Russian contagion increases risks for neighbours, says Fitch

By bne IntelliNews March 5, 2015

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The sharp slowdown in the Russian economy is a significant shock for other former Soviet countries, but the impact on these countries' credit profiles varies considerably, according to Fitch Ratings.

"Armenia and Ukraine have the most direct exposure among Fitch-rated sovereigns, while the steep fall in oil prices has magnified the fallout in Kazakhstan and Azerbaijan," the ratings agency said in its report "Russia slowdown hits CIS sovereigns".

Former Soviet countries with excessive dependence on trade, remittances and investment from Russia are directly impacted by the Russian economic crisis. "Russia is Armenia's leading export market and largest source of foreign direct investment and remittances," Fitch said. "Russia's slowdown will therefore have a major impact on Armenia's growth prospects, as reflected in our one-notch downgrade of the latter to 'B+' in January." Russia accounted for nearly 27% of Armenian foreign trade in January and it was the Caucasus's country's largest source of remittances in 2014 - 82.9% or $1.4bn.

Although direct Russian exposure is lower in Kazakhstan and Azerbaijan in terms of share of GDP,  the ruble's depreciation on their fixed currencies is a major indirect channel of contagion - particularly in a context of lower oil prices, Fitch said. "Azerbaijan has responded by devaluing the manat and shifting from a dollar peg to a euro/dollar basket," the agency said. Azerbaijan's central bank devalued the energy-rich country’s currency, the manat, by 33.5% to the dollar and by 30% to the euro on February 21. The new exchange rates were set at AZN1.05 to the dollar and AZN1.195 to the euro.

Fitch believes there is a high possibility Kazakhstan could also devalue "as the tenge's real effective exchange rate has appreciated to levels last seen before the February 2014 adjustment". Kazakhstan devalued the tenge by 19% in February 2014 and expectations of another devaluation were high, resulting in tenge run: the share of foreign-currency denominated retail deposits widened from 44% to 67.5% in 2014 and to 67.7% in January 2015, according to National Bank of Kazakhstan figures.

"Devaluation poses risks for both sovereigns, but they have strong buffers," Fitch said. Kazakhstan has over $100bn in international reserves, while Azerbaijan has $9.3bn.

"Georgia is less exposed to Russia via remittances and trade ties, although we are still likely to slightly revise down our GDP growth projections for 2015-2016," the ratings agency said. "Both Armenia and Georgia have allowed their currencies to float, providing a shock absorber and preserving foreign-exchange reserves."

Between October and February, the Georgian lari weakened by 14% versus the greenback, while the Armenian national currency, the dram, lost 25% of its value against the dollar between November and December.

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