Central & Eastern Europe Economic Monitor:

Russia - Strong Fundamentals and Reserves Mitigate Risk Profile
The country is registering very respectable growth of 6.4% this year thanks to strong macroeconomic and financial indicators offset by weak institutional factors. Notwithstanding massive export revenues, economic growth is being hindered by infrastructure bottlenecks, particularly in the oil and gas sector. This is expected to continue in the foreseeable future, as fixed capital formation remains among the lowest of all transition economies at under 20% of GDP. The resulting bottlenecks are also hindering the country's ability to attain the 7.5% annual
growth required to meet the government's target of doubling GDP in ten years. Still, economic growth remains high at around 6% thanks to rising wages and credit growth within a context of rising government expenditures. Moreover, foreign exchange reserves are still growing, and recently exceeded US$280 billion - the world's third largest; and the stabilization fund also surpassed $80 billion. These joint reserves should allow Russia to weather any economic downturn for some time.

Turkey - Outlook Clouded by Troubled EU Negotiations and Slowing Economy
Despite continuing decent economic results, Turkey's economic outlook may have been caught up in the possible suspension of negotiations over EU entry. At the time of writing, the EU Commission has recommended that accession talks with Turkey be suspended in eight of the thirty-five policy areas (chapters) over Turkey's delays in opening its ports and airpots to Greek Cypriots. Turkey has given no indication that it would bow to EU pressure to abide by that condition. Moreover, growth, which has averaged over 6% yearly in the last three years, may slacken this year on the back of the slowing world economy. A complicating factor for Turkey is
the looming 2007 presidential race which will be exacerbated by the chasm between Turkey's secular forces and the ruling AKP party. The economy is also slowing, with most recent industrial production (IP) data slowing to 5.8% in September, versus 9.3% the previous month. Most recent figures show inflation tracking at slightly less than 10% (y/y), far above the Central Bank original target of 5%. Moreover, the October trade deficit registered at $4.4 billion, for a cumulative January-October total of $44.5 billion (8% of GDP). The problem with Turkey is that the the EU negotiation/integration process had been one of the key mitigants of country risk by serving as
backstops to economic policy. If EU integration stalls, the country could find itself with only the current IMF economic program to provide a guarantee of economic sustainability. To sum up: Turkey's economic outlook has become clouded - stay tuned.