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Euromoney Country Risk

Credit rating agencies scrambling to keep up with Russia-Ukraine crisis

From Estonia to Belarus, many sovereigns have been caught up in a crisis their credit ratings fail to reflect.

Falling risk scores for Russia and Ukraine have sent both sovereigns careering down ECR’s global rankings this year.

Ukraine, in the lowest of ECR’s five tiered categories, has crashed 25 places through the rankings to 150th out of 186 sovereigns worldwide – 32 in total since Q2 2013.

Russia, now 64th on a score of 50.08 out of 100, is less than a point and two steps away from ECR’s tier four.

Yet many other countries with trade links, or reliant on Russia for investment and/or migrant workers’ remittances, have been pulled down too.

Indeed, falling risk scores for Azerbaijan, Belarus, Bulgaria and Kazakhstan signify their creditworthiness is lower than that implied by the ratings assigned by Fitch, Moody’s and S&P.


Wider implications

The impact on investor safety across the region has been quite diverse, more so in high-risk countries plagued with domestic political and economic problems.

Some countries, such as Poland, that are more integrated into western Europe have been relatively unaffected by the crisis, while for others domestic risks predominate, such as rising corruption and regulatory/policy uncertainties where the Czech Republic is concerned, and the return of a socialist-party government in Albania after the elections in June 2013.

Yet many sovereigns reliant on Russian trade, migrant workers’ remittances and/or capital flows have had their ECR scores downgraded by economists and other country-risk experts this year.

Triple-B rated Bulgaria, eight places lower in the global rankings, has fallen into tier four – normally associated with a BB+ rating at best.

The Russia crisis has compounded the country’s political troubles, highlighted by street protests and the resignation of the prime minister in the wake of the failure of a leading bank, forcing early elections this October.

Bulgarian trade with Russia – an economy now struggling to grow at all – merely adds to these risks.

Baltic countries too have seen their risks rise, but remain generally safer than some of Russia’s Caucasus neighbours. Azerbaijan (ranking 76th) and Kazakhstan (65th) have both drifted lower.

Lilit Gevorgyan, senior economist and country-risk analyst at IHS Global Insight states: “Considering the importance of the Russian economy for the rest of the CIS countries, the negative spillover of the under-performance of the Russian economy is almost inevitable.

“The expected downturn in fixed investment and overall domestic demand in Russia means that there will be weaker demand for imports from CIS countries as well as less jobs for guest workers from south Caucasus and central Asia, causing a decline in remittances to other CIS states.”

She adds: “This is a serious negative development, considering that remittances are a key contributor to the overall foreign-exchange inflows for many countries in the region.”

Kazakhstan, now the lowest ranking tier-three sovereign and less than half a point from slipping into tier four, is surely no longer deserving its triple-B rating.

All six political risk indicators have been downgraded from a year ago, alongside scores for the economic-GNP outlook, currency stability and government finances.

Bank stability is a notable concern, given the aggressive risk strategies of small and medium-sized lenders with already high debt exposures to the construction and property sectors. Bank stability – one of 15 sub-factors ECR experts are asked to assess – remains the lowest scoring of any economic risk indicator on just 4.1 out of a possible 10 points.

Belarus, meanwhile, plummeting to 149th in the rankings, looks to be overvalued even on a low single B rating.

“This may prompt Russian and western investors to think twice before investing in other former Soviet states,” says Gevorgyan.

Russia, too, is overvalued, it would seem.

Moody’s adjusted its outlook from stable to negative last month, but still has Russia on Baa1. Fitch took a similar decision in March, but is persevering with its BBB rating. S&P is the most negative of all, putting Russia on a BBB- rating.

Its present ECR score is indicative of a credit rating no higher than BB+.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.