Credendo downgrades business environment risk ratings for CIS states

Risk and insurance managers who work for multinationals that have operations in the Commonwealth of Independent States (CIS) must brace themselves for a “large external shock for the region” from the predicted 15% contraction in Russian GDP as a result of its invasion of Ukraine, according to Belgian state-owned credit insurance group Credendo. The agency points out that the immediate effects will be felt by companies with operations in Russia and Ukraine. But it predicts that this will be a conflict with “broad ripple effects”. “Even if Russia and Ukraine represent a small share of global GDP, Russia’s invasion of Ukraine is having wide and acute global repercussions. The invasion is provoking a sharp increase in commodity prices – notably oil, gas, metal and food prices, grain in particular,” points out Credendo. The credit insurer points out that these price hikes are severely harming Russia and Ukraine’s important trade partners, countries that welcome many Russian and Ukrainian tourists and that rely on remittances coming from Russia. “The most-impacted country is obviously Ukraine, which is in ‘war economy mode’ and will face huge reconstruction costs when the war is over. In Russia, following the imposition of harsh sanctions, the Russian rouble has tumbled. Many western enterprises are leaving the country, access to western financing and technologies is cut off, and pressures demanding to sanction the oil and gas sector too, are growing,” explains the credit insurance group. The Russian economy is therefore expected to contract sharply by 15% according to some estimates and inflation is expected to increase to 20% according to some estimates. The fallout of the war varies between countries and regions, but Credendo says that the CIS and Europe are understandably the most directly affected regions. “The CIS region is the most affected by the current crisis as Russia and (although to a lesser extent) Ukraine are important trade partners for many countries in the region. Moreover, many countries are relying on remittances from Russia. The experience of 2009 (and to a lesser extent that of 2014) has shown that an important contraction of real GDP in Russia constitutes a large external shock for the region,” says the credit insurer. It said that, based on an internal simulation of the business environment risk, taking into account 2009 real GDP growth and the recent evolution in exchange rates (such as the sharp depreciation of the Kazakh tenge), business environment risk ratings have been downgraded for Kazakhstan (to category E/G), for Armenia, Georgia and Tajikistan (to category F/G) and for Moldova (to category G/G). European countries will also be particularly hit by the ongoing conflict in Ukraine and its possible escalation, says Credendo. “Western European economies will mainly be impacted through higher gas, oil and electricity prices, as all western European economies (except for Norway) are major net fuel importers. Additionally, shortages of key commodities and materials imported from Russia (such as wheat, aluminium, steel, nickel), tightened financing conditions, falling business confidence causing delays or cancellations of investment projects, increases in precautionary savings by consumers and a rise in government support to refugees fleeing Ukraine, will probably weigh on western economies’ growth,” says the insurer. “In case of an escalation of the conflict, disruptions in gas deliveries could surge. The impact on real GDP growth is difficult to assess at this stage, even though there is still a consensus that Europe may avoid a negative real GDP growth rate this year. Hence, business environment risk ratings were currently kept unchanged (except for Ireland’s and Lithuania’s),” adds Credendo. The war in Ukraine will also have a negative impact on the Balkans region, including an indirect one via its shock for the European economy. “Serbia – having the closest relations with Russia from a historical point of view – might proportionally be the most vulnerable country. Even if it is to a moderate extent, Serbia is affected through reduced Russian demand, the impact of sanctions on Serbia’s Russian imports (i.e. 4% of total exports and imports) and its dependence on Russian hydrocarbons,” says Credendo. Still, for the time being, all risk classifications remain unchanged as the Balkan countries are already in moderate- to high-risk categories, says Credendo.

Credendo downgrades business environment risk ratings for CIS states

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