Russia-Ukraine tensions continue to affect the global economy (Part 2 of 10)

(Continued from Part 1)

Emerging Europe

You can characterize the past year as anything but stable for the emerging economies of Europe. These include Russia, Ukraine, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Croatia, Latvia, Slovakia, Serbia, and Turkey.

The year has been an eventful one, especially for emerging Europe. From Latvia joining the Eurozone to Bulgaria’s banking woes, Ukraine’s liquidity problem, Russia’s annexation of Crimea, the Russia-China gas deal, and the ongoing tensions on Ukraine’s Eastern border, this year has seen it all.

Investor impact

Many of these events have macro implications.

Russia’s annexation of Crimea from Ukraine led the US, Canada, and Europe to increase existing and apply new sanctions on Russia. This has had a colossal impact on investments flowing into Russia.

Popular exchange-traded funds investing in the Russian capital market—like the Market Vectors Russia ETF (RSX)—and others investing in Europe, like the iShares MSCI EAFE Index Fund (EFA), iShares MSCI EMU Index ETF (EZU), the Vanguard FTSE Europe ETF (VGK), and the SPDR EURO STOXX 50 ETF (FEZ), are also affected by these developments.

The International Monetary Fund (or IMF) has forecasted that the flight of funds from Russia this year will amount to ~$100 billion.

Some of the key issues surrounding emerging Europe are:

• Growth slowdown in much of the region

• Geopolitical risks weighing down future growth outlook for the region

• Need to revive investments to the area to support recovery

Growth in Europe

Overall economic growth is slowing down in central, eastern, and southeastern Europe (or CESEE). This is where most emerging European economies are located. Moreover, the IMF has revised down its 2014 growth forecasts for the region to 1.2%, largely reflecting the effects of Ukraine-Russia tensions.

Let’s take a look at Ukraine’s economic situation in the next part of this series.

Continue to Part 3

Browse this series on Market Realist:

• Part 1 - The global investment impact of ongoing Russia-Ukraine tensions

• Part 3 - A pivotal crisis: Understanding Ukraine’s economic free-fall

• Part 4 - IMF aid would depend on a realistic 2014 budget in Ukraine