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Russia Woes Affect Central Europe

August 26, 1998

WARSAW, Poland (AP) _ Lingering investor perceptions about Central Europe’s economic dependence on Russia have contributed to volatile swings in currencies and share prices in the region this week, as Moscow wrestles with its economic crisis.

But few analysts expect long-term problems for the emerging market economies of Central Europe because most have successfully shifted their trade away from Russia.

``We are looking at continued weakness and volatility,″ said Anthony Thomas, an economist at the investment firm Dresdner Kleinwort Benson in London. ``But to turn Central Europe into a full-blown crisis we would have to see not just Russia but China and Latin America go as well.″

The biggest problem for Central Europe has been nervous investors pulling out their money to cover losses from Russia’s plunging ruble and debt rescheduling, analysts say.

Such hedging has little impact in large Western markets, but it causes percentage drops in countries with smaller markets like Poland, Romania, Hungary and the Czech Republic.

More selling is expected in upcoming weeks as further details of Russia’s restructuring plan are released. Under the deal announced Tuesday night, Russian treasury securities maturing before the end of 1999 must be traded in for a variety of new ones that mature later and yield less.

``The fact that the Russia deal is somewhat worse than expected from investors’ point of view may mean they will sell more of their Central European holdings,″ said Wike Groenenberg, currency analyst at Salomon Smith Barney in London.

Some of the investor reaction comes from perceptions that Central European economies remain heavily linked to Russia.

But Poland, Hungary and the Czech Republic _ the three former Soviet satellites that will join NATO next year and are negotiating to join the European Union _ now export less than 10 percent of their goods to Russia.

``Stereotypes persist that the former Soviet economies are still dependent on each other,″ said Cezary Jozefiak of Poland’s Monetary Policy Council.

Analysts have said the fallout of the Russian crisis will cause some volatility.

Since Russia devalued the ruble Aug. 17, Poland’s zloty currency has fallen about 8 percent against the dollar. It closed at 3.779 to the dollar Wednesday. Analysts say it was artificially high before the drop and now would likely stabilize.

``Foreigners have put a lot of money recently into Poland, they’ve made a lot of money, and now they want to sell and cash in what they have,″ said Krzysztof Bledowski, an economist at Wood and Co. in Warsaw.

Hungary’s National Bank intervened Wednesday for the first time since 1995 to prop up the florint currency. It has fallen to record lows against the dollar and German mark because of sell-offs by foreign investors covering losses in Russia.

But Hungarian Economics Minister Attila Chikan said he expected no direct long-term impact from the Russian crisis.

In the Czech Republic, Prague’s PX-50 Index dropped 2.63 percent Wednesday while the koruna currency also struggled against the dollar and mark.

Selling by foreign investors caused the Romanian Stock Exchange to fall 11 percent Wednesday to its lowest level since opening in 1996. Stere Farmache, general manager of the exchange, said the drop continued a trend that began in June and has been exacerbated by nervousness over the Russian crisis.

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