Central and Eastern Europe: Market Insights


Despite the prevailing economic uncertainty being caused by COVID-19, CEE (Central and Eastern European) markets are in recovery mode. Societe Generale Securities Services [SGSS] looks at the main developments now underway in the CEE region, together with some of the challenges facing investors.

Investor inflows into CEE goes from strength to strength

Appetite for CEE equities and fixed income continues to be robust among global investors, many of whom are searching for returns amid the unprecedented low interest rates and volatility in some of the larger, more mature markets.  Inflows have also been facilitated through market upgrades by leading benchmarks as was the case in Romania. Interest in Romania has picked up following the decision by FTSE Russell to elevate the country from Frontier Emerging Market status to Secondary Emerging Market status1. Similarly, trading activity in Russia has jumped with the Moscow Exchange reporting a 10.4% YOY (Year-on-Year) increase in volumes, something which has been partly fuelled by the massive spike in retail investing2. Nonetheless, Russia is generating interest among global institutional investors too following a series of high-profile and well-received initial public offerings.  Other leading CEE markets- namely Poland and Czech Republic - are also recuperating from the COVID-19 pandemic as international investors increasingly start adding them to their portfolios again3.

Market enhancements fuel investor interest

Aside from the strong macro fundamentals driving global investor inflows into CEE economies, regulation is also playing a critical role. One of the bigger barriers to have historically hindered cross-border investment inside the EU – including the CEE region - was the absence of proper regulatory harmonisation, especially in areas related to post-trade. Since the 2008 financial crisis, huge efforts have been made to standardise a number of post-trade processes through regulation. The introduction of the Central Securities Depositories Regulation [CSDR] not only created a common regulatory framework for overseeing CSDs [central securities depositories] but it imposed a rolling T+2 settlement cycle across the EU, ahead of the introduction of Target2Securities [T2S], the European Central Bank’s [ECB] pan-EU securities settlement engine. The CEE markets have made excellent progress with their CSDR adoption to date.  Czech Republic and Romania are both busy incorporating the CSDR, whereas Poland’s CSD – KDPW – is in the final stages of implementing the regulation’s various provisions - principally the imposition of mandatory settlement tolerance levels, the extension of partial settlements and improvements around the cancellation of instructions.

Nonetheless, challenges persist with CSDR. In order to strengthen settlement discipline, the CSDR will impose a Settlement Discipline Regime [SDR], which will levy cash penalties and mandatory buy-ins on counterparties responsible for failed trades from February 2022. While the industry largely supports the idea of penalties, there is apprehension about mandatory buy-ins for non-cleared trades with some – including AFME [Association for Financial Markets in Europe] warning it could increase costs and dramatically reduce liquidity. Amid these concerns, the European Securities and Markets Authority [ESMA] recently wrote to the European Commission urging it to delay the imposition of mandatory buy-ins owing to ongoing uncertainty about the regime. However, ESMA said it had no objections to introducing other elements of SDR including settlement fails reporting and cash penalties for fails.

Elsewhere, the roll-out of the Shareholder Rights Directive 2 [SRD2] – which is aimed at promoting better shareholder engagement and transparency – will also potentially usher in more harmonious standards across the EU for institutional investors. Among SRD2’s provisions are that intermediaries distribute information between issuers and investors more seamlessly, in what regulators argue will help make it easier for shareholders to exercise their rights.  A number of markets – including Poland – have already successfully adopted the rules4. However, there have been some challenges with the implementation of SRD2 in some CEE markets. For example, corporate action processes; general meeting practices and ISO 20022 adoption rates are varied across CEE, and this is leading to regional divergences. Despite this, the growing focus on standardisation will help drive investor inflows into CEE economies. Outside of the EU, Russia has also made notable enhancements to its investment processes. Along with many other markets, Russia was forced to digitalise a number of manual and physical activities as a result of the pandemic. For instance, revisions to the country’s Civil Code have introduced provisions that allow for shareholder meetings to take place online5. Digitalisation and a willingness to embrace meaningful change will be essential if the CEE markets are to attract liquidity.

Tax challenges put pressure on investors

While CEE markets offer enormous promise, the region does have complex tax requirements, which require careful navigation. Revisions to Russia’s Double Tax Treaty [DTT] code are having ramifications for foreign investors in the market. In 2021, the Russian Ministry of Finance amended its DTTs with Cyprus, Malta and Luxembourg, and cancelled its DTT altogether with the Netherlands. As a result, taxes on interest and dividends at source have risen to 15% in these markets6. This is a substantial jump given that dividends were previously taxed at 5% while interest was exempt from levies. Moving forward, it is likely DTTs with Hong Kong, Singapore and Switzerland could also be subjected to further review7. Other major CEE economies – including Poland – are in the process of strengthening their beneficial ownership obligations, so as to ensure that tax treaty benefits are not being misused8. As one of the leading sub-custodians and local tax agents in these markets, SGSS has developed a new service to support foreign investors with their tax reclaim processes.

Markets awash with opportunity

Investor interest in the CEE region is on the ascendency, and it has been accelerated by positive market reforms and regulatory standardisation initiatives. Despite this, there are challenges. Arbitrary changes around taxation are likely to frustrate investors in certain CEE jurisdictions. Nonetheless, these challenges can be mitigated by leveraging industry leading providers such as SGSS which boast extensive local market expertise.  SGSS has a long track record of supporting international investors when accessing the CEE region. For example, SGSS is committed to market advocacy, having engaged with the Russian authorities on some of the recent tax changes in the country and the impact this could have on global custodians. Aside from offering investors a wide range of different product suites, SGSS is continuously updating its solutions and services so as to accommodate for local rule changes inside CEE. SGSS operates under the umbrella of leading and well-capitalised domestic banks across Russia, Romania, Poland and Czech Republic, in what should provide comfort to institutional investors.



Reuters [July 15, 2021] Poland eyes investment boost with new economic programme says minister

Thomson Reuters Practical Law – Shareholder activism in Poland: Overview

Dentons [July 8, 2021] Russian Civil Code – changes on virtual meetings

6 PWC {February 12, 2021) Russian Federation: Corporate – Withholding taxes

7 Societe Generale [January 26, 2021) All eyes on emerging and frontier markets

8 PWC  - Don’t overlook registering your UBO

Nathan Derhy Head of the International Department SGSS