YEREVAN, May 14. / ARKA /. According to Moody's Investors Service, the Russia/Ukraine crisis constrains the credit outlook for the eight rated sovereigns of the Commonwealth of Independent States (CIS) because it has exacerbated economic downside risks in light of CIS countries' strong economic links with Russia, which is undergoing economic deceleration; heightened geopolitical risks by reigniting longstanding territorial conflicts; and increased the likelihood of direct confrontations with Russia.
The report is titled "Sovereign Outlook - Commonwealth of Independent States: Rising economic and geopolitical risks due to Russia/Ukraine crisis."
The report provides an assessment of the credit outlook for eight Moody's-rated sovereigns in the region, namely Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Russia and Ukraine.
Moody's notes that strong economic links to Russia currently imply downside risks for CIS economies given that we expect a 1% contraction in Russian gross domestic product (GDP), which stems largely from pressures on gross investment related to the political and economic uncertainties associated with the crisis.
Ukraine will face the largest GDP contraction in the CIS region, with a projected decline of around 5%-10% in 2014 in light of its internal political uncertainty, the political and economic stand-off with Russia, a currency crisis and an external liquidity crisis. The vote on the question of independence in the Donetsk and Lugansk regions on May 11, 2014, is not conducive to a de-escalation of political tensions.
Although Russia's declining GDP is negatively affecting the economies of six of the eight CIS countries covered in the report, in particular via trade, foreign direct investment and remittances, GDP growth across the CIS is supported by the ongoing recovery in the European Union, the region's largest trading partner.
Furthermore, commodity prices remain at a relatively high level, which is supporting GDP growth to varying degrees in all CIS countries. As a result, Moody's expects the other six Moody's-rated CIS countries to record positive GDP growth in 2014. Georgia and Belarus are likely to record stronger growth this year, while GDP growth will likely fall short of the 2013 outcome in Armenia, Azerbaijan, Moldova and Kazakhstan.
In 2015, we expect GDP growth to pick up in all CIS countries, in line with the anticipated recovery in Russia (2%) and again slightly stronger growth in the EU. As long as this recovery scenario for 2015 takes hold, key fiscal, debt and external metrics in the region are unlikely to weaken materially.
If, however, the Russia/Ukraine crisis worsened significantly, e.g. harsh economic sanctions from the West triggering strong counter measures by Russia, those key credit metrics could deteriorate significantly as a result of increased economic headwinds.
Moody's highlights the increase in geopolitical risks across the CIS region as a consequence of the ongoing stand-off between Russia and Ukraine and the Russian annexation of Crimea in early March.
These developments could revive longstanding territorial conflicts. Whereas an escalation of these risks is credit negative, individual countries' susceptibility to these geopolitical risks is already reflected in their current ratings. However, a further deterioration or a crystallisation of those risks could exert downward pressure on CIS sovereign ratings.-0-