Quarterly Lodestar
Together with other emerging economies, the three largest ex-USSR economies stand to benefit from the broad-based recovery that is under way worldwide. The commodity markets are in a much better shape than 2-3 years ago, and regional geopolitics seem calm in comparison with the 2014 storm. Still, we warn investors against complacency in 2018-2019. We note a recent rise in global geopolitical risks; in the CIS region, we see a risk of a flare-up in hostilities in Eastern Ukraine ahead of presidential and parliamentary elections due in 2019. We also see a high likelihood of another oil price drop in the next few months that could pose a test to fledging inflation targeting regimes in the region.
- The US Treasury is about to submit a Report on further Russian sanctions, including a list of individuals close to President Putin and their family members. The report will also contain recommendations on further broadening of the existing sanctions. The high temperature of the debate in the US on the alleged Russian interference in the US election suggests that the markets should not totally discount the risk of sanctions’ extension to private companies not previously included into the list, and with no apparent connection to the President. The US administration is not expected to extend the sanctions to Russia’s sovereign debt, even though the new bill approved last summer allows for it. Crystallisation of this tail risk would deal a further blow to the investment climate, and would intensify capital outflows.
- In the new year, the Rada has approved some legislation required to unlock the next tranche of the IMF assistance for Ukraine. However, it has still not met several important conditions. We see a small probability of Ukraine receiving another tranche by mid-2018 when the election season fully kicks in. If external environment remains benign, the government should be able to muddle through this year, but may face problems next year when debt repayment schedule gets heavier.
- Without the new IMF tranche, the hryvnya weakening is likely to continue. Persistent depreciating pressure on the hryvnya is caused by an imports boom on the back of the more generous fiscal policy. We expect it to challenge NBU’s commitment to inflation targeting and put downward pressure on FX reserves.
- In Kazakhstan, the dynamics of de-dollarisation of bank deposits has so far been disappointing. In an event of another drop in the oil price (which we think is rather likely in the next few months), the NBK will need to find a right mix of intervention and policy tightening in order to prevent a resurgence of deposit dollarization.
- In the last 18 months, authorities in all three countries had to inject extra capital into the banking system to support systemically important banks. We are not particularly worried about the risk of a banking crisis in a near term in any of them, but will keep an eye on fiscal or quasi-fiscal costs of further banking sector stabilisation.
WHY EMERGINOMICS?
- Original take on geopolitical, economic and oil market developments
- Thematic research on hot topics
- Face-to-face meetings and presentations upon request
- Independent views not influenced by the need to comply with a “house view” or priorities imposed from above.
MEET THE FOUNDER. Tatiana Orlova holds a MSc in Economics from the LSE and has worked as an Emerging Market economist and strategist since graduation in 2001. She has been employed in EM research teams in four investment banks covering a diverse range of CEEMEA economies, with a particular specialism in the post-Soviet economies.
Tatiana is a widely known expert on the post-Soviet economies who has given multiple interviews to major world financial media (such as FT, Bloomberg, Reuters, CNBC etc) and spoken at conferences attended by hundreds of clients. Tatiana’s unique background and experience, as well as her deep knowledge of the region’s economics, history and geopolitical realities, allows her to make accurate forecasts and predictions across the range of Fixed Income instruments. She has covered the region’s hydrocarbon producers during the oil crises of 2008-2009 and 2014-2016, and issued a range of successful calls. Most notably, in September 2014 she predicted that Russia was about to lose its investment grade sovereign rating, which was a highly non-consensus view. Similarly, she correctly called imminent downgrades of sovereign ratings of Azerbaijan and Kazakhstan during the following winter. She also has a track record of successful FX and interest rate recommendations.
GET ACCESS TO EXPERTISE IN AN UNDERSUPPLIED MARKET
MIFID II forces big banks to switch to paid subscriptions by Mifid II as of 3 January 2018. Clients who subscribe to standard research packages covering emerging economies in the CEEMEA region may find themselves paying for run-of-the-mill research of variable quality, not always addressing the hottest topics affecting asset prices in a timely manner. Banks have already slimmed down their research teams substantially, and this process will likely continue after the new rules have kicked in. The cuts have already translated in a lack of resources and expertise to provide in-depth macroeconomic coverage, especially of smaller economies in the region.
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