Economic Resilience Amid Geopolitical Upheaval: Central and Eastern Europe Weather the Iran War Energy Shock While Russia and Ukraine Stumble

BRUSSELS / VIENNA — Driven by shifting manufacturing models, robust public investments, and an aggressive push into high-value technology, most of Central, Eastern, and Southeast Europe has successfully insulated itself from the severe energy price shocks triggered by the ongoing conflict involving Iran.

According to the autumn economic forecast released this week by the Vienna Institute for International Economic Studies (wiiw)—which tracks macroeconomic indicators across 23 nations in the region—the broader economic landscape has demonstrated remarkable resilience in the face of compounding global geopolitical turmoil. However, this macroeconomic stability is far from uniform. While nations like Poland, Kazakhstan, and the Western Balkans are experiencing significant economic expansions, structural vulnerabilities continue to drag down other territories. Most notably, Romania is grappling with fiscal deficits and the fallout from Germany’s industrial slowdown, while the direct combatants of the protracted conflict—Russia and Ukraine—find their economies stagnating under the crushing weight of war.

Main Facts

The wiiw autumn forecast paints a complex portrait of a region undergoing profound structural transformation. While the initial fears of a crippling energy crisis stemming from the Middle East have largely failed to materialize across the majority of Central and Eastern Europe (CEE), individual national trajectories diverge sharply.

• The Outperformers: Poland leads the eastern European Union member states with projected growth of 3.7% this year and 3% next year. The Western Balkans are anticipating robust average growth of 3.2% in 2026 and 3.3% in 2027.
• The Laggards and Exceptions: Romania is facing a mild recession, with output expected to contract by 0.4% due to strict fiscal austerity measures and heavy reliance on the stumbling German automotive sector.
• The Wartime Toll: Entering its fifth year, the war has severely constrained both Ukrainian and Russian economic growth, with wiiw forecasting meager 0.6% growth for both nations in 2026.
• EU vs. Euro Area Growth: Eastern EU members are projected to grow by an average of 2.2% in 2026 and 2.5% in 2027—more than double the anticipated growth rate of the broader euro area (0.9% and 1.0%, respectively).

Chronology of the Crisis and Economic Shifts

To understand the current economic footing of Central and Eastern Europe, experts emphasize the historical evolution of the region over the past decade, culminating in the recent convergence of Middle Eastern energy disruptions and ongoing European security crises.

• 2015–2024 (The Industrial Transition): Over the past ten years, eastern EU members steadily transitioned away from their traditional classification as low-cost manufacturing subcontracting hubs for Western European multinationals. High-tech sectors, particularly in Poland, expanded by nearly 40%.
• Early 2022 – 2025 (The Wartime Shocks): The outbreak of full-scale war in Ukraine permanently altered European energy markets. Supply chains fractured, forcing nations to decouple from Russian hydrocarbons and pivot toward alternative energy sources.
• Spring 2025 (Political Realignment in Hungary): Hungarian voters ended the long-standing, authoritarian tenure of Prime Minister Viktor Orbán. The subsequent political transition triggered a dramatic restoration of investor confidence, a strengthening of the forint, and a rapid drop in government bond yields under the new administration led by Péter Magyar.
• Late 2025 – Present (The Iran War Energy Shock & Regional Divergence): Fresh geopolitical instability in the Middle East sparked renewed fears of a global energy crunch. However, structural adaptations within CEE shielded most local economies, even as targeted infrastructure attacks in Ukraine and domestic fuel crises in Russia compounded existing wartime contractions.

Supporting Data and Regional Metrics

The wiiw dataset highlights stark disparities across the 23-country coverage zone, breaking down performance by sub-region, fiscal health, and sector-specific output.

Eastern European Union Members

The eastern wing of the EU continues its economic convergence with Western Europe, propelled by rising private consumption, targeted public investment, and structural shifts up the global value chain.

• Poland: Posting industry-leading growth of 3.7% in 2026 and 3.0% in 2027, anchored by a thriving high-tech manufacturing sector.
• Hungary: Following the democratic transition in the spring, the economy is rebounding, projected to grow by 1.7% this year and 2.6% by 2027.
• Romania: Plagued by large structural budget deficits and over-reliance on Germany’s stagnant automotive and machinery markets, output is set to shrink by 0.4%.

The Western Balkans and Turkey

• Western Balkans: Set for steady expansion, averaging 3.2% growth in 2026 and 3.3% in 2027. Serbia—heading toward a pivotal general election on October 25—is projected to grow by 3.3% and 3.4% across the respective years.
• Turkey: Demonstrating comparative resilience with anticipated growth of 2.9% in 2026 and 3.5% in 2027, despite downward revisions by wiiw analysts due to persistent domestic inflationary pressures.

Ukraine: Under Siege

Ukraine’s economic outlook remains critically constrained. Continuous aerial bombardments targeting critical energy grids, port facilities, and Black Sea transport routes have devastated export capacities.

• Agriculture and Industry: August grain exports plummeted by 70% compared to July figures. Steel production has faced intermittent, mandatory stoppages.
• Monetary Policy: Inflation hovers near 10%, forcing the National Bank of Ukraine to maintain a high key interest rate of 16%, throttling domestic borrowing and corporate expansion.
• Fiscal Deficit: According to the Ukrainian Ministry of Finance, the nation faces an alarming external funding gap of approximately $33 billion USD for 2027.

Russia: Domestic Fuel Crises and Sanctions

Despite maintaining the capacity to fund its military operations through low public debt and domestic banking reserves, Russia’s broader economy is straining under structural bottlenecks.

• Fuel Shortages: Ukrainian drone strikes targeting domestic refineries have triggered severe internal fuel shortages, prompting the Russian government to impose emergency bans on exports of petrol, diesel, and jet fuel.
• Monetary Constraints: The Central Bank of Russia estimates that fuel supply constraints will add 1.5 percentage points to inflation, forcing the central bank to hold its key interest rate at 14%.
• Investment Deficit: Western sanctions restricting the import of high-quality capital machinery have caused fixed investments to drop by roughly 10% in the first half of the year, amplifying labor shortages and generating a nascent rise in unemployment.

Official Responses and Expert Analysis

Economic analysts and institutional leaders emphasize that the future of the region depends heavily on modernization, structural adaptability, and sustained international aid.

• Moving Up the Value Chain:

  "Countries that invest in technology and productivity—for example, through automation and digitalisation—stand a good chance of continuing to prosper economically. Poland and, to some extent, Czechia are showing the way," noted Richard Grieveson, wiiw’s deputy director and lead author of the autumn forecast. Grieveson also highlighted that while traditional integration with Germany’s sputtering car manufacturing sector is posing headwinds, massive inflows of EU cohesion funds and domestic defense spending are providing critical economic cushions.

• The Humanitarian and Infrastructural Crisis in Ukraine:

  "The fifth winter of the war is likely to put Ukraine to a severe test. With its dwindling supplies of air defence missiles, the country is finding it increasingly difficult to defend itself against Russia’s growing barrage of ballistic missiles and drones," stated Olga Pindyuk, wiiw’s leading Ukraine specialist. Pindyuk warned that Russian President Vladimir Putin is deliberately shifting strategies toward terrorizing the civilian population as battlefield gains stall.

• The Impact of Asymmetric Warfare on Russia:

  "The pause in monetary easing is inevitably hampering Russia’s economic recovery, as high interest rates weigh heavily on economic activity. Ukrainian drone strikes are therefore having a very tangible adverse impact on Russian growth," explained Vasily Astrov, wiiw’s senior Russia expert. Astrov added that while Western capital goods restrictions have severely undermined long-term modernization, low sovereign debt levels mean Moscow will face little technical difficulty financing its military apparatus in the near term.

Implications for Global Trade and Geopolitics

The divergence highlighted in the wiiw report carries profound implications for international trade, European security architecture, and global supply chains.

1. Protectionism and Trade Dynamics: The European Union’s increasingly hawkish stance on trade disputes with China presents a double-edged sword for Central and Eastern European industrial bases. While protective tariffs may offer temporary breathing room for regional automotive manufacturers competing against subsidized Chinese electric vehicles, local industries face steep hurdles in sourcing cost-effective intermediate goods and securing direct foreign investment from Asia.
2. The Defense-Driven Economy: As traditional drivers of European manufacturing—such as German industrial machinery and automotive output—remain sluggish, defense expenditures and infrastructure modernization are emerging as the primary engines of regional economic activity. This militarized fiscal stimulus is fundamentally reshaping national budgets from the Baltic states down to the Balkans.
3. The Aid Dependency Dilemma: For Ukraine, the viability of even modest economic recovery remains entirely tethered to the continuation of robust financial and military assistance from Western allies. Any political fatigue or delays in foreign aid disbursement risk tipping vulnerable public finances into acute insolvency, threatening not just macroeconomic stability, but basic humanitarian survival through the winter months.