Russia-Ukraine conflict: Global fallout hitting business environment risk most in CIS countries and Europe

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. These price hikes are severely harming Russia’s and Ukraine’s important trade partners, countries that welcome many Russian and Ukrainian tourists and that rely on remittances coming from Russia. The situation will also (further) deteriorate the global financial conditions. 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. Hence, the Russian economy is expected to contract sharply (by 15% according to some estimates) and inflation is expected to increase (to 20% according to some estimates). The abrupt shock will cause a sharp deterioration of living standards for a vast majority of the Russian population. Moreover, the authorities have imposed countersanctions that affect cross-border payments to ‘hostile nations’. Given this sudden major external shock, Credendo has reviewed the business environment risk of the most-impacted countries. While the fallout of the war varies between countries and regions, the CIS and Europe are understandably the most directly affected regions.

• CIS

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. Based on an internal simulation of the business environment risk, taking into account 2009 real GDP growth and the recent evolution in exchange rates (cf. 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).

• Europe

European countries will be particularly affected by the ongoing conflict between Russia and Ukraine and its possible escalation. 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. 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).

In the Balkans, as Russia plays a strategic political role, particularly in Serbia, Montenegro and Bosnia and Herzegovina, its trade links and economic influence follow suit. Hence, the war in Ukraine will have a negative impact on the 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. Tourism will also be affected for Bulgaria and Montenegro, where Russians accounted for nearly 15% of total visitors prior to the conflict. At a country level, Montenegro stands to suffer as well from its high net food imports (10% of GDP) whereas Albania imports half of its grain from Russia and Ukraine. Finally, North Macedonia’s net dependence on fuel and ores and metals will leave the country vulnerable to soaring prices and extra supply chain disruptions. Still, for the time being, all classifications remain unchanged as the Balkan countries are already in moderate- to high-risk categories.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com