Russia’s economic growth slumped to the weakest in five quarters, underlining the risks to a recovery in the region as President Vladimir Putin retaliates after penalties imposed over the deepening conflict in Ukraine.

Gross domestic product advanced 0.8 percent in the second quarter from a year earlier after 0.9 percent growth in the first three months of the year, the Federal Statistics Service said today in an e-mailed statement, citing preliminary data. The Economy Ministry in Moscow had projected 1.1 percent expansion. GDP growth in Poland, Hungary and the Czech Republic probably slowed in the April-June period on a quarterly basis, according to analysts surveyed by Bloomberg.

The economies of former Soviet satellites are getting caught up in the crossfire of sanctions, compounding months of sagging Russian demand for their exports, after Putin slapped import bans on an array of foods last week. The fallout is ricocheting, with Finland, Poland and Lithuania planning to ask the European Union for compensation to ease the economic pain.

Regional economies from the Baltics to Poland will be “much more affected by the food ban that Russia imposed than Russia’s slowdown,” Ivan Tchakarov, an economist at Citigroup Inc. in Moscow, said by e-mail. Russia’s “risks of recession are certainly higher for the second half of the year as we suspect that investment spending will re-enter negative territory while consumer spending may continue to slow on the higher inflation, including because of the food import ban.”

David Fuller's view

Global investors were slow to realise the economic problem of sanctions, which are arguably the correct political response to Putin’s military aggression, but the inevitable counter sanctions make them a medium-term lose-lose situation for all countries involved. 

The article above highlights the fact that Eastern European countries, including Russia, are among those most affected by the current sanctions and counter sanctions.  However, while Putin switches to a more tactical rather than outright military approach, rallies in response to a short-term oversold condition can occur.  Personally, I would not invest in Russia for the same reason that I have never owned tobacco companies.  Nevertheless, Russian stocks have some of the lowest valuations of all, including the RTSI$ Index’s yield of 4.88%, according to Bloomberg, although the June high just beneath 1400 may not be broken until the political situation improves. 

The Czech Republic remains range bound but has steadied in recent weeks, probably helped by the Index’s dividend yield of 4.58%.  Hungary is also range bound and has fallen back from the higher side of this range since June.  It is oversold and the 3.01% yield should lend support.  Poland 3.93% has held up very well, considering the sanction problems, but a clear break beneath the psychological 50,000 level would probably trigger some additional selling.  Finland 4.66% has also held up well and is temporarily oversold near its 200-day (40-week) MA.  Lithuania is similarly oversold near its MA and the VILSE Index has a staggeringly high yield of 8.22%, according to Bloomberg.