Russia-Ukraine Reels Second-Tier Swathe

Back in the 1990s, strolling to a stock exchange conference in central Bishkek, the then-head of Kazakhstan’s central bank declared that when Russia caught a cold, Kazakhstan, Kyrgyzstan. and neighbors caught pneumonia.  While focus today is mostly on the fallout in Eastern and Western Europe with banking-energy entanglement, market malady is pervasive in off the-radar screen locations from the Ukraine shock. 

Kazakhstan has already hiked its main policy rate from 10.25% to 13.5% as the tenge sank a further 6% on news of the full-scale invasion.  The central bank earlier in the week intervened to support the currency, despite a nearly 7% fall in foreign exchange reserves from October-January after its President-protester political explosion. Kyrgyzstan relies on remittances from an estimated one million migrant workers in Russia who sent home nearly USD 3 billion in 2021. They total 28% of GDP as the main foreign funding source, according to the most recent World Bank data.  It relies on Russia for its oil and gas, while trade with Ukraine totals USD 100 million annually. Foreign exchange reserves stood at USD 2.6 billion in January, according to IMF data, but only USD 1.5 billion is in liquid currencies. Uzbekistan – resource rich with oil, natural gas, and gold – will also suffer. World Bank data puts remittances at nearly 12% of GDP, and while the country boasts official reserves of USD 30.2 billion, only USD 12.4 billion are in convertible currencies. 

Just as Russia was preparing to move in, Azerbaijani President Aliyev signed a wide-ranging “alliance agreement” with Putin at the Kremlin. While he claims the deal had been in the works for months, the timing of the 43-point pact – which covers military aid and territorial integrity as well as economic and social issues – is under scrutiny by the opposition party and neighbors, especially Armenia grappling with its own war aftermath. Azerbaijan’s foreign reserves are estimated at more USD 50 billion, including the assets of its sovereign wealth fund SOFAZ, and its annual bilateral trade with Russia is USD 3.5 billion.

Outside of Central Asia, Turkey is in the spotlight, already reeling from
“unorthodox” monetary policy and inflation near 50%.  Ukraine and Russia are both important trade partners of the NATO member. Turkey depends on them for critical wheat imports, and a sizable chunk of its energy needs.  The rise in oil and wheat prices will push up inflation, and a drop in tourism from Russia and Ukraine – which accounted for an estimated 25% of revenues last year – will further widen Turkey’s perennial current account deficit.  The TRY is expected to reverse momentum against the USD despite central bank intervention – after falling below 14/USD for the first time this year – and demonstrations over rising prices will expand.

Across the Mediterranean, Egypt is already scrambling to address food import pain, historically a recipe for political instability. Last year more than 75% of the country’s wheat imports came from the two countries, and any rise in the price of bread in Egypt breeds social unrest.  The state will further pressure the budget – with the deficit already expected to be well over 6% by the end of the fiscal year in June – by supplying subsidies to maintain calm. Like in Turkey tourism revenues are critical – pre-pandemic they accounted for 15% of GDP – and media reports that bookings from both Russia and Ukraine have plummeted this month.

The US Department of Agriculture data puts global exports of Russia and Ukrainian wheat at one-third of the global total, and together they account for more than three-quarters of sunflower oil.  Lebanon, already reeling from its ongoing economic crisis, imports half of its wheat from Ukraine where shipments are now blocked, and already lacks the cash to purchase food and energy.  Similarly, Pakistan, under an IMF program and with inflation already running at 13%, imports the bulk of its grains from Ukraine and will be hard hit by higher energy prices.  Prime Minister Imran Khan is under heavy criticism for his trip to Moscow this week – the first by a Pakistani Prime Minister in 20 years – which both sides indicated was long-planned and was originally billed as an IMF fund-raising pivot for stretched FX reserves. The geographic concentration and major emerging market tilt as an original BRIC slams the edifice and will magnify disconnects in these second order markets. They are set for peripheral damage that may also shake complacent economic models and trade relationships, so that investors in the future routinely scan their fit in complex portfolios.

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