Russian isolation chills debt markets for ex-Soviet neighbors

(Bloomberg) — The Russian invasion of Ukraine risks triggering a wave of financial distress and market losses from the Black Sea to the edge of the Himalayas.

The sweeping sanctions have put the world’s biggest energy exporter on track for a deep two-year recession that will jeopardize trade ties, tourism and billions of dollars in remittances to its former Soviet neighbors.

While a potential ceasefire deal in Ukraine sparked a relief rally this week, warning signs are still flashing in the $17bn Eurobond pool of Tajikistan, Georgia, Belarus, Armenia, Uzbekistan and Kazakhstan. The debt of Belarus, Russia and Ukraine has caused emerging market investors the biggest loss since the invasion of Moscow on February 24, with the others close behind.

“Extensive economic ties” could “affect the former Soviet republics’ ability to service their foreign debt,” said Claudia Calich, head of emerging-market debt at M&G Investments in London. They are “risky because they still depend a lot on the conflict”.

Bonds issued by the countries directly involved in the crisis (Russia, Ukraine and Belarus) are already at pre-default levels. In other places, the routes of contagion vary.

Tajikistan is most at risk of a drop in remittances, as its migrant workers in Russia contribute around 25% of gross domestic product, Calich said. About $13 billion is sent home each year from Russia by workers in the Central Asian republic. The country’s 2027 debt yield is up almost 400 basis points since February 23.

A “sharp and prolonged” economic downturn in Russia “may lead to a sustained deterioration in Tajikistan’s growth potential, primarily through a projected drop in remittance flows,” Moody’s Investors Service said in a report on Wednesday, in the that placed the country’s credit rating. under review for downgrade.

Western Union suspends operations in Russia and Belarus

Tourism, Banking

In Georgia, tourism is key. The travel industry accounts for about a third of the economy, with Russian tourists accounting for 15% of the total. Yields on April 2026 notes have risen more than 300 basis points in the period.

Belarus has supported Moscow during the invasion and faces its own international sanctions. But Russia also accounts for around half of its imports and exports and, according to M&G, a sharp slowdown would hit it badly. The nation’s Eurobonds have caused emerging-market investors the biggest loss since the invasion, Bloomberg indexes show.

Debt crisis grips Russia’s most loyal ally as dollar bonds plunge

Energy-rich Kazakhstan’s main vulnerability is its financial ties to Russia, according to a March 25 JPMorgan report.

The Institute of International Finance named Tajikistan, Mongolia, Kazakhstan and Uzbekistan as the border markets most at risk of trade disruption from the conflict. Total exports and imports with Russia and Ukraine account for more than 10% of the gross domestic product of those countries, it said in a report.

JPMorgan analysts point to Belarus, Kyrgyzstan and Armenia as the most exposed based on their exposure to Russia in terms of trade, remittances, direct investment and their banking industries. Workers’ money transfers home could fall as much as 40% this year, the analysts wrote.

“The level of connectivity of the region with the Russian economy and the channels of contagion vary, but the indirect economic effects will be material,” Fitch Ratings said in a report dated March 9. The currencies of the former republics have collapsed with the ruble, which could hamper the ability to pay foreign debts, Fitch said.

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