The risks of investing in Russia, Kazakhstan, Ukraine and other countries in the region are gradually easing, but remain diverse.
A window of opportunity for Ukraine, with a view of its national flower
Euromoney’s Q1 2021 country risk survey – to be released later this month – found a surprising, but welcome, bounce in risk scores for the Commonwealth of Independent States (CIS) region, based on the preliminary data.
Russia, Kazakhstan and Ukraine are among the countries with upgraded risk scores after last year’s volatility caused by the pandemic, making the region the most improved of all worldwide.
All three countries have seen across-the-board upgrades to all of their economic and political risk indicators, although many are still low-scoring, indicating substantial risk.
Iikka Korhonen, head of research at the Bank of Finland Institute for Economies in Transition, says that for central Asian countries, the continued strength of the Chinese economy and the oil price recovery are key positives.
“For Russia and some central Asian countries, the higher oil price is the single most important factor,” he says. “This, of course, reflects the general global recovery, fast roll-out of vaccines in the US and Europe, etc.”
The Covid-19 lockdowns saw oil prices fall below $20/barrel as economic activity stalled last spring, but the recovery has resulted in a stronger market, with prices moving back above $60/barrel since early February:
Russia still has its problems. Oil exports began the year on a weak note, inflation is above target – prompting the central bank to tighten monetary policy recently – the pandemic is far from beaten, and political risks are heightened by corruption, sanctions and institutional risks, among other features.
However, the economic picture is brightening. The latest IHS Markit purchasing managers indices (PMIs) show improvements to Russia’s manufacturing and services sectors, with the respective PMIs moving above 50, indicating expansion.
The World Bank has consequently released an upgraded forecast showing real-terms GDP growth of 2.9% for Russia this year and 3.2% in 2022 after last year’s contraction of 3.1%.
Russia’s ameliorating risk score means it is now the safest country in the region, ranking 76th globally, just above Kazakhstan – bearing in mind the survey results for Q1 2021 are preliminary and Euromoney’s global risk table has still to be updated to reflect this.
The European Parliament positively characterized Ukraine’s achievements in implementing decentralization reform and empowering local authorities- Source 'Vladimir'
These medium-risk countries are in the third of five tiers into which Euromoney divides all 174 countries, according to their aggregated risk metrics.
Unlike other world regions, the CIS group has seen an across-the-board improvement, with a notable bounce for high-risk Turkmenistan, bolstered by improving macro-indicators and the joint memorandum with Azerbaijan to develop a disputed Caspian Sea gas field.
Every country in the region, except high-risk Belarus (ranking 141st), is expected to register economic growth this year. Nevertheless, there is substantial variation in perceived risk between the best- and worst-performing countries.
Belarus and Kyrgyz Republic, for instance, are in tier five, the highest risk category. Ukraine and Moldova are also high risk, although their scores have improved in Q1. The same is true of Uzbekistan, now 93rd in the global risk rankings, up 51 places on a five-year trend basis – finding favour on the back of an ambitious reform agenda.
Ukraine is expected to embark on a mild recovery in 2021 after last year’s comparatively mild real GDP contraction of 4%. Its improving risk score reflects this.
The World Bank notes that the recovery in Ukraine has been more resilient than anticipated, with the economy benefiting from robust construction and agricultural activity, and firmer retail sales in late 2020.
Vladimir, one of Euromoney’s Moscow-based CIS-country experts, seeking a degree of anonymity, mentioned there has been some stabilization of the political system.
“The decision of the National Security and Defence Council of Ukraine in February on sanctions against the odious politician Viktor Medvedchuk (associated with Russian president Vladimir Putin) and his affiliates, and the subsequent blocking of Medvedchuk’s TV channels (estimated by many experts as de facto ‘pro-Kremlin’), from my point of view, can be assessed as overcoming one of the destabilizing factors for the Ukrainian political system,” he says.
US sanctions against Igor Kolomoisky, another Ukrainian oligarch – who is also hostile to Volodymyr Zelensky, president of Ukraine – were also mentioned.
Of course, a larger improvement in Ukraine’s score is dependent on progress with the IMF, which has suspended its lending programme amid concerns over institutional independence and corruption.
The threat of a third wave of the pandemic could also be a blow to the country’s economy in the second quarter.
Despite this, Ukraine is making strides in other areas, including its digitalization policy.
“In Q1, Ukraine made a significant step in digital ID system development, becoming the first country to equate a ‘passport in a smartphone’ with a paper one,” says Vladimir.
He goes on to mention the successful tax reform, noting that in January to February, the balance of VAT receipts increased by 1.5 times, which became possible due to the expansion of the tax base and decentralization.
“In February, the European Parliament positively characterized Ukraine’s achievements in implementing decentralization reform and empowering local authorities, urging the European Commission to consider applying these good practices in other countries,” says Vladimir.
These improvements highlight the complex and interrelated measurement of country risk that is not simply focused on economic growth, debt or government instability, and which is applicable to all the countries surveyed.
Euromoney will be releasing the results of its Q1 2021 country risk survey mid-April.