Is Europe getting into a RUT again?

January 27, 2014 admin

Russia, Ukraine, Turkey. RUT. Europe’s eastern edge. I’ve switched the morning news on to hear that fears of a terrorist attack on the Sochi Winter Olympic Games in Russia are high, that a state of emergency may be declared in Ukraine, and that the Erdoğan government in Turkey continues to grapple with machinations surrounding whispers of a military coup, corruption at high levels and accusations of a tendency to autocracy and desecularization. Not bad for a Monday morning.

Europe’s eastern edge is a bit of a porous border. It’s part of the question of where does Europe stop and where does Asia start. Those three large countries have a long history of not being part of Europe or of only being part of Europe when it suits them. Or when it suits Europe. Expansion of the E.U. in recent times has largely been confined to the European mainland.

People-rich Turkey has sought to apply for E.U. membership but has been rebuffed, ostensibly on human rights grounds but the real reasons can be found in religious bigotry among Europe’s staunchly Catholic nations. Resource- and energy-rich Russia has been content, as a former superpower but still possessing nuclear weapons and still prepared to saber-rattle, to forge its own path to economic prosperity. And Ukraine — with many of the problems and issues of a classic emerging market such as political risk, rule of law and security of title for land and buildings — has been left to find its own way, knowing that Russia has a vested interest in what it does and an effective means — turning off the energy tap — of expressing its displeasure.

And so it is proving. Ukraine and the European Union had been getting closer together. Then the Russians, who seemingly still see anything east of the Oder-Neisse Line — the post–Second World War border between Poland and Germany — as their sphere of influence, put pressure on Ukraine’s government to halt the dalliance with the E.U. Ukraine’s people, apparently convinced that the road to prosperity was E.U. membership or at least closer ties with the E.U. — certainly not a tighter relationship with a Greater Russia — saw things differently. The people are expressing their views, and last week we had the first deaths in anti-government protests. As we have seen with the Arab Spring, it rarely goes well after that point.

Russia, which has put on a diplomatic charm offensive ahead of the Winter Olympic Games by releasing the Greenpeace Arctic protestors and the Pussy Riot prisoners, may revert to type once the Games are over. Turkey, which was ruled by the military as recently as the early 1980s and where the military still plays a powerful role, has to be careful. It has a young population that knows nothing of life under the generals and that has modern-living expectations that will be hard to dampen; the imposition of constraints on life to fit in with the Erdoğan government’s view of good Muslim behavior is unlikely to be tolerated for long, certainly in the major cities.

It’s 25 years this year since the Fall of the Berlin Wall and the opening of the Iron Curtain. It has been a golden period for European political, economic and social development. Is the east-west curtain closing again?

Does this matter for real estate? Of course it does. Global real estate investors have put considerable sums into development of modern office and retail assets, and the ancillary assets that go hand-in-hand. Russia and Turkey have been two of the real estate world’s success stories of the past 25 years. Investors will not want those assets put at risk.

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RichardFlemingRichard Fleming is editor of The Institutional Real Estate Letter – Europe.

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