March 10, 2022 (MLN): The war in Ukraine and Western sanctions against Russia are significant shocks for CIS+ sovereigns, Fitch Ratings said in its latest report.
Direct exposures to Russia’s economy and contagion channels vary, but economic spillovers will be material across the region.
According to the report, uncertainty over the course of the conflict and the ultimate scope and duration of sanctions leads to uncertainty about the magnitude of disruption to intra-regional trade and financial flows as well as transport and logistics links. But the severity of the sanctions already announced make it inevitable Russia’s economy will contract in 2022, putting pressure on CIS+ economies through trade, remittances, and tourism channels.
Belarus is most exposed to Russia, which accounted for around 40% of its exports and 50% of its imports in 2021. Close economic and financial links were reflected in Fitch’s recent downgrade of Belarus to ‘CCC’, combined with new sanctions on Belarus and the possibility of additional measures.
Apart from Belarus, Russia and Ukraine, Fitch has not taken rating actions on other CIS+ sovereigns since the war began. Exchange-rate flexibility is a shock absorber for most of them, but currency weakness adds to inflation (as will higher food prices) and aggravates the impact from the generally high foreign-currency component of government debt and deposit dollarisation.
Outside Belarus, near-term external financing risks are mitigated by large external buffers (Kazakhstan, Turkmenistan, Azerbaijan, and Uzbekistan) and multilateral support (Georgia and Armenia).
Going by the report, energy and gold producers should benefit from higher prices, but Kazakhstan is highly reliant on Russian infrastructure, and Turkmenistan’s exports are sold under long-term contracts.
CIS+ governments have criticized recent Russian actions without joining the sanctions regime and some may find it a challenge to balance maintaining existing political ties with Russia against external economic pressures. Georgia has applied for EU membership, it noted.
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