Investors worldwide remain focused on the sustainability of global growth given the visible slowdown in the US and the threat of inflation. Eastern Europe, while certainly not immune from the market’s ills, is weathering the storm better than most expected. Eastern European equities performed well in April, despite reports that Russian oil output fell by 1% in the first quarter of 2008 versus the fourth quarter of 2007. May was another strong month for equities in the region; Russia’s rally was driven by two main factors, the continued increase in oil prices and the parallel events of Medvedev’s presidential inauguration and Putin’s appointment as the head of government. Risky assets faced challenges in June, as Turkey’s economy and politics were among the more notable market drivers in the region.
 
As we enter the third quarter of the year, slowing global economic growth combined with accelerating regional inflation remains the biggest challenge for policymakers and markets. While there are varying degrees of exposure to these issues (e.g. Russia’s economy benefits from higher oil prices but higher oil is negative for most other countries in the region), it is important that central banks navigate monetary policy carefully. Risk aversion also continues to have a dampening impact on investment flows to the region.