CIS Sovereigns: Better positioned than 2014/15 but risks loom

Notwithstanding the substantial negative impact on growth as well as fiscal and external dynamics, the region’s oil & gas sovereigns (Azerbaijan, Kazakhstan and Russia) appear to have sufficient capacity to deal with temporarily lower prices thanks to ample fiscal reserves and sovereign net external assets. Compared to the 2014/15 crisis, improved policy credibility and floating currency regimes have become additional lines of defence (more so for Russia and less so for Azerbaijan). It’s however worth noting that dollarization and weak banking systems remain a risk for Azerbaijan and Kazakhstan.

Our base case sees ICE Brent returning above US$40/bbl over the latter part of the year, but an adverse scenario with a prolonged period of weak growth and lower oil prices would gradually feed into credit fundamentals and, more importantly, increase socioeconomic risks as time passes by.

Ukraine, meanwhile, finds itself once more at crossroads as it faces a deep recession (we expect -7.5% for 2020 GDP) with increasing concerns on external vulnerabilities. Thus, a new IMF programme has become indispensable. However, this is not a repeat of 2015: Ukraine heads into this current crisis with its head held high, thanks to lower debt levels, higher FX reserves and strengthened by previous policy reforms (notably NBU policy credibility) while geopolitical risks have become less imminent.