The HSE experts on gas tensions with Ukraine and other associated issues
Ukraine lurched nearer towards an economic precipice on Thursday after Russian Prime Minister Vladimir Putin threatened to cut off gas to the country for the second time this year over unpaid bills.
A cut off would likely lead to an economic catastrophe in the country, potentially pulling Eastern Europe, the European Union and Russia into a death spiral of financial defaults.
"It could be similar to January," said Yevgeny Gavrilenkov, the HSE professor and chief economist at Troika Dialog group. "But this time there will be more pressure on Ukraine."
Despite Ukraine's ailing economy, which is expected to shrink 10 per cent this year, Kiev still has the ability to pay but the political turmoil that is engulfing the country might prevent a solution.
"They have the money but don't have a consensus," said Gavrilenkov.
"It is not an economic issue; it is 99 per cent political."
Europe and Russia fear that Ukraine's problems may result in a default, undermining confidence in the region. Past crises have spread throughout emerging economies, most recently the Asian crisis in 1997, which contributed to the default in Russia the following year.
However, there are marked differences between the economic situations of the countries and the central banks of Poland, Czech Republic, Romania, Bulgaria and Slovakia sought to emphasize that with a joint statement on Wednesday.
Hungary has been one of the worst-affected countries due to the high number of loans denominated in foreign currency. The forint fell 1.25 per cent on Wednesday to an all-time low against the euro.
"Much of the lending to the household sector in Hungary was financed in euros and Swiss francs," said Martin Gilman, a professor at the Higher School of Economics and a former IMF representative in Russia. "With the drop in the Hungarian currency that makes much of the Hungarian economy insolvent."
"The creditors of these countries need to know that there is going to be a solution even if it involves restructuring a considerable amount of debt," said Gilman. "Nobody, whether the IMF or EU, is going to bailout a country like Hungary or Latvia."
While the focus has largely been on the relationship between the EU and its newest and potential members, a crash in Eastern Europe is likely to have significant knock-on effects for Russia.
From The Moscow News
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