How will the “war” in the East affect Romania’s economy?

The Bucharest bourse went down Monday morning as international markets are under the influence of the Ukraine crisis, while the financial stocks took the heaviest blow. The Romanian leu depreciated during early hours Monday, in line with currencies in the region, from the same reasons.

Not a single stock went up on Monday morning, and the BET Fi index dropped 4 percent. All the stocks are on the chopping block from the most popular (Fondul Proprietatea, SIF) to the least interesting titles. The BET C index dropped another 3 percent, writes economica.net.

Biggest losses

– SIF Transilvania (SIF3) – 3.7 percent

– Dafora (DAFR) -5.9 percent

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– Mecanica Ceahlau (MECF) -5.8 percent

– SIF Oltenia (SIF5) -5.2 percent

– Cemacom Zalau (CEON) -5.2 percent.

The stock brokers are anticipating a conflict that will last a long while, given Western Europe’s weak reaction to the conflict in Crimea (particularly Germany’s weak reaction). The upcoming war will have a detrimental effect on investments in the area.

Romania and Ukraine comparison

In 1989, Romania and Ukraine’s economies were very similar: they had a similar GDP/per capita average: USD 1,800 in Romania and USD 1,600 in Ukraine. Romania’s acceptance to NATO in 2004 meant new benefits: not just in terms of security but also in terms of investments.

In 2007, in Romania’s first year as a EU member, its GDP per capita rose to USD 7,850 compared to Ukraine’s USD 3,070. In 2012, after the crisis, Romania recorded a USD 9,040 GDP per capita, while Ukraine stagnated at USD 3,870, according to capital.ro.

What does the future hold for Romania?

“The situation there affects the stability of the region and Romania is part of that region so we will feel the effects”, according to Lucian Liviu Albu, economist quoted by zf.ro.

“We will feel the effects of this crisis where it matters the most, direct foreign investments. The investors are going to refrain from making new placements and other companies that were planning on entering Romania will now wait to see what happens. Our trade relations to Ukraine will be affected” the economist went on to add.

Ukraine is the biggest country in the region and at the same time it is the state that Romania shares the longest boarde with (650 kilometers). In the first 10 months of 2013, Ukraine ranked 15th  in the top 20 destinations for local exporters. Romanians sold goods worth EUR 750 million in Ukraine in 2013, up 10 percent compared to the same interval in 2012. On the other hand, we imported goods worth EUR 400 million.

While the sums seem big, the truth is that the Ukrainean market represents only 1.8 percent of total Romanian exports and 0.8 percent of imports. In other words, there is plenty of room to grow if Ukraine becomes a democratic country, and Romanian companies could extend to the north. As it stands, Romania’s investments in Ukraine are almost non-existent.

Another factor to consider is Romania’s trade relations with Russia, where Ukraine has always served as a gateway. Romania imported goods worth USD 3 billion in 2012 from Russia, and exported products worth USD 1.3 billion. Romanian president Traian Basescu went on the record condemning Russia’s tactics in Ukraine as aggressive.

Ukraine is an important transit market for Russian gas reaching continental clients: 17 percent of Europe’s annual gas consumtpion is satisfied through deliveries made from Russia through Ukraine’s pipelines. Natural gas may be the simplest way for Russia to control the Ukrainian government, given that the smaller country is completely dependent on gas imports for its industry. A new price negotiation is in the future for Russia and Ukraine and we have no idea how the conflict will affect those negotiations, but most experts rely on the past to make their predictions: when Ukraine behaves, gas prices go down. When Russia is not happy with Ukraine, prices will go up.

Romania’s gas necessities are covered in proportion of 11 percent through imported Russian gas. While that isn’t enough to cause a really upset, a harsher winter may remind us how important that resource is for us.