Emerging Europe Weekly, 2023.2.4

By FMN Team

Russia and Iran integrate banking systems to avoid Western sanctions. Iran and Russia have connected their interbank communication and transfer systems to help boost trade and financial transactions, a senior Iranian official said on Monday, as Tehran and Moscow struggle under Western sanctions, the NYT’s Cora Engelbrecht reports.

The financial blockade on Russia, which some call the most extensive sanction regimen in modern history, has eroded its economy and undermined post-Soviet modernization efforts. Extensive sanctions have similarly cut off Iran from key markets, damaging its economy and its currency, which in recent months has fallen about 30% to a historic low.

*Iran’s central bank. Photo: Wana News Agency, via Reuters*

Linking their financial systems will allow Tehran and Moscow to coordinate sanctions avoidance and take advantage of holes in national sanctions regimes that affect each differently. While Russia’s central bank declined to comment on the deal, as many as 700 Russian banks and 106 non-Russian banks from 13 different countries will be connected to the system.

Corruption rises across emerging Europe. Turkey, Hungary, Bosnia and Herzegovina and Serbia got their worst corruption scores in 10 years in the latest Global Corruption Perceptions Index. The fall in scores across Eastern Europe and the Balkans underlined how high-level corruption has flourished, linked to political instability and weakened institutions.

*A protest in *Montenegro* against a controversial new law that restricts the president’s power to form a government, 20 December 2022. Photo: Rusmin Radic/Anadolu Agency via AFP*

Governments undermining democratic processes, cracking down on civic space and restricting media freedoms is fueling a vicious circle of corruption and authoritarianism, according to Transparency International, which publishes the index. While Hungary, Bulgaria and Romania saw marked deterioration, though, Armenia, Moldova and Ukraine’s scores have substantially improved over the past few years.

Central Europe poised to dodge recession as regional economies show resilience. The economies of Central and Eastern Europe have proven more resilient to shocks from the Russia-Ukraine conflict than initially expected, according to the Vienna Institute for International Economic Studies’ Winter Forecast. While growth will be significantly lower than in 2022 in almost all countries, only Russia, where GDP is expected to shrink by 3%, and Hungary with a decline of 1%, will experience full-year contractions.

The institute’s deputy director Richard Grieveson says most countries of the region have probably already processed most of the economic shock caused by Russia’s war on Ukraine. If the conflict doesn’t escalate further, growth in Eastern Europe should pick up again from the second half of the year as inflation begins to fall from 15-year highs.

*The Vltava River, Prague, Czech Republic. PHOTO: DaLiu*

The relative resilience sets the stage for a recovery in CEE assets later in the year, with bright spots such as Romania’s success in attracting companies’ reshoring operations, Croatia’s euro adoption and Turkish pre-election spending offering opportunities for outperformance.