Eastern Europe and CIS: Country Risk
The key issue remains the Russia/Ukraine war and it's spillover effects.
Eastern Europe and CIS Regional Overview
The main issue across the Eastern Europe and CIS region is still the Russia - Ukraine war, which remains deadlocked. Taking into account that the winter is arriving (as Russia prefers to keep low level activity during the winter time), in addition to Russia’s and Ukraine’s spring offensives having both failed to make major advances, and increasing signs of exhaustion on both sides, the war is deadlocked. A pause and a frozen conflict with or without a ceasefire deal for a longer time than expected is likely as the prospects of a credible peace deal remain very slim.
In Russia, in addition to military issues, major challenges seem to have shifted to the economic side as Russian economy continues to struggle, particularly after July. RUB plunged to an 18-month low against USD in October led by the ongoing war in Ukraine, compounded with the decline in energy earnings. The RUB has weakened by over 30% since the beginning of 2023 owing to sharp decline in the foreign trade surplus. In addition to the ongoing economic turmoil, 2024 will be the election year for Russia as the country will choose its president in March 2024. Putin remains as the strongest candidate according to various polls. The aforementioned issues coupled with sanctions continue to cap growth in the overall economy, in addition to foreign investor’s restrictions for Russia. In addition, taking into account that the recent war between Israel and Hamas in Gaza could change the balances in the Middle East, where Russia is active, the war may likely affect Russia’s role in the region. Russia’s overall risk rating remain high.
Similarly, Ukraine’s overall risk rating remains high. The high risk rating comes from a very high risk rating in political violence; high risk rating in legal ®ulatory risk, supply chain disruption and sovereign non-payment risk. The ongoing war continues to devastate the country. Particularly serious damage has already occurred on the country’s infrastructure such as road, rail and energy networks, which would necessitate a long rebuilding program and extra funds to repair. The next presidential election was supposed to be in 2024, but president Zelensky, will likely remain in power since the elections will probably be cancelled due to martial law. The current level of financial support both from the EU and US remain questionable, which could severely impact Ukraine’s ability to act. The November 2024 US presidential election outcome could particular impact US financial and military support if Donald Trump is elected.
The spillover of the Ukraine war is evident in the region, particularly on Central Asian countries, some of which continue to have close ties with Russia.
In Kazakhstan, which is the largest state in Central Asia, the overall risk rating remains at medium-high. Despite the political environment slowly improving after the March 2023 parliamentary elections, the political interference risk and legal & regulatory risk are at medium-high. The policy is still centered around the president, Kassym-Jomart Tokayev, who remains powerful despite the mass protests in January 2022 during when Russia came for help. Having close economic and political ties with Russia, and Russia being the biggest trade partner, Kazakhstan chose to abstain rather than backing up Russia on the Russia-Ukraine war. Despite this, the country remains under the Western spotlights mostly concerning its trade ties with Russia. On the economic front, the country enjoys high global oil and commodity prices. Banking sector vulnerability has fallen from medium-low to low, showing strengthening banking sector. According to Asian Development Bank’s forecasts, Kazakhstan's GDP is expected to grow by 4.1% in 2023 and 4.3% in 2024, showing the country’s potential. To achieve economic targets, Tokayev unveiled a “new economic direction” on September 1 and detailed impending economic and policy changes spanning several primary domains, including business, finance, trade, defense and transportation. Despite positive developments, political instability may rise again quickly, particularly if inflation would continue to bite and worsen socioeconomic conditions. The IMF is project a slowdown in inflation to 9% in 2024, but this is still elevated.
Elsewhere, affected by the war in Ukraine and sanctions against Russia, Uzbekistan’s economy is still strained by corruption, structural deficiencies, and high state involvement on the business environment. Securing a renewed seven-year term in a snap July 2023 presidential election, Shavkat Mirziyoyev, is criticized of not being able to initiate any serious political liberalization and recent pressures on media and bloggers. Despite some negative outlook, the country has been strengthening relations with Azerbaijan and Turkiye since the Russia-Ukraine war started, and the acceleration pace of the relationships seem promising. The banks’ vulnerability risk remains medium-low as the stress on the banks liabilities and liquidity conditions are stable.
Another source of instability in the region is the ongoing Nagorno-Karabakh dispute which continue to ignite tensions between Azerbaijan and Armenia. Nagorno-Karabakh remains under the control of Azerbaijan after the war between the countries in 2020. In September 2023, Azerbaijan launched an anti-terrorist operation in the region as Azerbaijan claims its operational aim is to drive out Armenian forces, while Armenia asserts none are present in the region. Thousands of ethnic Armenians have fled from Nagorno-Karabakh since the territory surrendered to Azerbaijan, but the humanitarian concerns remain affecting the displaced. The dispute mostly remains as a local issue and likely not bring other countries into direct conflict, while Turkiye and partly Russia are indirectly involved.