The market for Eastern European stability has just taken another hit. The UK Foreign Office has issued an emergency travel warning for Romania, as drone incidents along the border with Ukraine escalate. For investors, this is yet another reminder that geopolitical risk premiums are not just for textbooks. They are real, and they are costly.
Let me be blunt. When the Foreign Office issues a travel warning, it is not a casual advisory. It is a signal that the risk of doing business, or even being present, in that jurisdiction has materially increased. For Romania, a country that has enjoyed relatively low volatility compared to its neighbours, this is a significant downgrade. The gilt market has not yet fully priced this in, but it will. Capital flight is a slow drip at first, then a flood.
The details are still sketchy, but we know that drones have been spotted near the border, and the Romanian government has activated emergency procedures. The Foreign Office warns against all but essential travel to certain areas. This is the kind of headline that makes fund managers reach for the risk-off button. Expect to see Romanian bond yields widen and the leu come under pressure.
But let’s not lose sight of the bigger picture. This is not just about Romania. It is about the contagion effect of the war in Ukraine. Every time the conflict spills over a border, it raises the cost of capital for the entire region. The market abhors uncertainty, and right now, Eastern Europe is a black box of uncertainty.
Fiscal responsibility? Forget it. When a country faces a security crisis, spending goes up, deficits widen, and inflation becomes harder to control. The National Bank of Romania will have to walk a tightrope between supporting the currency and keeping a lid on inflation. I do not envy Governor Isărescu.
For the UK traveller or expat in Romania, the immediate concern is safety. But for the broader market, the concern is the erosion of confidence. The Foreign Office warning is the canary in the coal mine. If this escalates, we could see a flight to quality into US Treasuries or even UK gilts, which would be a rare moment of relief for British bondholders. But don’t hold your breath.
The bottom line: This is a negative development for risk assets. The drone threat is a reminder that the war in Ukraine has no clean lines. It is leaking into neighbouring countries and creating volatility where there should be stability. The market will react. It always does.
Stay tuned. This story is developing, and the next headline could be about capital controls or a currency peg. In this market, you have to be prepared for the worst while hoping for the best. That is the Alastair Thorne rule of investing: hope is not a strategy.
