Emerging Europe Weekly, 2023.1.28

By FMN Team

Welcome to the first edition of Emerging Europe Weekly, an extended roundup of key news and insight from Europe’s most dynamic growth markets from Czechia to the Caucuses.

Zelensky cracks down on corruption. Ukraine’s President Volodymyr Zelensky oversaw the departure of 15 officials this week as allegations of graft grew, threatening to sap momentum and support for Ukraine’s war with Russia. The public servants, who had been accused of various types of misappropriation, overpaying and self-dealing, include front-line governors, high level development and defense officials, and members of Zelensky’s own staff.

The president’s actions came as concerns over corruption have grown in Western capitals since the start of the conflict. Billions of dollars have entered the country, which was ranked 122 of 180 countries in 2021 by Transparency International. 

From a Sunday speech following a report on military procurement abuses to the wave of departures during the week, Kyiv’s approach highlights how corruption could sap the country’s morale—and the support of key backers in the EU and beyond.

Romania outpaces struggling neighbors on regional reshoring, stable EU relations. Romania is quietly outpacing the economies of stagnating neighbors as Bucharest benefits from reshoring, EU funding and a strong currency support, Romania Insider reports. The IMF expects Romanian real GDP to grow 3.1% in 2023, surpassing 1.8% and 0.5%  for Hungary and Poland, respectively. 

Romanian industry has been climbing the value chain, moving from mainly garment and textile exports in the 1990s to heavy manufacturing and information technology today. EU membership and the subsequent opening of its borders aided Romania’s development and boosted the country to upper middle-income status. 

Russia’s war on Ukraine has also helped: Companies fleeing Russia are finding Romania an especially attractive destination, prompting FDI to reach its highest level since the country joined the EU in 2007. Despite its history of corruption and political instability, Romania has already drawn over €6 billion in grants and cheap loans from the EU and aims for €10 billion a year

Serbia considers sanctions against Russia. Serbian Foreign Minister Ivica Dačić suggested on Wednesday that Belgrade might impose sanctions against Russia, Euractiv reports. Sanctions against Russia are a prerequisite for EU membership, which Serbia has been seeking for over a decade.

Serbian President Aleksandar Vučić has long opposed the idea of sanctions against Russia. Moscow supplies the vast majority of Serbia’s oil and natural gas, and has been playing an increasingly active role in the country and the rest of the Balkan region. 

There is no historical precedent for Serbian sanctions against Moscow, but after last year’s invasion of Ukraine, Serbian officials appeared more willing to speak out against their traditional ally, although the prospect of sanctions in the near term remains unlikely.

Hungary won’t veto EU funding package to Ukraine. Hungary agreed not to veto an additional $543 million in aid from the European Peace Facility this week, the Associated Press reports. The facility has provided $3.1 billion in aid to Ukraine so far but Hungary had repeatedly delayed or blocked EU agendas around Ukraine over a longstanding rule of law row and disapproval with Russia sanctions.

However, Hungary’s foreign minister said on Monday that Budapest would oppose future proposals to sanction Russia’s nuclear power industry, which provides fuel for Hungary’s only nuclear power plant.

Estonia and Latvia expel Russian ambassadors as uneasy ties rupture. Tensions between Russia and Baltic EU member countries Estonia and Latvia have escalated following Moscow’s decision to expel Estonia’s ambassador, Politico reports. 

The Russian foreign ministry cited “Russophobia” and Estonia’s reduction of Russian embassy staff in the country as the reasons for the move. The diplomatic row comes as EU foreign ministers met in Brussels to discuss Russian aggression towards Ukraine, with the Baltic countries calling for tougher sanctions and approving tanks for Ukraine. 

Russia and Estonia have both expelled ambassadors from each other’s countries in a tit-for-tat move, with Latvia also announcing it would downgrade diplomatic relations with Moscow in a show of solidarity with Estonia.

EU alternative to Belt and Road Initiative gains momentum. The European Union has lined up 70 projects in its first concrete steps to counter Chinese projects through the Global Gateway initiative, Politico’s Barbara Moens reports. The initiative aims to offer developing countries an alternative to China’s Belt and Road Initiative, which seeks to project the country’s power along strategic trade routes through various infrastructure projects. 

The first projects of EU’s Global Gateway include a cable under the Black Sea, an optical fiber cable to connect Mediterranean and Northern African countries, and a hydroelectric project in Cameroon. 

The Global Gateway aims to mobilize up to €300 billion ($326 billion) in public and private funds by 2027 to finance infrastructure projects abroad—still far short of the nearly $2.3 trillion China has invested in nearly 4,000 overseas projects since 2005. The EU initiative’s list includes several projects in China’s and Russia’s backyards, such as an energy transition partnership with Indonesia, a digital connectivity project in the Philippines, a hydrogen project in Kazakhstan, a transport link in Central Asia and a hydro-power plant in Tajikistan.

What we’re reading

China Belt and Road dreams fade in Germany’s industrial heartland. (Nikkei)

S&P downgrades Hungary’s ratings to ‘BBB-/A-3’, outlook ‘stable’. (Reuters)

Croatia in 2023: Euro, Schengen accession feed New Year optimism. (Balkaninsight)

North Macedonia says Bulgaria diplomat recall ‘disproportionate’ as Balkan tensions bubble over. (Radio Free Europe)

Bulgaria to hold 5th election in 2 years after talks fail. (AP)

The EU is leading Ukraine into a sovereign debt crisis. (Politico Opinion)

EU ministers agree on new package of sanctions against Iran. (Reuters)

Less than 9% of Western firms have divested from Russia. (University of St. Gallen)

Russian agents suspected of directing far-right group to mail bombs in Spain. (NYT)

Russia’s war breathes new life into Radio Free Europe. (NYT)

Russia presses attack in Ukraine’s south while Kyiv waits for weapons. (WSJ)

Russia’s budget comes under pressure from sanctions. (FrontierView)

US brands Russia’s Wagner mercenary group ‘transnational criminal organization.’ (Radio Free Europe)

Azerbaijan sues Armenia for wartime environmental damage. (The Guardian)