Poland Defence and Security Report Q4 2008

The dominant short term development is that Poland agreed on August 20 to allow the US to install 10 interceptor missiles on Polish territory. The swift conclusion to the longrunning negotiations between reflects the recent military conflict in Georgia. From the Polish perspective, Russia's unanticipated fierce response to Georgia's attempts at reestablishing control over the breakaway region of South Ossetia, has meant that Russia's threats to aim missiles at Polish targets should be taken more seriously.

Public support in Poland for the missile defence system has grown as more and more Poles begin to view the Russian threats seriously.

Though the US appears to have got its way, the deal also represents a victory for Polish Prime Minister Donald Tusk in the domestic political sphere. Tusk stood firm throughout the negotiations and would not accept a deal that did not include the modernisation of Polish air defences. The US finally conceded in order to wrap up a deal quickly.

While any form of military action against Poland is highly unlikely (given its membership to the EU and fullbacking of NATO), we caution that the risks of worsening relations extend to the economic level.

Indeed, there is a potential for a proliferation in trade sanctions should political relations deteriorate further, as has previously been seen with Russia's controversial ban on imports of Polish meat. Though certainly a risk, we do not want to overstate the importance of Russian trade to the Polish economy, especially given that Russia only absorbs around 5% of Polish exports.

While the potential impact on trade may be fairly negligible and amount to mere nit picking, the potential risk to Polish (and European) energy security could be much greater. Indeed, with 80% of gas imported from Russia via Ukraine, and given that many pipelines run through Poland to the rest of the Europe, there are distinct concerns over the security of energy supplies.

The Polish economy posted a substantial 6.6% rate of growth in 2007. This marked the fastest rate of expansion in 10 years, and also signifies the peak of the economic cycle. We expect the Polish economy to cool over the course of 20082010 as it rides out the postboom wave, while a secondary reason would be the knockon effect from the slowdown in the US and the credit crunch. That said, we affirm our view that the Polish economy will continue to expand at a healthy clip over our 10year forecast period, with average annual real growth of 4.2%. Moreover, Poland's solid macroeconomic fundamentals and credible central bank will likely see euro adoption around 2013, underpinning further integration with the EU.