EM Europe/CIS: Country Risk Ratings

Armenia

Armenia’s overall risk level remains medium high. Vahagn Khachaturyan continues to be the president of Armenia after being in elected in March 2022, after the resignation of his predecessor. Political violence remains medium high and political interference and legal & regulatory risk at a medium rating. Violence was reported in Nagorno-Karabakh, an area which was mostly populated by Armenians was captured by Azerbaijan in September 2023, leading to 32 deaths, hundreds injured and thousands Armenians displaced. Domestically corruption still exists in Armenia, while the close relationship between oligarchs and politicians has raised many concerns regarding their influence in political decisions. Supply chain disruption remain medium, with the problems in Nagorno-Karabakh. Even so, Armenia reported economic growth of 12.6% in 2022, it is expected to decrease in the following years, with a forecast of 7.0% for 2023 by the IMF, though this is still good. Inflation has increased significantly, since 2021, with CPI inflation in 2022 at 8.6%. This sudden increase in inflation, was mainly due to Russia’s war in Ukraine, but also the arrival of many Russians into the country, which has increased economic activity. CPI is expected to slow to 3.5% in 2023, according to the IMF helped by the central bank following a contractionary monetary policy to stabilize inflation. Armenia reported a positive current account balance, with a surplus of 0.8% of GDP in 2022. However, Armenia is forecasted to not maintain a positive balance, but experience a swing to a -1.4% deficit in 2023 and reach -2.3% in 2024. Sovereign non-payment thus remains medium, but exchange transfer declined from medium to medium low. The Armenian dram, the domestic currency has been performing well against the dollar and the euro (apart from early October temporary spike), since Russia’s invasion in Ukraine helping exchange transfer. Elsewhere, banking sector vulnerability has increased from medium low to medium, while inability of government to provide fiscal stimulus has remained medium.

Azerbaijan

Azerbaijan’s overall risk level remains medium high. Ilham Aliyev has been President of the country since October 2003. Political violence, as well as legal & regulatory risk remain high and political interference at a medium high rating. Corruption remains a very important issue in the country that has not been resolved. Azerbaijan captured Nagorno-Karabakh in September 2023, after launching a large-scale military offensive, which the Artsakh forces did not manage to defend and therefore collapsed relatively quickly. Nagorno-Karabakh’s majority population were Armenians, before they were forced to leave by the Azerbaijanis. Domestically the weakness and inability of the judicial system allows government officials to act with impunity. Moreover, the anti-corruption measures by the government have proven to be ineffective. Supply chain disruption also remains medium. On the economic front, GDP growth is expected to slow to 2.5% in 2023 and 2.5% by 2024, according to the IMF. The country continues to highly depend on the production of natural resources, such as oil and gas, that account for about 92% of the total exports of the country. The government has been trying to attract foreign investment to diversify the economy and improve in other sectors of the economy. The risk of doing business also remains at a medium risk rating, while the economy has not significantly progressed into achieving diversification in the business sector and corruption remains a challenge firms face in Azerbaijan. The current account surplus remains large and is projected to be 16.9% of GDP in 2023.Thus the sovereign non-payment risk remains medium and exchange transfer remains medium low. The Azerbaijani Manat has been exactly at the same rate against the US dollar for the past year, trading at 0.59 dollar per 1 Manat.Azerbaijan has however been suffering from inflation, due to the invasion from Russia into Ukraine, but also global inflation, have led to a CPI of 13.9% in 2022. CPI is forecasted to continue to be high in 2023, with a CPI equal to 10.3%, according to the IMF.

Kyrgyz Republic

Kyrgyz Republic’s overall risk score remains high. The political violence risk level is at medium-high, while legal and regulatory risks are very high. When compared with the previous risk analysis period, sovereign non-payment risk and banking sector vulnerability decreased from medium-high to medium level. The Russia-Ukraine war continues to affect Kyrgyz Republic’s economy, partly positively, thanks to increased foreign investment from Russia and a resilient mining sector, despite the risk of supply chain disruptions remaining at medium-high. The government continues to express its desire to attract greater FDI and to develop the IT, creative, and green economy sectors as Turkiye, China and Russia remain as the top incoming FDI sources. According to IMF, the economy is expected to grow by around 3.4% in 2023, but the economic problems such as twin fiscal and current-account deficits and large informal sector set the scene. On the trade front, the BRI developments look to improve trade over the already popular transit corridor between Uzbekistan, Kyrgyz Republic, Afghanistan, Pakistan, and China, and this may help lift the current account. As the oil prices continues to surge, the economy may likely take a hit from increasing oil prices, as a net importer. The political interference is at medium-high and risk of doing business remains at medium, as maintaining short-term political stability amid rising public discontent remains the top agenda item for the government. Meanwhile, the president Sadyr Japarov continues to be criticized about restrictions on press freedom in the country. The recent trip by Russian President Putin to the country on October 12-13, and the Kyrgyz parliament ratifying an agreement with Russia on the creation of a joint regional air defence system on October 11 have raised eye brows of the Western world.

Russia 

Russia’s overall risk rating remains at medium-high. Political violence is at very high rating; legal and regulatory risk at high and political interference at medium-high as the war in Ukraine continues to cause a domestic strain. In addition to military issues, major challenges seem to have shifted to the economic side as the economy continues to struggle, particularly after July. RUB plunged to an 18-month low against USD on October 9, exceeding 102.1 level, the lowest since March 2022, led by the ongoing war in Ukraine and the recent escalating tension between Israel and Hamas, compounded with the decline in energy earnings. The RUB has weakened by 34% since the beginning of 2023 owing to stronger dollar and high demand for imports coupled with reduced exports. Russia’s foreign trade surplus shrank dramatically in January-September 2023 YoY to $87.8 billion while the surplus of the country’s current account also plummeted in the same period to $40.9 billion, showing the deterioration on the trade front. In addition to the 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 and we think he would win the elections while we expect election related populist spending will increase putting further pressure on already struggling inflation. Despite investor’s perceptions over the Russian economy is negatively affected by the ongoing war, sanctions and the economic developments, Russia continues to enjoy plenty of room to stimulate via fiscal policy, given the low government debt/GDP trajectory while the banking sector vulnerability remains medium-low. On the war front, we see a pause on territorial advance by Russia or Ukraine and increasing signs of exhaustion on both sides. We forecast there could be a pause and a frozen conflict with or without a ceasefire deal for a longer time than expected. 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. 

Turkiye

Turkiye’s overall risk level is at high. The local elections planned for March 2024 will likely cause the government to increase spending as the ruling party AKP wants to “win” the big cities back, which may lead to severe political violence (currently very high), and a deterioration in legal and regulatory risk, which is at medium-high. In addition to elections, Turkish economy continues to struggle due to high inflation, increasing trade and budget deficits, and weakening Turkish Lira (TRY). Turkiye continues to receive help by a government debt/GDP trajectory which is still at manageable levels, but upside risks emanating from increasing food and energy prices remain high, particularly taking into account the country’s heavy dependence on imported inputs for exported goods. The current account is deteriorating, as imports growing faster than exports, and foreign direct investment inflow remaining weaker than expected while investor interest in Turkiye remain muted. A gradual return towards the traditional and rational economic policy making is maintained, as the Central Bank of Turkiye hiked the policy rate from 8.5% to 30% in the last four months, and strongly hinted at a determination for further monetary tightening to cool down the economy and squeeze inflation lower. Despite this, the risk of doing business in Turkiye remains at medium level as political interference continues to be a medium-high level. On the current account front, the government hopes to fill in the gap by tourism revenues or via a possible hike in the export revenues following the devaluation, but these offer limited support. The conflicts in the region continue to affect the Turkish economy negatively as relations with the West are not at its best. Despite Turkiye's mediator role having helped the Black Sea grain deal to be extended many times, the deal was terminated as of July 17 and the future of the deal remains unknown, despite President Erdogan’s numerous engagements with President Putin and President Zelensky. The recent war between Israel and Hamas in Gaza ensuring that Middle East tensions remain elevated in the near term is not good news for Turkiye, as the country has good economic relations both with Israel and Palestine. Turkiye is also concerned about a possible new migration wave from the Middle East if the tension will remain longer than expected.

Ukraine

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 & regulatory risk, supply chain disruption and sovereign non-payment risk while political interference and exchange transfers posing medium-high risk. When compared with the previous risk analysis period, the inability of government to provide stimulus increased from medium to medium-high, particularly considering Western financial support remain questionable. On the war front, the military confrontation is at a high intensity, particularly in Ukraine's East and South. Ukraine reportedly notched victories in the south eastern Zaporizhzhia region recently, penetrating the first line of Russian defenses, and made advances around Bakhmut. The path towards a credible peace deal remains slim, as pause in fighting then a frozen conflict with or without a ceasefire deal for a long time is likely, sustaining the overall risk rating of the country to be high. The war continues to devastate the country, with serious damage already occurred on the country’s infrastructure such as road, rail and energy networks, which would necessitate plenty of time and extra funds to repair. The country has also been under martial law since the beginning of the war, and this continues to be the case. 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 risk of doing business in Ukraine is at medium-level while banking sector’s vulnerability is medium-low. The war’s adverse impacts continue to shape the economic and political stance of the country.

Uzbekistan

Uzbekistan’s overall risk score remains at medium-high. The high risk rating comes from a medium-high risk rating in political violence and political interference, in addition to very high risk rating in legal & regulatory risk. Despite promising 7.4% in 2021 to 5.7% in 2022 economic growth, the economy continues to be strained by corruption, structural deficiencies, and high state involvement in the economy and 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 liberalisation and recent pressures on the media and bloggers.Despite this the country is aiming to attract more FDI, but the risk of doing business and exchange transfers ratings remain at medium-high. Struggling against insufficient exports lately, the country recorded a current account deficit of $1,897 Million in the second quarter of 2023, and inflation started to surge again after July hitting 9.2% as of September 2023. Despite some negative headwinds, 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.