Moscow Journal: Eastern Europe Making Progress -- at Snail's Pace

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KIEV -- At first glance, Eastern Europe and the former Soviet Union look like fool's bets. Economic growth is anemic and political reform seems to have fallen victim to cronyism.

But the region seems to be quietly creeping toward economic health. The postcommunist "transition" economies, as they're politely called here at the

European Bank for Reconstruction and Development's

sixth annual meeting, continued to attract foreign capital last year, even though the

Southeast Asian

crisis dampened investor enthusiasm for emerging markets.

Nicholas Stern

, the EBRD's chief economist, explains that unlike Asia, the region boasts competitive exchange rates and inflation that "is also broadly under control and edging downward" despite exceptions such as Ukraine. In 1997, the combined economies of Eastern Europe and the former Soviet Union actually expanded for the first time since 1989, logging cumulative GDP growth of 1.6%. Setbacks came from

Bulgaria

and

Romania

, where GDP contracted 7.8% and 6.6%, respectively.

Poland

and

Hungary

, the swiftest reformers of the bunch, will likely lure more of the foreign direct and portfolio investment, according to regional analysts and the EBRD. "The region has had very strong warnings from the crisis in Asia, and it should recognize those lessons," Stern says.

Stock markets such as those in

Turkey

and

Greece

, called "convergence" plays due to their desire to integrate more closely with the

European Union

, have risen as much as 50% year to date. Turkey's

Ishkabank

just this month sold a 12% stake in a $655 million IPO, and the state airline is rumored to be next on the block. The Ishkabank offer was four times oversubscribed despite Turkey's roughly 100% annual inflation, says a gleeful

Ron Freeman

, managing director at underwriter

Salomon Smith Barney

.

Russia's importance to Central and Eastern Europe can't be overstated, and a recent report by

Independent Strategy

, the London-based economists, rudely writes off the country's near-term prospects, declaring that "Russia is broke."

If Russia fails, and the ruble is devalued again, the Central and Eastern European currencies and markets will likely go with it. But Russian Finance Minister

Alexander Kudrin

told attendees here that lower world oil prices forced the government to scale back spending by 26%, and fund managers who watch the area say the central bank is prepared to defend the ruble.

Hopefully, the drop in oil revenue will hasten the sale to foreign bidders of state-owned enterprises, including a second stake in the

Svyazinvest

telecommunications holding firm, the

Rosneft

state oil company, bids for which close May 25, and the

Transneft

pipeline network. Kenneth Lopian, head of emerging markets issuers at Bank of New York, says Russia still tops the list in terms of ADR issuance this year and next on Western exchanges.

For Poland, the road should be smoother. The democratic darling of the West, Poland swallowed harsh reforms early, and officials Monday contend the country will balance its budget by 2003 and post consistent 5% annual growth by the year 2001.

What else is for sale in Central and Eastern Europe? In terms of privatizations, Poland leads the pack for 1998, forecasting the sale of $1.8 billion worth of juicy state assets such as the favored

Plock Petrochemical

and

TP SA

, Poland's $15 billion telecommunications company.

Schroders

is advising the state on its handling of the 50% block in the Polish telecom firm, including an IPO of 30%. The Czech Republic could offer up to 48% of

Komercni Bank

in a secondary offering, but "elections in June could change that," says the bank's president, Petr Budinsky. "It really is tied up in politics for now."