Report Contents

March 10, 2021

Europe

EUROPE: CEE PULSE

BY Andrius Tursa

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( 5 mins)

The resurging pandemic presents the greatest challenge for governments across Central and Eastern Europe (CEE). While Russia is one exception from this negative trend, its slow vaccination campaign and removal of most Covid-19-related restrictions leave the door open for another wave of infections. In Ukraine, the government needs to address five specific issues in order to unlock financial support from the International Monetary Fund (IMF) and the European Union (EU). Finally, Belarus is redirecting its shipments of oil products away from Lithuania and Latvia, which will negatively affect the ports, railway, and logistics companies in the two Baltic states.

Region

Most countries in CEE are coping with a so-called third wave of the Covid-19 pandemic, which is associated with the spread of a more transmissible variant of the virus (SARS-CoV-2, B.1.1.7). Country-wide lockdowns have been announced in the Czech Republic (until 21 March), Estonia (until 11 April), Hungary (until 22 March) and Slovakia (until 19 March). Health indicators also show a worsening situation in Poland, Romania, Serbia and Ukraine, all of which have announced lockdowns that are varying in scope. Bulgaria will likely re-tighten restrictions in the coming days too. Meanwhile, Croatia, Latvia, Lithuania and Slovenia – all of which have overcome major surges in the pandemic in the past few months – are cautiously relaxing their respective restrictions.

Belarus/Baltics

Minsk is delivering on its threats to redirect the rail transit of Belarusian goods away from the Lithuanian and Latvian ports over sanctions imposed by the two Baltic states following a brutal suppression of protests in the wake of the contested outcome of the presidential election last August. On 16 February, Belarus and Russia signed an agreement to start shipments of Belarusian oil products through the Russian port in Ust Luga in the Gulf of Finland and the first deliveries under the agreement were made on 7 March. This is a worrying trend for Vilnius and Riga as in 2020 Belarusian cargo accounted for around 30% of loading volumes in Lithuania’s Klaipeda port and around 20% in Latvia’s Ventspils port. In addition, the Lithuanian and Latvian national railway companies are also set to lose significant shares of revenue, particularly if Belarus also halts the transit of other products, most notably fertilizer. However, the overall economic impact would be limited (less than 0.1% of GDP). For Belarus, the shipment of oil and other goods through a much more distant Russian port is more costly compared to Klaipeda or Ventspils; however, the difference is likely subsidized by Moscow.

Russia

In contrast to most CEE countries, the epidemiological situation in Russia is continuing to improve. The rolling average of new daily infections declined by 6% to around 10.6K during the past week, reaching the lowest levels since late September. The capital Moscow lifted the mandatory self-isolation regime for the elderly and chronically ill on 8 March. Besides the ban on holding mass events, all major restrictions in the Russian capital have been lifted. This leaves the door open for a new wave of infections, particularly as the vaccination campaign is progressing slowly. According to the deputy mayor of the capital Anastasia Rakova, around 700,000 of the capital’s residents (5.5% of all Muscovites) have been vaccinated as of 8 March. Overall, around 5mn Russians (3.4% of the population) have received the first dose of the Covid-19 vaccine and 2.5mn (1.7% of the population) have got both jabs as of 5 March (latest available data). The vaccination progress varies greatly across country, and nine (out of 85) federal subjects have not started vaccinating as of early March.

On the economic front, Russian authorities are reportedly considering a new tax on foreign IT/digital companies for the commercial use of data of Russian citizens. Such a proposal was discussed by the deputy prime minister Dmitry Chernyshenko with various stakeholders and the draft legislation on the topic could be presented by mid-2021. Proceeds from the tax would be used to support the domestic IT industry, which has already benefited from notable tax breaks adopted last July as pandemic-related support.

Ukraine

Prime Minister Denys Shmyhal (independent) revealed five issues in the negotiations with the IMF, which are key for unlocking the next USD 700mn tranche from the fund as well as around USD 2bn funding from the EU. The issues are: 1) removing energy subsidies at the end of March; 2) agreeing with IMF on macroeconomic indicators for 2022-2023; 3) advancing judicial reforms, most notably concerning the High Council of Justice; 4) restoring criminal liability for public officials for not filing assets declaration or doing it improperly; 5) adopting a law on the National Anti-Corruption Bureau of Ukraine (NABU) resolving the outstanding inconsistencies with the constitution. The first two issues depend directly on the government and will likely be resolved without greater difficulties. However, the latter three topics concerning the judicial reform and anti-corruption could prove more challenging as they require adoption of laws in parliament. Truly reform-oriented legislation might struggle to receive support in parliament – particularly as the ruling Servant of the People (SN) group in parliament is divided – while the watered-down bills might not satisfy the IMF. The next plenary session in Vekhovna Rada is scheduled for 16-19 March.

In addition to the IMF-related topics, parliament may adopt a 20% VAT on services provided by foreign companies via the internet. According to the draft legislation, the levy would apply to companies whose annual turnover from the provision of electronic services exceeds UAH 1mn (around EUR 30,300). As a result, this could affect not only large global digital companies operating in Ukraine, but also smaller companies in other industries.

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