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CEE: Lost in transition

It shows how far expectations have fallen for CEE that its most exciting prospect is now Romania.

Putin Russia sea-R-600

It would be a hardy global investor who ventured into Russia's murky and treacherous waters

These are depressing times to be covering central and eastern Europe, for bankers and financial journalists alike.

One by one, the largest and most promising markets are shutting down. Hungary is determinedly pursuing an agenda of economic nationalism and crony capitalism. Russia is doubling down on sanctions and isolationism. Ukraine is rapidly dissipating the international goodwill won post-Maidan.

Even Poland, long a beacon of progress and stability in the former Communist sphere, now appears to be following Hungary down the populist path of bank-bashing opportunism and disdain for democratic institutions.

There are still a few bright spots – the Czech Republic, Slovakia and the Baltics – but all are relatively small and offer few opportunities for international investors, given that most major assets were bought up at least a decade ago.

That leaves Romania as the new poster child for the region – a sign of just how far expectations have fallen. When a frontier market with endemic corruption, no infrastructure and growth of less than 3.5% is being touted as CEE’s most exciting prospect, you know you are in trouble. 

Under the circumstances, it is no surprise that dealflow has slowed to a trickle. Valuations are dismal and capital markets all but non-existent, particularly since Poland decided to hobble a burgeoning equity market by eliminating its core pension fund investor base. 

Russia’s domestic equity and debt markets are showing some signs of life but it would be a hardy global investor who ventured into those murky and treacherous waters. What is more, this activity is coming at the expense of western markets, as a steady stream of Russian firms abandon once-coveted London listings.

Privatizations also continue to prove a reliable source of disappointment. Slovenian politicians cancelled the sale of the country’s national telecoms operator at the last minute in August and the Serbian government followed suit in December. Hungary is busily bringing previously privatized assets back under state control and there are fears that the new Polish government will do the same. 

The only area where investors seem to be immune to the prevailing regional malaise is real estate. Across central and even south-eastern Europe, property prices are rising rapidly as domestic and global buyers alike pile into the sector. 

This is perhaps inevitable, given the very high liquidity in local banking systems and the dysfunction or lack of opportunity in other industries – but it is also disturbing. Many countries in CEE have barely recovered from the bursting of real estate bubbles in 2009.