Hi, this is Andra Timu and Irina Vilcu in Bucharest. Welcome to our weekly newsletter on what’s shaping economics and investments from the Baltic Sea to the Balkans. You can subscribe here.

Romania over the past decade turned into something of a poster child for economic development. The authorities got serious about tackling corruption, foreign investment almost doubled, and European Union money was used to build hundreds of miles of new roads. 

The transformation was underpinned by a recent period of stable politics after Prime Minister Marcel Ciolacu and the Social Democrats formed a grand coalition with their bitter rivals, the Liberals. But as Romania heads into back-to-back presidential and parliamentary elections, the financial cost of catching up with Western Europe is looming large.

The country of 19 million people has the biggest budget hole of any EU member based on the size of its economy. That’s in part due to the lingering effects of the pandemic, the war next door in Ukraine and a period of rapid inflation. Yet it’s also down to government spending on wages, pensions and infrastructure.

Ciolacu is running for president and is ahead in the polls. A likely scenario is a runoff on Dec. 8 against ultra-nationalist challenger George Simion, who wants to stop military aid for Ukraine and is in second place. Ciolacu’s Social Democrats are also on course to win the most votes in the parliamentary election.

Whatever the makeup of the government that will emerge or whoever wins the runoff to become head of state, everyone seems to have acknowledged that a fiscal reckoning is inevitable. With the economic dynamo now waning, companies are worried that any impending austerity will compound the impact on growth.  

Marcel Ciolacu, Romania's prime minister, is running for president and to return his Social Democrats to power. Photographer: Andrei Pungovschi/Bloomberg

Ukraine: The war entered a new phase after Kyiv’s forces hit Russia with American and British missiles and Moscow launched what Ukraine called a new kind of ballistic missile at the city of Dnipro. Meanwhile, allies are pushing President Volodymyr Zelenskiy to consider new ways to get Vladimir Putin to negotiate. 

Poland: President Andrzej Duda accused Chancellor Olaf Scholz of trying to cut Donald Trump out of talks over the future of Ukraine in a bid to revive Germany’s own relations with Russia.

Lithuania: Taiwan’s foreign minister is leading a delegation of executives from 20 drone companies to Vilnius, where they are expected to meet government officials. The trip is likely to draw a rebuke from China.

Hungary: Chinese company CATL, the world’s largest maker of batteries for electric vehicles, is in talks to establish recycling operations in Europe. It’s discussing sites with governments including Hungary, where it’s already building a battery plant.  

Regional: The return of Donald Trump as US president was welcomed in some quarters and raised concerns in others. In Europe, the contrast was between the guarded reception to his victory in many Western capitals versus the reaction in the east, home to some of his staunchest supporters.

The escalating hostilities between Russia and Ukraine hit financial markets this week. The Hungarian forint was the worst performer among all emerging-market currencies, while the Warsaw stock exchange’s benchmark index fell the most among peers because of concern over the war. 

• Czech coal billionaire Pavel Tykac is expanding into a greener industry. His Sev.en Global Investments AS has agreed to buy 100% of steel recycling companies Celsa Steel UK and Celsa Nordic.
• Moldova’s prime minister announced three key changes to his cabinet after the nation’s pro-Western president pledged a reshuffle following a tighter-than-expected referendum on European Union membership.
• Hungary paved the way to allow for an increase in the €12.5 billion ($13.2 billion) contract with Russia it signed in 2014 to expand its sole nuclear power station.

• Lithuania’s Parliament approved Social Democrat Gintautas Paluckas as the Baltic nation’s next prime minister. He has two weeks for form a government. 
• In Bulgaria, parties are continuing negotiations to form a coalition and avoid an eighth election in four years.
• Slovak central bank Governor Peter Kazimir will find out next week whether he will be convicted of corruption by a court in Bratislava. He denies all charges, and is also likely to remain in his post and a member of the European Central Bank’s governing council. 

The focus this week has been on Ukraine’s deployment of long-range missiles supplied by the US and UK to hit Russia. But one of the main issues weighing on the war effort is the ongoing struggle to recruit soldiers for the front line. One brigade, at least, is helping fill the void. Khartiia, formed by multimillionaire Vsevolod Kozhemyako and now part of Ukraine’s National Guard, has used a slick marketing campaign to go from a few hundred-strong force to a few thousand. What makes it different, he said, is NATO-style management. The most technologically advanced units “are created by mobilized civilians,” he said, “not by the military.”

An attack drone crew from the Khartiia Brigade during a night operation near Lyptsi, Kharkiv region, in June. Photographer: Global Images Ukraine/Global Images Ukraine

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