Emerging Europe is facing a fresh geopolitical shock linked to tensions involving Iran, but the impact is unlikely to match the severity of the 2022 crisis triggered by Russia’s invasion of Ukraine, the Vienna Institute for International Economic Studies (wiiw) said.

“What kind of shock are we seeing? It’s not 2022,” Richard Grieveson, deputy director at wiiw, said in a webinar presenting the institute’s latest forecasts on April 30.

Although oil prices have risen sharply, other indicators point to a more limited disruption. “The oil price maybe says it’s a 2022 shock. The rest of the indicators say it’s not,” he said. “Gas prices have gone up a little bit but are very far from 2022 levels. The bond market does not seem to be too worried.”

Grieveson pointed to Romania as “the canary in the coal mine” for bonds, noting that yields “did spike a bit but they came back down and they are very far away from 2022.”

“Overall this is an inflation shock if you look at oil price and one-month data, but this is not the kind of monumental shock we had four years ago,” he added.

The relative resilience reflects several factors. “The Americans clearly don’t want a long war,” Grieveson said, adding that a sustained energy shock would be needed to drive broader inflation. “You need a very persistent energy price shock to drive an increase in overall inflation. If you look at gas prices, that’s not what you see at the moment.”

He also highlighted structural changes since 2022. “We’re much more diversified than we were in 2022 in terms of energy sources – though that creates a new problem because we are dependent on the US now,” he said.

Still, risks are building. “It’s not a broad-based inflation shock yet. However, there’s a risk there could be,” Grieveson said, warning that higher prices could “start to feed into wage demands.”

Food inflation could also follow with a lag. “We haven’t necessarily seen food prices spike, but we’ve seen fertiliser prices increase and that will feed through to domestic food inflation,” he said.

Baseline rests on quick end to war

In its baseline scenario, wiiw assumes a relatively swift resolution to the conflict and has made modest downward revisions to its outlook.

For the 27 countries covered in the report wiiw projects growth of 2.1% this year, rising to 2.5% in 2027 and 2.9% in 2028. However, projections vary widely across the region. 

“Growth is holding up reasonably well but there is big differentiation,” according to Grieveson.

Countries such as Belarus, Russia and most of the eastern EU member states are expected to post relatively weak growth, while parts of Southeast Europe, the Western Balkans and Turkey are performing more strongly. “Poland and Kazakhstan are other two strong performers in the region – that’s been the case for a while,” he added.

Despite disparities, convergence with Western Europe continues. “Pretty much everybody is still converging with Western Europe. We still see this resilience of the region,” he said.

However, wiiw also outlines a more adverse scenario in which geopolitical tensions escalate and the conflict drags on.

“The negative scenario is very plausible,” Grieveson said. If oil prices stay well above $100 per barrel, this would lead to “a bigger upgrade to inflation, downgrade to growth for the euro area, and a much more drastic effect on our region.”

Again, the impact would be uneven. Turkey, the Baltic states, Belarus and Ukraine would be among the hardest hit, along with parts of Central Europe. Grieveson warned of multiple channels of vulnerability. “Hungary is vulnerable on FX and fiscal; Romania on fiscal and inflation; Serbia on inflation,” he said, also flagging North Macedonia and Poland as exposed.

At the country level, Hungary is expected to recover gradually following elections, though underperformance will persist. “Even by 2028 Hungary will still be underperforming the regional average in terms of growth,” he said.

Romania is also struggling. “Romania is really in a difficult spot economically at the moment, one of the worst performers in the region – it’s never previously been an under-performer, but for three years now it has,” he said. “By 2028 we think it will bounce back and be outperforming the region again.”

Poland remains a relative bright spot but faces mounting fiscal concerns. “Poland is outperforming the region almost always, but it does have challenges,” he said. “Inflation is one, but the big story remains fiscal.”

“As Romania starts to climb out of the hole with its fiscal deficit, Poland goes more into it,” he added. “It is increasingly on the radar of rating agencies. We stay very positive on Poland, but there is this issue.”

By contrast, energy exporters such as Kazakhstan and Russia would fare better. “Others that produce a high share of their own energy – Romania, Albania – are downgraded but not much,” he said.

Grieveson also singles Albania out. “Albania was the standout country in terms of managing the inflation shock in 2022-23, helped by very good monetary policy but also a very high share of its own energy production for its own energy needs,” he said.