The war also batters rest of region

Europe's poorest states see trade, investments dive after Kosovo

By pounding away at Yugoslav President Slobodan Milosevic's war machine, NATO has worn down not only its enemy but also some of its friends, Europe's poorest states.

The air raids on Yugoslavia have indirectly battered countries in Eastern and Central Europe, destabilizing their exports, tourism, river trade, and investments. Funds in Macedonia and Albania vital for national development are being diverted to help ethnic Albanians fleeing Kosovo.

Tourists are shunning Slovenia and Croatia. Investors are nervous about putting money in the Czech Republic, Estonia, Hungary, and Poland. Ill effects are even spreading to the West, shaking the 11-nation European single currency, the euro.

The destruction of bridges over the Danube river in Yugoslavia has effectively blocked traffic on Europe's longest waterway. This is hurting trade for Hungary, Romania, and Bulgaria, which have relied on river navigation.

With prospects that the war may drag on, Kosovo cast a severe pall over the meeting in London last week of the largest investor in former Communist European states, the European Bank for Reconstruction and Development.

"Against this background, the prospects for the current year remain worrying," bank chairman Yannos Papantoniou said in a keynote speech April 19.

Things were bad enough in the region, following the financial crisis that erupted in Russia last August and seeped into neighboring states, scaring off investors. This was on top of the lingering hurt endured by Yugoslavia's neighbors when economic sanctions were slapped on that country in the early 1990s over the war in Bosnia.

Now, five weeks of airstrikes have caused fresh problems for many of Moscow's former satellites that have been struggling to make the transition to market economies since the Soviet Union imploded in 1991.

"Investors' risk tolerance has collapsed for Southern and Central Europe," says Eric Kraus, a Moscow-based debt analyst with investment services firm Dresdner Kleinwort Benson.

One of the biggest losers is Albania, Europe's poorest country. It says it needs more than $800 million in aid to cope with the influx of Kosovo refugees. The country's economic growth is now expected to drop to 5 to 6 percent this year from a targeted 8 percent.

Hungary is particularly hurt by interrupted shipping on the Danube and the Czech Republic by loss of investor confidence.

Tourists stay away

Croatia said April 19 it would seek money from the International Monetary Fund (IMF) and World Bank to help cover losses from the conflict. The country's vital industry, tourism, is under threat as German and Austrian tourists cancel their traditional holidays on the Adriatic Sea.

The Croatian National Bank estimates it could lose 10 to 15 percent of its tourism revenues this year, worth $450 million to $500 million.

Bulgaria has asked the IMF for loans to cover lost revenues. Interrupted Danube trade and the cancellation of many flights to Europe are costing the country $1.5 million daily in exports, officials say. The government is pessimistic about attracting the $1 billion in foreign investment previously expected.

Romania, too, is reminding the West that it is losing millions because of collapsed trade on the Danube. Romania says it has lost $730 million since the beginning of airstrikes.

Both nations are demanding compensation if a proposed oil embargo goes into effect against Yugoslavia but have not given figures as to how much potential losses would be.

Ukraine says it is taking losses of $330,000 a day because of blocked Danube navigation.

Russia gains, for now

The one winner, for the time being, is Russia, but its good fortune may not last.

While investors flee Central Europe, multilateral organizations such as the IMF and World Bank are lining up to provide funds to stabilize Russia. With Russia strongly opposed to the NATO strikes, they want to keep Moscow from being totally isolated from the West.

Elections for president and parliament are due in the next 15 months. But a shift in power to a nationalist, antireform government would make cooperation with international lenders more difficult.

"Russia's economic situation is very much determined by political considerations," says Rair Simonyan, managing director in Moscow of New York-based financial services firm Morgan Stanley Dean Witter. "If rhetoric inflames again or nationalists go in the ascendancy, reforms will reverse and Western aid and confidence will dry up," he says.

Even if that didn't happen, continued NATO bombing could wipe out a recent recovery in the Russian stock market by creating uncertainty that sends investors running.

Whatever happens to Russia's economy will spill over to many former Soviet states. Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan are among those still firmly linked economically to their erstwhile master.

Euro feels pinch

Even markets in Western Europe have suffered a psychological impact from NATO's war. This nervousness is contributing to the weakness of the four-month-old euro, which in turn keeps US and Japanese equity investors away from European securities markets.

The prospect of the war dragging on may also be contributing to a lack of business confidence, especially in Italy and Germany, and may affect investment decisions, say economists. Some estimate that Greece, which traditionally has close economic ties with Yugoslavia, will see a 0.5 percent decrease in economic growth this year. And Italy is reporting a 30 percent drop in fishing on the Adriatic.

Unofficial estimates put European allies' contributions to the war effort at $3 billion to $5 billion - a fraction of overall spending - but a land war would send these figures up. This would be worrisome for countries whose budget deficit is already close to 3 percent of gross domestic product, the ceiling set by euro-members. For instance, Italy's GDP is projected at 2.7 percent and France's at 2.3 percent.

"At the moment, Kosovo is not a major weight on European markets," says J. Paul Horne, a European securities analyst at financial services firm Salomon Smith Barney in London. "But as it drags on and escalates, it will become one and it will be a burden on the real economy too, through its impact on business confidence, employment, and investment policies."

There are silver linings, however. A prolonged war benefits defense industries. And when the war ends, building companies would thrive from reconstruction, particularly if a German proposal for a Marshall Plan for the region goes ahead.

*This report includes contributions from Lucian Kim in Berlin, Richard Wentworth in Italy, and Peter Ford in Paris.

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