EM Europe and CIS: Select Country Risk Ratings

Armenia (ARM)

Armenia’s risk level remains medium high. Vahagn Khachaturyan is President but PM Nikol Pashinyan holds most of the executive power, having been Prime Minister since 2018. The main political issue in Armenia relates to the ongoing conflict between itself and Azerbaijan. Armenia is hoping to agree and sign a peace deal with Azerbaijan in the short term future, after Azerbaijan took the region of Nagorno-Karabakh last year, leading to the arrival of over 100,000 Armenians from the region. The conflict has persisted for three decades since both broke away from Moscow. Political violence is therefore at a high level. To accelerate peace talks, PM Pashinyan has given Azerbaijan control of 4 strategically important villages near the border, but this decision has resulted in Armenians calling for their PM to resign. In addition, the absence of Russia support during the Azerbaijan advance, has led to Armenia needing to become less dependent on Russia and now attempt to build closer ties with the EU. Armenia have received EUR 270 million worth of aid from the EU and have withdrawn from Russia led military group CSTO, all since they lost Nagorno-Karabakh. The IMF estimate 6.0% real GDP growth in 2024 and 4.9% in 2025. Despite, significant economic shocks in recent years, the economic outlook remains resilient with continued efforts for macroeconomic, justice and healthcare reforms. The risk of doing business remains medium low. Government debt is set to modestly worsen from 52.4% of GDP in 2024 to 55.6% in 2025. Despite the need to continue to invest in security, infrastructure and reforms, there is aid coming from the EU and IMF to facilitate and support this. The inability of the government to provide fiscal stimulus is now at a medium high risk level. The Armenian Dram remains stronger against the USD after a sharp appreciation in recent years. From the stronger dram and lower import prices, the resulting monetary easing implications should see inflation rise moderately in 2025 from a boost in domestic demand, with the IMF projecting inflation to be at 3.1% level in 2025 from 0.2% in 2024. The current account deficit is set to also modestly worsen from -4.2% of GDP to -4.8% in 2025. Despite this, exchange transfer risk stays at medium.

Belarus (BLR)

Belarus’ overall risk score remains high. The political violence risk level is at medium-high while legal and regulatory risk is very high. The country held parliamentary and local elections on February 25, alleged to be among the most flawed ballots in the thirty-year reign of President Lukashenko as the opposition candidates were not permitted. (Note: Belarus's next presidential election is scheduled for 2025 and president Lukashenka has confirmed that he plans to run for re‑election, which he will likely win). Because the allegations that the elections are not exercised freely due to political oppression, legal proceedings continue to be initiated against researchers and journalists on charges of conspiracy to seize power. Consequently, a climate of heightened political tension remains in the country. In this respect, political interference, the risk of doing business and supply chain disruption remain at medium-high. Belarussian economy continues to be negatively impacted by the Ukraine-Russia war due to close ties with Russia. Price and wage volatility remain strong which can be attributed to international sanctions.  The National Bank of the Republic of Belarus (NBRB) is trying to reduce dollarization, for instance by increasing banks' mandatory reserves of foreign currency, but low confidence in the Belarusian ruble, failures in financial regulation and supervision, and high levels of political risk continue to impede such efforts causing exchange transfer risk to remain at medium-high and the sovereign non-payment risk rating at medium level. Reliance on trade with Russia increase exposure to external shocks as well.

Kazakhstan (KAZ)

Kazakhstan’s overall risk score remains medium-high. The political violence risk and legal and regulatory risk levels are also at medium-high. The country continues to be an autocratic state with reform momentum having slowed after the 2022 election with socioeconomic discontent elevated due to high unemployment and corruption. Even though the country is appearing to distance itself from Russia after the war in Ukraine started, Kazakhstan’s trade and FDI interdependence to Russia means the economy is highly exposed to movements in the Russian rouble and global oil prices. Russia still has the control over the main oil export pipeline to the Caspian Sea, while trading relations with China has also grown and drawn economic activity closer to the Russia-China axis. On domestic politics, the majority of Kazakh voters approved the government’s plans to build a nuclear power station in Kazakhstan on October 6th. (Note: Sources cite that the vote served to further highlight the strength of president Kassym-Jomart Tokayev). The underlying economy momentum is good, as the government tries to maintain growth momentum. Though 2024 GDP is forecast at 3.1%, it is projected to accelerate to 5.6% in 2025 by the IMF.  The exchange transfer risk remains at medium high, which partially reflects the persistent current account deficit that is projected to grow to 4.5% of GDP in 2024. Despite political concerns and high corruption, the risk of doing business remains at medium and banking sector vulnerability is at medium-low level. The banking sector has systemic deficiencies that ensure poor scores for corruption and state intervention, financial regulation and supervision. Elsewhere, sovereign non-payment risk remains at medium considering a fairly low public debt/GDP ratio (25.2% of GDP) and reasonable access to international bond markets. Kazakhstan's falling foreign-exchange reserves, large financing requirement and dependence on oil and other commodities continue to create economic vulnerabilities. 

Russia (RUS)

Russia’s overall risk rating remains medium-high as the war in Ukraine continue to dominate both domestic politics and economy. The rouble remains very volatile, inflation is high and investment levels are low due to weak business climate as sanctions continue to hamper foreign investment. The overall environment for doing business in and with Russia remains unfavourable. Political violence is at very high rating and political interference risk is high due to alleged concerns on political oppression causing political tension to increase. The legal and regulatory risk remains high, and sovereign non-payment risk is medium-high as the war continues to cause a domestic strain creating an increasing financial burden due to high military spending and fiscal support. On the economic front, inflationary pressures remain elevated, inflation expectations worsen, and there are heightened transfer and convertibility risks. Inflation is the core macroeconomic problem as CPI has steadily increased from the low of 2.3% in April 2023 to 8.5% in October 2024 (stayed over 8% after May 2024) ignited by import suppression, labour shortages, and supply-chain disruptions. Despite macroeconomic problems and investors’ negative perceptions, Russia's overall public debt burden remains low and economic growth is higher than expected after 2023 via military spending and fiscal policy. Additionally, banking sector vulnerability is at medium-low as banks have remained profitable taking into account that the government continues to support large banks despite non-performing loans have increased in nominal terms. Given acute inflationary risks and high inflation expectations, we believe inflationary pressures won’t easily soften unless the Ukraine war comes to an end. The war will continue to be the key determinant for Russian economy and politics in the near future.

Serbia (SRB)

Serbia’s overall risk remains medium. Aleksander Vucic remains President having won re-election in last December’s snap elections. Political interference is at a medium level and legal & regulatory risk is medium high. The situation with Kosovo remains complicated as it has done since Kosovo’s independence in 2008. Relations remains tense, despite last year’s EU and US mediated deal seeing Serbia informally recognising Kosovo as a state while Kosovo being able to provide some self-governance over areas of Serb majority in Kosovo. In September, Kosovo had to temporarily close 2 of its borders with Serbia after Serbian protestors blocked roads, turning away passengers with Kosovo documents and in early 2024 Kosovo banned the use of the Serbian dinar for cash transactions, increasing tensions further between the two countries. Serbia is committed to joining the EU, however at the same are keen to remaining strong ties with Russia and China as the Balkan nation have failed to follow the EU and much of Western Europe in applying sanctions on Russia in response to the war in Ukraine. This alongside the Kosovo situation will hold Serbia back in EU accession. According to the IMF, real GDP is set to grow by 3.9% in 2024 and 4.1% in 2025, reflecting improving economic conditions after the economy suffered due to the pandemic and the Ukraine-Russia war. Easing inflation at 4.5% for 2024 and 3.6% in 2025, back in line the National Bank of Serbia’s target and a now more stable Serbian dinar, will boost booth private consumption and investment as June saw the start of the NBS’s easing cycle. Exchange transfer risk is at a medium low level. Government investment in infrastructure and in the renewables sector can also be attributed to a more positive economic outlook. Making the risk of doing business medium low. In addition, a downward trajectory of government debt to GDP anticipated by the IMF to be at 48.6% in 2024 and 47.4% in 2025, makes the inability of the government to provide fiscal stimulus medium low. The summer of 2024 saw a severe drought in Serbia affecting the production of crops and livestock reflecting the threat of the climate crisis among the Balkan states. Supply chain disruption remains at a medium level.

Turkiye (TUR)

Turkiye’s overall risk level remains high when compared to previous risk analysis period, with no changes in any of risk levels in this reporting period. The political tension in the country remains high, particularly after governing party, AKP, lost the popular vote for the first time in 22 years during the local elections in 2024, leading to political violence (currently very high), political interference standing at medium-high level and legal&regulatory risk at medium-high. Relations with the EU and the U.S. remain tense. On the economic front, after Turkiye made a shift to traditional economic policies followed by orthodox monetary steps mid-2023, there is a recent wave of improving economic indicators such as international reserves and current account balance. International credit agencies have significantly upgraded the country’s sovereign risk ratings, and CDS spreads have fallen. The banking sector vulnerability is currently at medium-low level, showing the relative strength of the banking system supported by Turkiye’s removal from the Financial Action Task Force (FATF) gray list in June 2024, which was a remarkable development for Turkish financial sector – though the banking sector is still exposed to Turkiye's heavily indebted private sector. The risk of doing business stands at a medium level, partly backed by manageable government debt/GDP trajectory and increasing tourism revenues supporting the economy. Despite positive developments, economic vulnerabilities such as high inflation and a volatile currency continue to cause concerns. (Note: Inflation decreased to 48.6% y/y in October due to lagged impacts of the tightening cycle and relative slowdown in credit growth, but remain elevated). There are still low foreign-exchange reserves relative to external short-term debt while a large gross external financing requirement and vulnerability to external shocks exist. The supply chain disruption risk is at high level as the country struggles due to the conflicts in the Middle East and Ukraine.

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