage from the rapid
industrialization of the communist era. Worse still, many areas of East Europe are
continuing these same processes today, leading to further environmental degradation
where effective environmental legislation is not in place.
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Key Geographic Issue in East Europe
The Danube River
The Danube River is one of Europe’s most
important rivers.
• The Danube is a main waterway for eight countries
and flows through one of the region’s most important
economic regions.
The blockage of the Danube following NATO’s
attack on Yugoslavia in 1999 highlighted the river’s
vulnerability to the region’s political instability.
• The river remains a vital trade link between Central
and South-eastern Europe.
• It is also the leading outlet to the sea for products from
Hungary, Serbia and Romania.
An improving political climate in Southeast Europe will allow the Danube to grow in
importance as a trade route for the region, following the decades of separation caused
by the Cold War and the wars in the former Yugoslavia.
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East Europe: Demographic and Environmental Risk Outlook
Current Risk Ratings:
Demographic Risk Outlook:
• East Europe’s declining population is increasing
demographic risk levels to dangerous levels.
Environmental Risk Outlook:
Low Risk………………High Risk
• ISA Risk Ratings
–
–
–
–
–
• Few areas of the world have experienced more
environmental degradation than East Europe.
0.0 to 1.9 = Low Risk
2.0 to 3.9 = Low to Moderate Risk
4.0 to 5.9 = Moderate Risk
6.0 to 7.9 = Moderate to High Risk
8.0 to 10 = High Risk
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Summary
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Future Outlook Summary
Political Outlook
• The divisions in Ukraine that led to Russia’s intervention in the pro-Russian insurgency in eastern Ukraine
(and its annexation of Crimea) will remain in place and the threat of another full-scale war will remain in place.
• Russia’s economic woes and increasing political isolation will prove to the greatest challenged ever faced by
President Vladimir Putin.
• The European Union’s eastward expansion will slow as EU member states grow weary of that
organization’s rapid expansion.
Economic Outlook
• Economic growth is jeopardized by the continued weakness of key export markets in West Europe.
• Russia’s economy will remain mired in a deep slump as economic sanctions and lower oil prices continue to
severely damage the region’s largest economy.
• Southeast Europe will struggle with the poor financial health of many governments in that region, keeping
growth from achieving its potential.
Demographic and Environmental Outlook
• Population decline will continue in nearly all areas of East Europe. The biggest declines will occur in Russia,
Ukraine and Bulgaria. The economic impact will be substantial, with economic growth being held back in the
long-run.
• The risk of Chernobyl-like environmental disasters is very high in many areas of the region as poor
environmental protection standards remain in place in many areas of the region.
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ISA Region Report
East Europe
March 2016 Edition
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