Portfolio flows to Russia are weakly correlated with global flows, likely due to sanctions. Despite the risk of further sanctions, government debt remains attractive to investors, as Russia stands out among EM due to exceptionally low macroeconomic vulnerabilities. In the long run, sanctions can lead to less prudent policies and reduce growth prospects. We expect discussions of Russia sanctions in the US Congress to pick up again in the fall.

Low breakeven oil price for the current account provides buffer against shocks. Introduction of the fiscal rule in 2017 has led to significant reserve accumulation. Debt repayments spiked after the 2014 sanctions but are now less of a concern. However, private sector capital outflows have picked up and may accelerate. Portfolio inflows have returned but are sensitive to sanctions announcements.

The US and EU have introduced numerous financial sanctions on Russia. The first episode of multilateral sanctions in 2014 had the biggest impact. Limiting investor access to the Ruble market (OFZ) is unlikely to be as severe. Existing sanctions will weigh on investment, productivity, and growth.

We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.

We have estimated Ukraine’s financing gap at $2 bn (1.5% of GDP). A key ingredient is a stable current account despite growth recovery. This is due to a favorable shift in the current account toward the EU. Domestic politics aside, a key risk is the growth slowdown in Europe.

We do a balance of payments forecast to assess the funding gap for Ukraine. Ukraine needs a follow-up IMF program of $2 bn under benign assumptions. Political impasse is a key risk due to parliamentary elections in October.