Ukraine War Dominates the Region
The main issue across the Eastern Europe and CIS region is dominated by the Russia - Ukraine war, which remains deadlocked for now as Russia’s and Ukraine’s spring offensives having failed to make major advances. The prospects of a credible peace deal are slim, as Russia wants the West to stop arm shipments and Ukraine wants Russia to withdraw from captured territories. These are hardline positions for either side to reach compromise on. Hopes for the ceasefire also remain weak, as Russia prefers to keep low level activity once winter sets in.
Eastern Europe and CIS Regional Overview
In Russia, Wagner Group’s mutiny on June 23, which involved Wagner forces marching towards Moscow and taking control of military facilities in two Russian cities, tipped the scales and weakened President Putin’s authority. Despite Putin announcing on July 4 that the country is stable and united despite the rebellion, Russian economy struggled badly after the rebellion as the ruble weakened in July 7 to trade beyond 90 per dollar. International sanctions due to Ukraine war, decline in energy earnings compounded by Wagner’s mutiny caused Russian currency to descent fast, depreciating almost 2%. Reports suggest that the Wagner leadership remains in Russia rather than moving to Belarus and is thus still an internal stability issue. However, Putin’s reign since 2000 has seen him eventually overwhelm internal pressures and regime change remains unlikely. Even so, President Vladimir Putin's grip on power is being questioned by business, and it seems the aforementioned issues will have negative effects on the overall economy in addition to investor’s perceptions over the Russian economy. Russia overall risk rating remain high.
In Ukraine, the ongoing war continues to devastate the country, particularly serious damage has already occurred on the country’s infrastructure such as road, rail and energy networks, which would necessitate a long time and extra funds to repair. Ukraine’s president Zelensky stated on July 5 that he had wanted to start the military push sooner, signaling the war on the battlefield can go worse but Ukraine counteroffensive is struggling to retake territory. The country has also been under martial law since the beginning of the war, and this continues to be the case. Ukraine’s economy has been severely affected by the war, as IMF estimates Ukraine’s GDP to decline by 3% in 2023, and projected consumer prices (% change) is 21.1% in 2023. The war’s adverse impacts perpetuate to shape the economic and political stance of the country. The 2024 U.S. presidential election is also an issue, as a Republican president could reduce finance and arms for Ukraine.
The spillover of the Ukraine war is evident in the Region, particularly on Belarus, which continues to have close ties with Russia. After Wagner Group staged a rebellion in Russia on June 23, Belarussian president Lukashenko was quick to play a key role in defusing Wagner militia’s mutiny against the Kremlin. Lukashenko intervened and brokered a deal under which Prigozhin would likely move to Belarus, and Wagner fighters either sign up to the Russian military, go to Belarus or return to their families. Elsewhere, Kazakhstan continues to distance itself from Russia invasion of Ukraine, though Moscow did come to President Tokayev supporting during the January 2022 coup attempt. The domestic political environment continues to improve slowly on a multi-year basis, with president Tokayev’s allowing a move towards different opinions after the March 2023 parliamentary elections. This means controlled debate within parliament rather than a body that rubber stamps presidential decisions, but does reinforce Tokayev position. The economy momentum remains good, as commodity demand is diverted from Russia and as the government tries to maintain growth momentum – though inflation remains too elevated and is set to be 14% in 2023.
Turkiye’s agenda shifted from politics to economics as presidential elections are now over with another President Erdogan win. Despite relative stability on the political front, Turkish economy continues to struggle due to high inflation and depreciating currency. Recent increases in minimum wage, upsurge in taxes, and rise in the cost of the currency protected deposits (KKM) pose trouble for the Turkish economy. Although markets were concerned that re-election of Erdogan and the AKP could mean continuation of unorthodox policies, the appointment of Mehmet Simsek as the new treasury and finance minister and Simsek’s signaling to a hesitant return to conventional orthodox economic policies partly relieved the markets. Within this framework, Central Bank of Turkiye hiked policy rate from 8.5% to 15% on June 22, in the first monetary policy committee meeting after the elections, and hinted further monetary tightening to cool down the economy and squeeze inflation lower. On the regional front, despite Turkiye's mediator role having helped the Black Sea grain deal to be extended many times, the future of the deal remains unknown.