Entries for 'EM Europe'

Russia’s current account surplus reached $227 bn in 2022. Exports increased by more than 10% Jan-Sept 2022, while, imports contracted by 16% for the year as a whole. After falling by over 35% in spring, Russia’s imports recovered. China, Hong Kong, and Turkey have expanded exports to Russia. Replacing Russia’s former top trade partners, such as the EU. China accounts for over 36% of Russia’s imports and 20% of exports. Despite export controls, Russia increased its import of chips in 2022. With China and Hong Kong supply about 40% of Russia’s total chips.

Growth across CEE-4 remained relatively resilient to external events. But rising inflation began to weigh on consumer confidence in late ‘22. Monthly indicators suggest further weakening in activity in ‘22Q4, while risks of a severe recession in the Euro Area in ‘23 look less likely.

Elevated levels of inflation remain the biggest challenge for CEE-4. Meanwhile, concerns over a recession will likely weigh on demand. This leaves central bankers in a tricky position to strike a balance. The market anticipates interest rate cuts will begin sooner in 2023.

Elevated commodity prices deteriorated CA balances across CEE-4. Fiscal deficits will likely improve in 2022 from a year earlier for most CEE-4, while a higher imported energy bill is expected to widen CA deficits markedly. The region will likely end 2022 with sizable fiscal and CA deficits.

Russia’s current account surplus reached $180 bn by end-August. Well on track to hit the forecast of $250-$280 bn surplus in 2022, followed by a current account surplus of about $80 bn in 2023. Russian banks are accumulating FX as the BoR is under sanctions. Due to the risk of further sanctions, Russia is keen to de-dollarize. Despite the creative schemes, progress has been limited so far.

Energy supply shortages will weigh on near-term growth prospects for the CEE-4 region. Covid-driven supply chain stress is off its peak, but a return to pre-Covid norms will take time. The CEE-4 region could help make global supply chains more resilient if the region can attract more FDI.

Russia’s fiscal accounts continue to benefit from high commodity prices. Debt-to-GDP stands at 17%, and the NWF fund is 8% of GDP in 1H2022. However, ~40% of federal budget revenues come from oil and gas. Revenues will fall due to energy wars and the EU oil embargo in 2023. We expect a federal budget deficit of about 2% in 2022 and 3% in 2023.

Non-residents have cut their holdings of Lira-denominated bonds to historic lows, while still keeping sizable positions in Turkish Eurobonds. Turkey might need to attract more non-resident deposits going forward, unless external debt rollover ratios could be pushed higher.

Global liquidity conditions look set to tighten further, which will force CEEMEA central banks to continue to hike interest rates. Wider macro imbalances also call for tighter policies in some cases. Energy shortfalls could lead to falling output and employment, which would ease demand pressures.

Ukraine has received $6.8 bn in assistance since the beginning of the war. However, the monthly fiscal financing gap reached nearly $4.5 bn in May. $23 bn in commitments for the remainder of 2022 might not be sufficient. The NBU has been providing substantial monetary financing to the budget. To stabilize FX and bring real rates to positive territory, it hiked rates to 25%. Without further support, Ukraine may face a BoP crisis in the coming months.

The CEE-4 outperformed Euro area GDP growth in 2022Q1. Uncertainty and fallout from Russia’s invasion of Ukraine, as well as tighter policies are to blame. Central banks may need to tighten policies further should depreciation pressures rise. Energy supply shortages could trigger a severe recession.

Russia has weathered the de-SWIFTing of key banks better than many expected. Investment in domestic payments and messaging systems since 2014 has paid off. Some concerns are being raised about sanctions circumvention via crypto assets. We believe it to be unlikely that Russia can rely on such channels in the near term. The market appears to be too small relative to the country’s trade and capital flows. U.S. and EU sanctions have also been extended to crypto assets and companies.

Sanctions on Russia combined with supply shortages elsewhere may keep oil prices elevated despite lower global demand. Higher global oil supply combined with weaker demand growth could stabilize the oil market in H2 2022 and in 2023

An embargo by the EU on Russian crude oil and petroleum products would be impactful. While details are still being discussed, we project meaningful volume reductions in 2022. The final impact over 2022-24 will largely depend on Russia’s ability to redirect exports. Sanctions by the U.S. and EU could make a difference as far as third parties are involved. We estimate Russian exports could be $155 bn lower than the baseline over 2022-24. Uncertainty surrounding this estimate is unusually high due to the number of moving parts.

Russia stopped natural gas exports to Poland and Bulgaria on April 27. Disruptions should be limited for Poland due to high storage levels, with more diversified sources, including LNG imports, also factoring in. We do not expect spillover effects to other European countries’ supplies. However, Russia’s energy policy is prompting them to seek other sources.

An EU embargo on Russian crude oil exports would have a meaningful impact. Oil accounts for one-fourth of Russian exports and around 30% of fiscal revenues. Ultimately, the effect will depend on the country’s capacity to redirect exports. Infrastructure constraints and the threat of secondary sanctions are key challenges. European decision-makers may prefer direct sanctions on the shipping industry. Overall, the EU has a better chance of limiting "seaborne" (vs. pipeline) oil exports.

Russia’s invasion will have a severe impact on Ukraine’s economy in 2022. We expect output to contract by more than 35%-with risks to the upside. The country’s fiscal gap could reach $3-10 bn/month as revenues collapse. Reserves may also come under heavy pressure should the war be protracted. Ukraine needs macro-financial assistance now-not only for reconstruction. Commodity supply chain disruptions will have worldwide repercussions.

Severe sanctions have focused on Russia’s domestic financial system, with freezes of Bank of Russia assets among the most impactful steps. Emergency liquidity support by the CBR stabilized the banking system. The Ruble has also made up most of its losses due to capital controls, together with large current account surpluses and tight monetary policy. We see a tightening of financial sector sanctions as likely going forward.

Sanctions have hit the Russian economy hard, but more measures are likely coming. At this time, the discussion largely focuses on a potential embargo on energy exports. We show that a stop to natural gas imports would be much more difficult than to oil. This is due to both Europe’s gas supply composition as well as the mode of delivery. For Russia, an embargo would have a dramatic effect on overall activity and exports. The country could lose $250-300 bn in export receipts, depending on price dynamics.