The Russian Bear Hasn't Mauled Central Europe

In fact, the crisis is serving to speed up efforts at reform

From Malaysia to Brazil, markets and currencies are still quaking from the effects of Russia's mid-August financial collapse. But the emerging-market region closest to Russia--Central Europe--seems to be taking it all in stride. Despite a slump in the Warsaw, Prague, and Budapest stock markets, the worst may be over. "There's no need to run out and buy sugar and flour," says Bohdan Wyznikiewicz, a director of the Gdansk Institute for Market Economics in Poland. "We are not very touched by this crisis."

Such confidence reflects just how far Central European economies have come since the Soviet bloc collapsed. Only a decade ago, the economies of Poland, Hungary, and the Czech Republic were tightly linked with their big neighbor to the east. Now, Poland sends almost 33% of its exports to Germany, its biggest trading partner, compared with 8% to Russia. Hungary ships only 4% of its exports to Russia and the Czech Republic, 4%. Just as important, all three of these countries are determined to become members of the European Union eventually, and so are solidly committed to carrying out tough economic reforms, including austerity measures.

In fact, the Russian crisis is spurring Central European countries to move even faster. In Prague, for example, newly elected Social Democrat Prime Minister Milos Zeman is promising to improve transparency in the Czech Republic's markets and "create the right conditions" for investors, "including the certainty that they won't be robbed." And in Poland, where the most pressing need is to reduce bureaucratic barriers to long-term investment, Finance Minister Leszek Balcerowicz has pledged to push through plans to liberalize the zloty by making it convertible for current account transactions. And the government will go ahead with the sale of up to 25% of Telekomunikacja Polska (TPSA) in October or November, despite market jitters.

Of course, even with such measures, Central Europe can't totally shield itself from the fallout of financial problems elsewhere. As a result of the Asian and Russian crises, Poland is likely to grow 5.5% this year, down from the 6.2% growth expected earlier. Hungary's gross domestic product will probably rise around 5%, a hair less than expected. The only exception is the Czech Republic, where the economy is expected to shrink by 0.3%. Still, the Czech finance ministry predicts a bounceback to 2% growth next year.

So far, the greatest impact of the crisis has been on companies with financial market plans. Several Polish and Czech groups that had been planning new share or bond issues for the next few weeks have had to put them off. Czech engineering giant CKD Praha has postponed a $40 million share issue and a $600 million bond issue that had been scheduled for the end of August. Polish pharmaceutical group Prosper has also decided to put off an initial public offering.

MEAT MARKETS. Other companies that had maintained old contacts with Russia, or built new businesses there, are losing money. Poland's pig farmers, heavily dependent on exports to Russia, now worry that they have lost their main market and won't be able to compete at home against subsidized imports from the EU. And Warsaw-based meat processor Animex, which shipped $40 million worth of sausage and ham to Russia last year, is scrambling to find new markets.

Still, these companies represent just a small part of Central Europe's total industrial economy. If they can survive the shock of collapsing sales to the east, they may emerge stronger--just as Central Europe's economies have grown fitter after years of difficult reforms. In that sense, the region offers a lesson to other emerging markets--above all, perhaps, to Russia.