ISA Region Report East Europe

1. ISA Region Report East Europe July 2014 Edition

2. Recent Political Events Recent Economic Events Other Recent Events Table of Contents Current Events: Economic Outlook: • Economic Overview • GDP Growth Forecasts • Keys to Regional Economic Growth • Inflation Forecasts • Regional Exchange Rate Forecasts • Labor Force Overview • Foreign Investment Outlook • Key Regional Economic Issues • Regional Economic Risk Outlook Political Outlook: • Regional Political Overview • Recent Elections or Government Changes • Upcoming Elections • Key Regional Disputes or Conflicts • Potential Conflicts • Regional Military Outlook • Key Regional Political Issues • Regional Political Risk Outlook Demographic & Environmental Outlook: • Population Overview • Population Characteristics • Leading Urban Centers • Key Demographic Issues • Key Environmental Issues • Regional Demographic and Environmental Risk Outlook

3. Current Events and Recent Changes

4. Billionaire businessman Petro Poroshenko won a comprehensive victory in May 2014’s presidential election, winning nearly 55% of the vote, while no other candidate won more than 13%. After his victory, President-elect Poroshenko indicated that he would meet with pro-Russian militants that control many areas of eastern Ukraine in a bid to end the political crisis that persists in Ukraine. Pro-Russian militants continued to carry out attacks across eastern and southern Ukraine, with hundreds of people being killed in these clashes. Meanwhile, it was revealed that militants from Chechnya were fighting alongside pro-Russian militants in eastern Ukraine. Russian President Vladimir Putin travelled to France for the commemorations for the 70th anniversary of D-Day. During this trip, President Putin met new Ukrainian President Petro Poroshenko for the first time since he took office. United States President Barack Obama visited Poland, where he pledged $1 billion to help bolster European defense forces in the wake of the crisis in Ukraine. East Europe: Recent Political Events and Changes Key Political Events and Changes: • Voter turnout for the elections for the European Parliament was very low in most of the Central and East European members states of the European Union. • Lithuania’s President Dalia Grybauskaite defeated former Prime Minister Zigmantas Balcytis in that country’s run-off presidential election by a margin of 58% to 42%. • As a result of the resignation of Slovenia’s Prime Minister Alenka Bratusek, early parliamentary elections in that country were called for July 2014. • The Bulgarian government survived its fifth no-confidence vote in recent months. This was called to protest against the government’s decision to halt work on the Russian-led South Stream gas pipeline. • The leaders of Russia, Kazakhstan and Belarus met to launch the procedures that will lead to the formal creation of the Eurasian Economic Union in 2015. • The European Commission recommended that Albania should become an official candidate for membership in the European Union.

5. Summary - Russia’s decision to seize control of the strategic Crimean Peninsula led to the most dangerous political crisis in Europe since the fall of Communism in Central and East Europe 25 years ago. The immediate concern is whether or not Ukraine can survive as a unified state or if Russia will move to either take control of pro-Russian areas of that country or install a Russian-backed government in Kiev. While a full-scale war between Russia and Ukraine remains a distinct possibility, there still is room for a compromise solution. Key Political Issue: Can a War be Averted in Ukraine? • Flashpoint Crimea • It is no surprise that Russia chose to act first in Crimea. • On one hand, nearly 60% of the population of Crimea is Russian and this majority is opposed to Kiev’s control of the peninsula. • Moreover, the Crimean port city of Sevastopol is home to Russia’s Black Sea fleet and control of this port is the key to maintaining control of the waters of the Black Sea. • Few future developments would scare Russia more than to see Ukraine one day join NATO and see US and Western naval forces based in Sevastopol. • With significant Russian military forces already present in Crimea prior to the recent crisis in Ukraine, it was not difficult for Russian President Vladimir Putin to decide to act first in Crimea, nor was it difficult for Russian forces to seize control of the region. • War or Peace • Looking ahead, it will be President Putin’s decision on what Russia should do in eastern Ukraine that will determine how this crisis plays out. • Should Russia choose to invade eastern Ukraine in order to back pro-Russian elements in cities such as Kharkiv and Donetsk, a full-scale war between Russia and Ukraine is highly likely. • Moreover, Russia will face major economic sanctions from the West, devastating its economy and unnerving global markets. • On the other hand, if Russia calls for referendums on secession in areas of Ukraine that have large ethnic Russian populations in exchange for peace, a full-scale war may be averted, although Ukraine could end up losing much of its territory. • What to Watch For: • The Crimea’s vote in favor of secession from Ukraine just weeks after Russia seized control of that territory places the Ukrainian government in a difficult position.

6. China signed an agreement with Russia to import Russian gas over the next 30 years. It is believed that this deal with worth more than $400 billion. Russia cut off gas supplies to Ukraine. Russia’s state-owned gas giant Gazprom claimed that it cut off gas supplies due to the failure of Ukraine’s government to begin paying upfront for its gas imports from Russia. Russia, Kazakhstan and Belarus signed a deal to create the Eurasian Economic Union in 2015. Bulgaria halted work on the Russian-backed South Stream pipeline following pressure from the United States and some European countries. East Europe: Recent Economic Events and Changes Key Economic Events and Changes: • The European Central Bank (ECB) cut interest rates by 10 basis points to just 0.15% in a bid to boost economic growth in the Eurozone. • Croatia’s economy contracted by 0.4% on an annualized basis in the first quarter of 2014, the 10th consecutive quarterly contraction in Croatia. • Slovenia’s economy grew by 1.5% year-on-year in the first quarter of 2014, in line with forecasts. • The European Commission ruled that Lithuania had met the criteria for adopting the euro as its currency and would do so in January 2015.

7. East Europe: Other Recent Events and Changes • Severe flooding devastated many areas of Serbia and Bosnia, with at least 40 people having died in these floods. • The ongoing crisis in Ukraine led to the space agencies of the United States and Russia cancelling a number of joint projects in recent months. • New census data revealed that Albania’s population had shrunk by 7.7% over the past ten years due to a high rate of emigration. Other Key Events and Changes:

8. Regional Political Outlook

9. Ukraine held a presidential election amid the crisis in 2014 that had seen Russia annex the region of Crimea and pro-Russian militias take control of a number of areas of eastern Ukraine. Voting was unable to take place in many areas of eastern Ukraine due to the resistance of pro-Russian militias. However, Russian President Vladimir Putin did announce that he would recognize the results of this election. Billionaire businessman Petro Poroshenko won a comprehensive victory in May 2014’s presidential election in Ukraine. Mr. Poroshenko won 54.7% of the vote, enough to avoid te need to face a run-off election. Former Prime Minister Yulia Tymoshenko finished a distant second with just 12.8% of the vote. Far-right nationalist political parties had been expected to perform much better, but in the end, these parties won a very small share of the vote. Ukraine: Most Recent ElectionsPresidential Election – May 2014 Summary of the Last Elections: Results: Source: National election authority

10. As expected, the right-wing opposition Fidesz party swept to another comprehensive victory in April 2014’s parliamentary elections in Hungary. Fidesz managed to barely hang on to their two-thirds majority in the parliament, winning 133 of the 199 seats in the parliament. This will enable the Fidesz-led government to retain its ability to change the country’s constitution without the support of the political opposition. Despite the formation of an alliance of leftist political parties led by the Socialists, the political left suffered another crushing defeat in the 2014 parliamentary elections. The leftist alliance won just 38 seats in the parliament. Meanwhile, the far-right Jobbik party finished in third place, winning 21% of the vote and 23 of the 199 seats in the parliament. Hungary: Most Recent ElectionsParliamentary Election – April 2014 Summary of the Last Elections: Results: Source: National election authority

11. The Progressive alliance led by the Serbian Progressive Party (SNS) emerged as the big winner in 2014’s early parliamentary elections. These elections were called amid rising tensions within the previous coalition government that consisted of the SNS and the Socialist Party (SPS). In these elections, the SNS emerged as the dominant power in the country, becoming the first party ever to win an absolute majority of the seats in Serbia’s parliament on its own. The SNS received 48.4% of the popular vote and won 158 of the 250 seats in the parliament, paving the way for a new government led by SNS leader Aleksandar Vucic. Meanwhile, the Socialists maintained their share of the vote from the previous election by winning 13.5% of the vote and 44 seats in the parliament. The nationalist Democratic Party (DSS) finished a distant third with 6.0% of the vote and just 19 seats in the parliament. The only other non-ethnic party to qualify for representation in the parliament was the alliance of parties led by former President Boris Tadic. Serbia: Most Recent ElectionsParliamentary Elections – March 2014 Summary of the Last Elections: Results: Source: National election authority

12. After the fall of two prime ministers in a short period in mid-2013, early parliamentary elections were held in October 2013. This political turmoil had cost many of the country’s traditionally leading parties much of their support and allowed for the rise of new parties. Moreover, voters were dismayed with the recent scandals that had dogged the government in the months before the elections. Due to the fact that seven parties qualified to enter the parliament in the wake of these elections, there were fears that the Czech political system would return to gridlock. The Social Democrats won the largest share of the vote, even after they lost six of their seats in the parliament. The new ANO party led by the businessman Andrej Babis finished a surprising second, winning 47 seats. Another big winner in these elections were the Communists, who finished third with 33 seats in the parliament. Meanwhile, the Civic Democrats suffered severely from the scandals involving former Prime Minister Petr Necas and lost 37 of the seats that they had held in the parliament. Czech Republic: Most Recent ElectionsParliamentary Elections – October 2013 Summary of the Last Elections: Results: Source: National election authority

13. Edi Rama and his Socialist-led coalition won a comprehensive victory in June 2013’s National Assembly elections, bringing an end to the eight-year reign of Prime Minister Sali Berisha and his center-right government. The Socialist-led alliance won 84 of the 140 seats in the parliament. In contrast, the Democratic Party-led alliance slumped to just 56 seats in the parliament. The strong dislike of the two leaders of the opposing blocs dominated the election. Mr. Rama had accused Prime Minister Berisha of cheating him of victory in both the 2009 parliamentary elections and the 2011 mayoral elections in Tirana. The European Union welcomed the defeat of Prime Minister Berisha and suggested that his ouster would speed Albania’s process towards becoming a member of the EU. Albania: Most Recent ElectionsNational Assembly Elections – June 2013 Summary of the Last Elections: Results: Source: National election authority

14. The Citizens for European Development of Bulgaria (GERB), won the largest share of the vote in May 2013’s early parliament elections. These elections took place three months after the GERB-led government resigned following growing opposition to its austerity measures. In the months before the elections, political tensions had risen sharply in Bulgaria, with massive street protests taking place across the country and many people setting themselves on fire to protest against the political and economic situation in Bulgaria. For those hoping that May 2013’s elections would bring an end to Bulgaria’s political standoff, there was a sense of disappointment as the election resulted in a stalemate. The GERB party won 97 of the 240 seats in the parliament and the largest share of the vote (30.5%). Meanwhile, the Socialists finished a close second, with 84 seats in the parliament. Only two other parties, the Turkish Movement for Rights and Freedoms (MRF) and the far-right ATAKA party, won a large enough share of the vote to enter the parliament. Bulgaria: Most Recent ElectionsParliamentary Elections – May 2013 Summary of the Last Elections: Results: Source: National election authority

15. Key Regional Disputes in Central and Southeast Europe • Kosovo • Key Issues – Serbia, along with most of its allies, has not recognized Kosovo’s declaration of independence in 2008. • Outlook – International forces will remain in Kosovo for the foreseeable future, but ethnic-Albanians will not accept anything short of independence. • Bosnia • Key Issues – Bosnia remains divided into two separate entities that hardly work together and the longer this separation continues, the more difficult it will be to ever reunite the country. • Outlook – International peacekeepers will remain in Bosnia for many years to come as the country would likely disintegrate back into chaos if they were to leave in the near future. • Macedonia’s Albanian Minority • Key Issues – Ethnic Albanians comprise nearly one-third of Macedonia’s population and many call for greater autonomy or even outright secession. • Outlook – The likelihood of an all-out conflict between ethnic-Albanian separatists and government forces remains very high and this would destabilize neighboring Albania and Kosovo as well. • Central Europe’s Hungarian Minorities • Key Issues – Nearly three million ethnic Hungarians live in the countries that surround Hungary, a legacy of the First World War. Hungary’s former Status Law was designed to give these ethnic Hungarians the same rights as Hungarian citizens, but this angered its neighbors. • Outlook – Nationalism is still a strong force in Hungary, but it will continue to be subdued by Hungary’s ongoing integration with the West.

16. Key Regional Disputes in the European CIS • Chechnya • Key Issues – The ongoing low-level war in between Russian forces and Chechen separatists has exposed the risks facing Russia in the Caucasus and has highlighted the deterioration of Russian military capabilities. • Outlook – The war will continue, though Russia will step up efforts to destroy the last remnants of the rebel forces. Meanwhile, regional unrest will grow in the areas near Chechnya, threatening Russia’s control. • Russia’s Other Minorities • Key Issues – Vast areas of Russia are populated by the country’s hundreds of ethnic minorities, many of whom are seeking independence or greater autonomy from Moscow. • Outlook – In many ways, Russia remains an empire, controlling vast territories gained over the past four centuries. As the Russian population continues to decline, Moscow’s control over these territories will become ever more precarious. • Ukraine’s East-West Divide • Key Issues – Western Ukraine is heavily oriented towards Central Europe and has many Catholics, whereas Eastern Ukraine has close ties with Russia and is primarily Orthodox. • Outlook – Russia’s intervention in Crimea in 2014 and that region’s secession from Ukraine have raised tensions between Russia and Ukraine to their highest levels since the collapse of the Soviet Union.

17. Regional Military Outlook Balance of Power in the Region • Russia’s military dominance over East Europe has come crashing down over the past 15 years. • Today, NATO’s expansion into Central Europe, the Balkans and the Baltic States has reduced Russian influence in favor of that of the United States and West Europe. • The military forces of the region are adapting to their new roles with NATO. • Meanwhile, the Russian government is seeking to rebuild Russian military strength, but lacks the economic might to do so. Outlook Source: SIPRI • The West, led by the United States, has pushed its military influence to the eastern border of Russia and will play the dominant military role in the region. • Meanwhile, Russia will seek to rebuild its military influence in other areas of the former USSR such as Central Asia and the Caucasus. • Ukraine will prove a contentious issue as the Yushchenko government seeks to move its military alignment towards NATO and away from Russia.

18. Russia’s control over the strategically important Caucasus region is increasingly tenuous. Russia gained control over the region in a power struggle with Persia and the Ottoman Empire in the 18th and 19th centuries. Like the Balkans, the region is a mix of ethnic and religious groups that have a long history of disputes. Following the dissolution of the Soviet Union, three Caucasus states became independent, while the others remained inside the Russian Federation. These states, stretching from the Black Sea to the Caspian Sea, having varying degrees of loyalty to Moscow. The separatist movement in Chechnya broke out into a full-scale war in the 1990s that has threatened to spread to neighboring republics to its east and west in recent years. In 2008, Russia and Georgia fought a war that resulted in a major defeat for Georgia and the potential permanent loss of South Ossetia and Abkhazia. Potential Conflict – The Caucasus Region Peace is hard to find in the Caucasus region, but the situation is likely to become worse over the next few years. As Russia struggles to maintain a grip on the region, it will be interesting to watch the reaction of Iran and Turkey.

19. Potential Flashpoint: Russia-Ukraine Flashpoint Summary Main Actors Global Implications Maps The breakup of the Soviet Union ended more than a millennium of near-continuous unity between Russia and Ukraine. For Russia, no loss during the collapse of the USSR was greater than that of Ukraine, and Russian revanchists see the re-absorption of Ukraine into Russia as a prerequisite for Russia once again becoming a global power. For Russia, the continuing political in-fighting inside Ukraine presents an opportunity to re-establish Russian influence there. Moreover, many areas of Ukraine, such as the Crimean Peninsula or the eastern industrial heartlands of the country, contain a majority of people who wish to be a part of Russia, not Ukraine. • Russia • Russia believes that it needs the Ukraine to be a great power once again. Also, Russia fears that growing Western influence in Ukraine could permanently pull Kiev from Moscow’s orbit. • Ukraine • Ukraine’s deep political divisions will give Russia a pretext to intervene in Ukraine. Western Ukraine, home of Ukrainian nationalism, is hostile to any closer ties with Moscow. • European Union • The EU has hesitated to establish significant ties with Ukraine due to fears of offending Russia, but Central European EU members favor Ukraine. • Central Europe • Central European countries see Ukraine as a buffer state between Russia and themselves and fear the return of Russian military forces to their borders. • Energy Politics • Russia has cut off gas supplies to Ukraine at strategic times in recent years and this has led to gas shortages in many areas of Europe, spurring European efforts to find new energy supplies. • Russia’s Near-Abroad • Russia will continue to move to re-establish a leading role, if not outright hegemony, over the countries within its near-abroad. Ukraine will likely prove the most difficult test for Russia in this endeavor. Potential Outcomes • Ukraine’s current government continues to strengthen ties with Russia in the wake of the 2013 strategic partnership agreement between the two countries. • A nationalist-Ukrainian government orders Russia to leave its naval bases in the Crimean Peninsula, leading to a Russian-backed uprising in the Crimea that is backed by Russian military forces, leading to a Russian invasion of areas of Ukraine with large pro-Russian majorities.

20. Potential Flashpoint: Cyprus Flashpoint Summary Main Actors Global Implications Maps Although Cyprus peacefully declared independence from the United Kingdom, Greece and Turkey in 1960, efforts by Greek Cypriot nationalists wanting to reunite with Greece led to a coup d'état in 1974. Turkey then invaded under the pretext of protecting Turkish Cypriots, establishing the Turkish Republic of Northern Cyprus in the northern third of the island. With the discovery of oil and natural gas reserves in the “Leviathan Field” off the south-eastern coast of Cyprus, tensions have risen between the Republic of Cyprus and Turkey. • Republic of Cyprus • The Republic of Cyprus is seeking to reestablish sovereignty over the whole island • Turkish Republic of Northern Cyprus • The Turkish Republic of Cyprus claims sovereignty over the northern third of the island and is recognized as a state by Turkey. • Turkey • Turkey demands that the island be reunified before any drilling or exploration for oil and gas is conducted by the Republic of Cyprus. • European Union • Cyprus’ EU membership has strained relations between the EU and Turkey. • Cypriot Oil and Natural Gas • Cyprus has the potential to be a new source of oil and gas for energy-hungry Europe. • EU Membership • The issue of Cyprus has been the biggest obstacle facing Turkey’s potential membership in the European Union. • Turkey’s Rising Power • Turkey’s power and influence in the Middle East and Southeastern Europe is clearly on the rise. Potential Outcomes • Turkey’s growing power and influence forces Greek Cypriots to take a closer look at steps to reduce fears of Greek domination of a unified Cyprus, paving the way for a peace deal. • Rising tensions between Turkey and Greece lead to clashes in Cyprus that could lead to a wider war.

21. Political risk levels vary greatly across East Europe. In Central Europe, political risk levels have fallen sharply over the past two decades and now rank among the least risky countries in the world. In the Balkans, political risk levels remain high due to weak governments and the risk of internal unrest in places such as Bosnia and Macedonia. In Russia, political risk levels remain high due to the threat of terrorism and separatists movements in Chechnya and other regions. Russia’s intervention in Ukraine in 2014 raised political risk levels in that region to new highs. East Europe: Political Risk Outlook Current Political Risk Ratings: Political Risk Outlook: Low Risk………………High Risk • ISA Risk Ratings • 0.0 to 1.9 = Low Risk • 2.0 to 3.9 = Low to Moderate Risk • 4.0 to 5.9 = Moderate Risk • 6.0 to 7.9 = Moderate to High Risk • 8.0 to 10 = High Risk

22. Regional Economic Outlook

23. East European Economic Overview • East Europe can effectively be divided into three distinct economic regions. • Central Europe includes the wealthiest countries in the region and this sub-region’s economies have been integrated into the European Union’s economy. • Southeast Europe includes a number of countries where growth has been delayed by political instability, but as stability takes hold, many of these economies will begin to see much more foreign investment. • The former Soviet Union has a number of economies that have remained focused on supplying their domestic markets. • Russia is the dominant economy in this sub-region and the rest of this sub-region has close economic ties with Russia. Source: ISA Economic Forecasts, Avg. Annual GDP Growth 2008-2012 Per Capita GDP at PPP Most of East Europe will realize economic growth over the next decade. Central Europe’s economies will continue to close the wealth gap with West Europe. Southeast European countries such as Serbia and Romania will receive increasing FDI. Russia will continue to develop along the lines of large Latin American economies like Brazil.

24. Central European Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Central European economies were hit hard by the economic crisis in Europe, particularly the region’s manufacturing sector that is dependent upon exports to West Europe. However, growth as returned in 2014 as export demand in Germany and outside of Europe have risen.

25. Southeast European Economic Growth Outlook Source: ISA Economic Forecasts, national statistics After a period of strong economic growth between 2001 and 2008, economic growth rates have fallen dramatically in recent years. With export growth likely to remain weak over the next few years, economic growth in Southeast Europe will not return to pre-crisis levels.

26. Baltic States Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Economic growth in the Baltic States collapsed between 2008 and 2010 as the region’s economies overheated and the global financial crisis hit the region particularly hard. Growth returned in recent years, easily exceeding that of most of the rest of the European Union.

27. European CIS Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Russia’s economic growth rate has trended downwards in recent years and growth in Russia is forecast to remain weak over the course of the forecast period. In Ukraine, the economy has been devastated by the recent unrest in that country.

28. East European Economic Growth Summary Key Factors Export growth remains the key to economic growth in Central and Eastern Europe. The region will continue to see uneven growth between those countries with diversified economies and those reliant upon one or two sectors. Russia and much of the former USSR have failed to diversify their economies as other regions have. Foreign investment is flowing into Central Europe and is beginning to grow in Southeast Europe as well. The recent economic crisis exposed the weaknesses of many of the region’s less diversified economies. Central and Southeast Europe will benefit from increasing integration with the economy of West Europe and will realize relatively stable growth over the forecast period. Elsewhere, growth will remain inconsistent with large fluctuations throughout the remainder of the decade.

29. Central European Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflation rates have fluctuated greatly in recent years, alternating between inflationary peaks in 2008 and 2011 and periods of near deflation in many countries in this region. Looking ahead, inflation rates are forecast to remain subdued across all of Central Europe, although current deflationary pressures will slowly ease.

30. Southeast European Inflation Outlook Source: ISA Economic Forecasts, national statistics All of the countries in Southeast Europe are having success in controlling inflation after a decade of wild fluctuations in the inflation rates of Romania, Serbia and Bulgaria. Inflation rates have fallen in the wake of the economic crisis and are forecast to remain steady over the course of the next few years.

31. Baltic States Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflation rates fell sharply in 2013 and the first half of 2014, with deflationary pressures emerging in Latvia and Lithuania in the second half of that year. Looking ahead, inflation rates are forecast to hold relatively steady in the coming years.

32. European CIS Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflationary pressures in Russia and the European CIS rose sharply in previous years as food prices remained very high. The worst inflationary pressures were found in Belarus, where the collapsing currency led to soaring inflation rates. In recent years, inflation rates in Russia fell before the rubel weakened in 2013 and 2014.

33. East European Key Exchange Rates Against the US Dollar(1 US$ = Local Currency) Source: ISA Economic Forecasts, OANDA

34. Central European Unemployment Source: ISA Economic Forecasts, national statistics Unemployment rates have risen in much of Central Europe as the recent downturn resulted in major job losses in many industries in the region. Unemployment will remain high over the near-term, but will begin to decline later in the forecast period as the size of the region’s working-age population shrinks.

35. Southeast European Unemployment Source: ISA Economic Forecasts, national statistics Unemployment remains high across all of Southeast Europe, with the level of unemployment rising in a number of countries in the region in recent years. As working-age populations in the region shrink and foreign investment increases, these unemployment rates will be significantly reduced.

36. Baltic States Unemployment Source: ISA Economic Forecasts, national statistics Unemployment rates rose dramatically in recent years as all of the region’s economies shed jobs as the severe recession had a major impact on the region’s labor market. In the coming years, unemployment rates will trend downwards as growth returns.

37. European CIS Unemployment Source: ISA Economic Forecasts, national statistics Overstaffed state-owned enterprises continue to keep unemployment rates artificially low in most areas of the former Soviet Union. As these firms are slowly reformed, unemployment across the region will rise, despite a rapid decline in the working-age population.

38. Foreign Investment in Central Europe Source: UNCTAD Foreign investment in Central Europe was high until the onset of the recent economic crisis. Much of this investment went to export-oriented manufacturing operations whose products are destined for the markets of West Europe. In recent years, Poland’s strong domestic market has attracted higher levels of foreign investment.

39. Foreign Investment in Southeast Europe Source: UNCTAD Foreign investment into Southeast Europe lagged behind that of Central Europe, but has closed the gap in recent years. However, the recent economic crisis has led to a sharp decline in foreign investment inflows into Southeast Europe in recent years, a trend that will continue over the near-term.

40. Foreign Investment in the Baltic States Source: UNCTAD Per capita FDI levels remain fairly high in the Baltic States, which are attracting significant foreign investment from Scandinavia in the information technology sector and other high-tech industries. However, the recent economic crisis has deterred many foreign investors from investing in the region over the past few years.

41. Foreign Investment in the European CIS Source: UNCTAD Foreign investment in Russia soared in recent years as high prices for oil, gas and other natural resources has attracted foreign investors. Meanwhile, foreign investment in Ukraine has grown in recent years, but not at the level that had been expected due to the political uncertainty in that country.

42. Regional Foreign Investment Source: UNCTAD Per Capita FDI inflows in Central and East Europe are among the highest in the world as manufacturers continue to invest heavily across the region. While countries in Central Europe are unlikely to realize major increases in foreign investment, some countries in other areas of the region have much room for growth.

43. The Automotive Industry in East Europe • East Europe has one of the world’s fastest growing automotive industries. • The region has become a vital manufacturing center for vehicles and components destined for all of Europe. • Central Europe has been at the forefront of the automotive revolution in the region and is now completely integrated into the West European automotive industry. • Meanwhile, Russia remains isolated, with most production destined for sale on the domestic market. • Eight of the world’s ten largest automakers have assembly operations in the region. • Automotive markets in the region are also showing healthy growth. • The car parc of Central Europe already closely resembles that of West Europe. Central Europe’s automotive industry plays a role similar to that of Mexico in North America by being a low-cost, high-quality center of production. Growth will continue throughout the region, with new foreign investment in the industry continuing.

44. Key Business Issue in East EuropeCorruption • Corruption remains one of the biggest challenges to doing business in East Europe. • Organized crime and corrupt government officials are behind much of the region’s corruption. • In Central Europe, corruption is declining, but remains above the average levels of West Europe. • In Southeast Europe, corruption levels are very high in all countries. • In the former Soviet Union, corruption levels are also high, though regional variations are significant. Source: Transparency International Corruption levels will fall in many areas of East Europe as the rule of law spreads, but the process will be a long one, with some countries remaining too corrupt to attract the levels of foreign investment needed to modernize their economies.

45. East European economic risk levels are low by emerging market standards. Central Europe’s economic risk levels have fallen significantly, but an over-reliance upon the stagnant West European market remains a major risk. Balkan economic risk levels remain higher, but could fall if foreign investment continues to increase and political stability is strengthened. Russian economic risk levels remain higher due to the lack of economic diversification and the government’s growing control of the economy there. East Europe: Economic Risk Outlook Current Economic Risk Ratings: Economic Risk Outlook: Low Risk………………High Risk • ISA Risk Ratings • 0.0 to 1.9 = Low Risk • 2.0 to 3.9 = Low to Moderate Risk • 4.0 to 5.9 = Moderate Risk • 6.0 to 7.9 = Moderate to High Risk • 8.0 to 10 = High Risk

46. Demographic and Environmental Outlook

47. East Europe Population Trends Source: US Census Bureau Source: US Census Bureau The decline in the working-age population will have major repercussions for the region as the ratio of working-age people to non-working-age people declines continuously over the forecast period. As a result, the retirement age in the region will have to be extended, while imported labor will increasingly be in demand.

48. East Europe Population Trends by Country Source: US Census Bureau Source: US Census Bureau No region in the world is experiencing the level of population decline as East Europe. Russia and Ukraine alone will see their collective populations decline by nearly 30 million people by 2050. This will have a major impact upon the economies and social structures in the region.

49. East Europe Ethnic Composition Slavic ethnic groups account for more than 80% of East Europe’s people, but this share is declining. Russians account for nearly 40% of the region’s population, but have one of the lowest birth rates. Ukrainians and Poles are the second and third largest ethnic groups in the region. The fastest growing ethnic group in East Europe are the Albanians. Source: CIA In Russia, non-Slavic ethnic groups are growing, while Slavic groups continue to see their numbers fall. East Europe’s demographic decline includes all leading ethnic groups. In countries where these groups predominate, the overall population is declining rapidly. However, in countries with the few ethnic groups (i.e. Albanians) the are still growing, the balance of the population is shifting in favor of these groups.

50. East Europe Religious Composition Various Eastern Orthodox groups predominate in the former USSR and the eastern Balkans. Roman Catholics form the majority in Central Europe, particularly in Poland. East Europe’s Muslim population is found predominantly in the former Ottoman regions and in Russia. Protestant groups are making significant inroads in many areas in East Europe, not only the Baltics. Source: CIA The Muslim share of the population will continue to grow as the birth rate among Muslims is higher. Religion plays as much of the national identity role in East Europe as anywhere else in the world, as evidenced in Bosnia. This will allow religion to continue to play an important role in many areas of this region for many decades to come, as opposed to the gradual decline in religion’s influence in West Europe.