The row between Russia and Ukraine over payments for natural gas looks to be de-escalating. Gazprom has committed to letting the gas flow freely again after the EU requested this action be taken. The question now is whether the core issue of payments for natural gas can be solved. The Financial Times takes a stab at this in their latest Lex column, part of which is excerpted below.

The Ukraine-Russia row over natural gas has escalated to a new high. Now, state-owned Gazprom has completely cut off supplies to Europe through the Ukrainian transit route. It still remains unclear what the ultimate aim of the Russians are in bringing the issue to this critical state. Nevertheless, it is generally believed that Russia is making as much a political statement about NATO expansion, the disregard of Russia’s sphere of influence, and the dependency of the European Union on Russia for its energy needs. One should expect a political response from the EU shortly.

The question on everyone’s mind in the emerging markets is who will blow up next. Arnab Das of Dresdner Kleinwort Benson takes a stab at answering that question. He targets the Baltics as the problem children and sees current account surplus nations in Asia as lest vulnerable. He also discusses his views on Russia.

Below is the video with him on CNBC giving forth his view.

You probably know that I am gearing up for some serious writedowns in Eastern Europe because I see these countries as having external imbalances which will have to be corrected as the economy softens. In previous posts, I had mentioned that there was considerable exposure to Eastern Europe in Austria, Sweden, Denmark ad Germany in particular. Austria is the worst of the lot. Today, I happened upon an article and a quote which puts the Austrian exposure into context.

As an article in my links yesterday suggested, for many in the west, Russia’s behavior of late has lurched toward the unpredictable, volatile and aggressive. After Russia’s moves against Georgia in South Ossetia, wariness in the west has increased, sometimes bordering on hostility.

I have generally taken a more pro-Russian view of events, seeing the reactions by Russia as predictable responses to a Super Power provoked by repeated slights. That is neither here nor there as the latest controversy heats up, this time over natural gas.

Trolling the web today as is my wont, I happened across an interesting article about the Austrian finance company Immofinanz. It seems that Immofinanz got caught up in the Eastern European property market. Unfortunately, its investments have not worked out and it was forced to report a half-year loss of 1.85 billion euros. Is Immofinanz a canary in the coalmine for Eurozone financial services exposure to Eastern Europe? I certainly believe so as I indicated in my ten predictions for 2009.

Has Paul Krugman been reading my stuff? He is certainly thinking like me regarding emerging market risk. He has a post today talking about Latvia as the new Argentina.

By now, you are familiar with the carry trade, where one borrows in one’s own currency in order to invest in higher yielding foreign assets, often times with significant leverage. The Japanese were famous for making this trade in Australian Dollars, U.S. Dollars, you name it.
What a lot of people don’t realize that everyone [...]

In the last few weeks, the currency market is where the action has been. We have witnessed massive moves in every major currency and in some not so major ones. To my mind, all of this is a prelude to some sort of currency crisis.

This crisis has been sneaking up on us as most of us have been transfixed by the U.S. subprime crisis and the subsequent credit crisis. For some currencies, it has been a sickening ride. The U.S. Dollar plunged to 1.60 to the Euro only to snap back viciously to 1.25. The U.S. Dollar plummeted to below 2.10 to the British Pound but is now above 1.60. All of this in the space of a few months.

But, it is in commodity and emerging market currencies where the trouble is brewing.

Yesterday, I made the case for us to be less concerned about the U.S. and even Western Europe, but to be very concerned about a slowdown in Asia. The reasons for this are simple: most analysts now understand the extent of problems in the U.S. and Western Europe.
This, is part of the reason [...]