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In late 2009, Greece revealed that its published debt and deficit figures had been pulled out of thin air. And so was born the euro zone debt crisis. Saving Greece, an economic irrelevancy, wasn't the point of the colossal rescue mission; the point was preventing contagion that could have ripped the euro zone apart and nearly did.

The euro zone crisis more or less ended last year, but because nature abhors a bad-news vacuum, a new crisis is emerging. This one is centred on the emerging markets, or EM, to use the shorthand of the global investment managers. The EM selloff began in Turkey and Argentina, touched on China, did a 180-degree turn and landed squarely in Eastern Europe. Today, once again, the talk is of contagion as bond yields in Eastern Europe rise and currencies and stock markets go in the opposite direction.

The selloff could go from worrisome to terrifying next week, after Sunday's sovereignty referendum in Russian-occupied Crimea. By Friday, it appeared that the abilities of the United States and European Union to prevent the referendum from going ahead were proving as elusive as Malaysia Airlines flight 370. Russia does not have a history of backing down and President Vladimir Putin shows every sign of keeping that pig-headed tradition intact. As if to prove the point, some 8,000 Russian soldiers began military exercises Friday on Russia's Ukrainian border.

Contagion is dreaded by investors, finance ministers and politicians who face re-election. The term refers to the spread of grim economic developments from one country to another. A few decades ago, contagion, or at least rapid contagion, was rare because economies were not closely linked; their debt, currency and equity markets were separated by only slightly porous walls.

Those walls have since vanished. The 1997 Asian crisis began in Thailand and galloped off in every direction, hitting countries from South Korea to the Philippines in what became known as the "Asian Contagion." Repeat in the euro zone, when Greece's meltdown propelled bond yields in Ireland and Portugal to crisis levels, triggering their bailouts. The contagion put Spain and Italy into intensive care.

The EM selloff lacks a clear pattern, since EM countries are spread all over the global map. But there is no doubt its new epicentre is Eastern Europe. The selloff in Eastern Europe was troubling even before the Ukrainians sent president Viktor Yanukovych packing in February, after which the Russians invited themselves into Crimea. Hungarian bond yields had been rising even though the country runs a current account surplus and its economy is growing.

Since the Crimean invasion, the markets have been falling throughout Eastern Europe, save Poland. The Budapest stock market index has lost 13 per cent since the start of the year. Ukraine is close to bankruptcy and in dire need of a bailout. The Romanian stock market has lost almost 6 per cent the past month.

But Hungary and Romania are not the big worries. The biggie is Russia, the world's eighth-biggest economy and a member of the Group of Eight countries (although the G7 countries might kick it out in retaliation for the Crimea invasion). We saw the damage inflicted on the euro zone by little Greece. The Russian economy is 10 times bigger. Imagine the hell it could unleash if its markets were to go into the tank.

Russia is already sinking fast and its Ukrainian adventure isn't helping. Forget sanctions; the damage is self-inflicted.

Since the start of March, the Russian stock market is down 18 per cent and the ruble is down 2 per cent, taking the currency's fall to 12 per cent since January, making it and the Argentine peso the worst-performing EM currencies this year. The Russian central bank recently raised rates by 1.5 percentage points, to 7 per cent, and raided its foreign reserves to protect the currency. The yields on Russian 10-year bonds have soared to 9.2 per cent from 7.7 per cent at the end of December.

If all this weren't bad enough, Russia's once strong growth rates are collapsing. In 2010, Russia's gross domestic product was up 4.5 per cent. Last year, it was 1.3 per cent and the forecast is for a mere 1-per-cent growth this year. Russia's public debt load is relatively small, and it still has ample reserves to defend its currency, but contagion can be a nasty thing, leading to a positive feedback loop, where a selloff in Russia could accelerate the selloffs elsewhere in Eastern Europe, and the other way around.

All bets are off if Russian troops stray beyond Crimea, or if punitive sanctions, such as a freeze that would strangle Russian banks, are put into play by the United States and the EU. Ukraine's bankruptcy, were it to happen, could also wreak havoc. The International Monetary Fund would like to offer Ukraine bailout loans, but it's unlikely to offer assistance to a country on the verge of being invaded. At the same time, Russia is unlikely to extend any financial favours to a country whose government it considers illegitimate.

Absent an incursion into mainland Ukraine or a shooting war, the country to watch is Poland. It has been resilient so far as the EM selloff damages its neighbours to the south and to the east. "If Polish assets fall, it would take the [EM] crisis to a whole new level," says Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London debt investment consultancy.

The next few days will define the direction of the EM crisis in Eastern Europe. With Russia digging in as the Crimean referendum gets under way, the sensible investment strategy is to assume the worst.

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