EM Europe and CIS: Select Country Risk Ratings

Albania (DZA)

Albania’s overall risk level is medium as Edi Rama remains PM ahead of legislative elections in 2025. Political violence and political interference are both at a medium level. However, there remains political division. This summer, there have been opposition protests, including the throwing of petrol bombs towards the direction of the Albanian government buildings. The leader of the opposition and former PM, Sali Berisha remains under house arrest for alleged corruption when he was PM but there remains a feeling that PM Edi Rama is looking to limit any opposition. Albania remain a candidate for EU accession but obstacles for Albania remain with the need for reforms in the legal and judicial system and better governance. However, it is worth noting, EU Commission President Ursula von der Leyen said last year that the future of the Western Balkan nations was ‘’in our Union’’. According to the IMF, real GDP is projected to grow 3.1% in 2024 and 3.4% in 2025. The growth in the tourism industry post COVID has allowed for a positive outlook for Albania as they are welcoming more tourists than ever before, stimulating more private investment and boosting wages. These wage increases, coinciding with inflation expected to fall back to the Central Bank’s 3% target in 2025, should allow strong enough domestic demand to sustain positive growth in 2025. The inability of the government to provide fiscal stimulus is medium low and sovereign non-payment risk is medium. Government debt (as a % of GDP) will continue to fall after it peaked off the back of the 2019 earthquake and 2020 COVID crisis. The IMF forecast government debt/GDP will sit at a level of 58% in 2024 and modestly drop to 57% in 2025. The Albanian Lek continues to become stronger against the EUR, as exchange transfer risk is deemed as medium low. Concerns over reduced competiveness from the currency appreciation and wage increases as well as a stalling Eurozone economy (Albania’s biggest trading partners), means the current account deficit will remain wide -- the IMF estimate the current account deficit to be at -3.5% in. Climate change is an ever-worsening issue in Albania. This summer has seen severe wildfire blazes including through the coastal town of Shëngjin with soaring local temperatures. In addition, agriculture does also remains a fundamental part of their domestic economy, heightening Albania’s future potential climate risk. Supply chain disruption is medium.

Azerbaijan (AZE)

Azerbaijan’s overall risk score is at medium-high level. The political violence risk and legal & regulatory risk stand at high, while political interference risk remains at medium-high in this rating period as Azerbaijan’s economy continues to be strained by structural deficiencies and corruption. On the political front, the country’s president Ilham Aliyev secured his fifth term and another seven years in office after the election in February as his popularity in the society was bolstered following the success of capturing Nagorny Karabakh from Armenia. The dispute between Azerbaijan and Armenia remains as a local issue, and seems partly solved, -at least for now- causing no further risks over the outlook. The economic momentum is promising as the government maintains growth momentum supported by growing FDI and surging government spending. One of the major FDI sources in Azerbaijan remains Turkiye as the countries have been recently strengthening their relations and accelerated following Turkiye’s full support to Azerbaijan during the Nagorny Karabakh conflict. On the economic end, the annual inflation rate increased to 2.7% in July from 1.1% in June as CPI remains moderate. The country also recorded a trade surplus of around USD2 billion in the second quarter of 2024. Backed by the positive economic environment, the risk of doing business remains at medium while exchange transfers risk is at medium-low. Additionally, the medium-low banking sector vulnerability rating is demonstrating relative stability of the financial sector. Despite positive developments, Azerbaijan's economy heavily relies on oil and gas exports, and it appears any fluctuations in global energy prices can dramatically impact economic performance. Minimal diversification of the economy sustained by oil and gas revenue continue to weigh on growth. The government continues to adopt a number of strategies to diversify the economy and strengthen the non-oil sectors, and this will be key for the Azerbaijani economy in the near future.

Russia (RUS)

Russia’s overall risk rating remains medium-high as the war in Ukraine continue to dominate both domestic politics and economy. The overall environment for doing business in and with Russia remains unfavorable. 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. While political and military issues remain critical, the focus is currently on the economy as inflationary pressures remains elevated, sanctions hurt, and currency weakening continues. Inflation is the core macroeconomic problem as CPI has steadily increased from the low of 2.3% in April 2023 to 9.1% in August 2024 ignited by import suppression, labor shortages, and supply-chain disruptions. Despite investor’s perceptions over the Russian economy being negatively affected by the ongoing war and sanctions, Russia continues to enjoy plenty of room to stimulate growth via fiscal policy, given the low government debt/GDP trajectory coupled with the banking sector vulnerability remaining medium-low. Given acute inflationary risks and high inflation expectations, we believe inflationary pressures won’t easily soften unless the Ukraine war comes to an end. On the war front, the conflict remains deadlocked unless Donald Trump is elected U.S. President in November and threatens to curtail Ukraine funding leading to a probable Russia-friendly peace deal in 2025. We now feel the battle in Kursk region is also turning into a stalemate as neither side makes major advances and winter is coming. It is still uncertain whether the Kursk operation will be a game changer and increase Ukraine’s bargaining position at any negotiations if Trump is reelected. The war will continue to be the key determinant for Russian economy and politics in the near future.

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 this year, leading to political violence (currently very high), political interference standing at medium-high level and legal and regulatory risk at medium-high. 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. International reserves (net of swaps and other liabilities) increased by USD91 billion between April and August, and international credit agencies upgraded the country’s sovereign risk rating while CDS spreads also declined nearly 440 bp since mid-2023. 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. The risk of doing business stands at a medium level, partly backed by decreasing current account deficit, increasing tourism revenues, and manageable government debt/GDP trajectory supporting the economy. (Note: Current account deficit shrank to 2.7% of GDP in Q1 2024, from 4% of GDP in 2023 thanks to increasing exports). Despite abovementioned positive developments, economic vulnerabilities such as high inflation and a volatile currency continue to cause concerns. (Note: Inflation decreased to 49.4% y/y in September due to lagged impacts of the tightening cycle and relative slowdown in credit growth, which indicated a positive real interest rate for the first time in the last three years as the key rate remains at 50%).  The supply chain disruption risk is at high level as the country struggles due to the conflicts in the Middle East and Ukraine.

Ukraine (UKR)

The adverse impacts of Ukraine-Russia conflict, which is coming to a deadlock, continues to cause Ukraine’s overall risk rating to be high. Ukraine’s high risk rating comes from a very high risk rating in political violence, high risk ratings in legal & regulatory risk, supply chain disruption and sovereign non-payment risk coupled with political interference posing a medium-high risk. Despite most of the risk items remained unchanged in this rating period, the only change recorded in exchange transfer risk, which increased from medium-high to high taking into account that the financial sector remains under pressure after the new set of sanctions in July. The inability of government to provide stimulus remain at medium-high, given the cost of the war.  The war continues to devastate the country, with serious damage already on the country’s infrastructure such as road, rail and energy networks, which will likely need plenty of time and extra funds to repair. The country is still governed under martial law. Despite the adverse impacts of the war such as the electricity cutoffs and smaller harvests compared to the previous year, the National Bank of Ukraine improved its expectations for economic growth from 3% to 3.7% in July citing businesses in Ukraine are now much more prepared for electricity cutoffs because they have generators and batteries. Inflation remain at a moderate level, and amounted to 4.3% in July. In H1 2024, the Ukrainian budget had a USD14.5 billion deficit, which is a quarter more than during the same period of 2023, igniting budgetary concerns. Despite ongoing problems, the risk of doing business in Ukraine is at medium-level and banking sector’s vulnerability is at medium-low, demonstrating relative strength of the Ukrainian economy.