This report does not constitute a rating action.
Key Takeaways
- Diplomatic efforts to reach a ceasefire agreement between Russia and Ukraine are gaining momentum.
- In this report we aim to formulate potential transmission channels following a hypothetical ceasefire that could impact the economies and banking sectors in the region, namely Armenia, Azerbaijan, Georgia, Kazakhstan, and Uzbekistan.
- We consider that a hypothetical ceasefire would have a limited direct impact on regional economies and banking sectors in 2025 because we expect that economic growth, remittance inflows, and trade flows, although diminishing, would remain solid and continue supporting regional economies.
S&P Global Ratings notes a high degree of uncertainty about the extent, outcome, and consequences of the Russia-Ukraine war. The exact scope and/or timing of the possible ceasefire or any other solution to the war are difficult to estimate at this point. That said, we have outlined below the key credit transmission channels that we will monitor as they evolve and our current assumptions under a hypothetical ceasefire scenario.
Regional Macroeconomic Effects Expected To Be Muted, At Least Initially
We view an immediate and significant outflow of migrants, investments, and capital from Central Asia and the Caucasus as unlikely, following a potential ceasefire. This should limit economic volatility.
Population movements are unlikely to be significant. It is difficult to isolate the economic impact of the Russia-Ukraine war on its neighboring countries. The inflows of migrants, primarily from Russia, to the region have been gradually diminishing after the peak of 2022. From the estimated slightly under 1 million who have left Russia since February 2022, some went to Kazakhstan (about 150,000), Serbia (150,000), Armenia (110,000), and Georgia (62,000), according to estimates compiled by Re: Russia. That said, these movements of people are hard to track and we understand that significant numbers have since returned to Russia or moved elsewhere.
Positive growth effects are likely to persist albeit at moderated levels. The arrival of migrants and visitors to Central Asia and the Caucasus, along with business relocations, boosted sectors such as information and communications technology (ICT), logistics, financial services, hospitality, and trade. For example, several thousand businesses owned by Russian citizens have been registered in Georgia since 2022. In Kazakhstan, the number of Russian companies in the ICT sector grew sevenfold compared to 2021, and make up 75% of the sector as of early 2024, according to Halyk Finance. In a ceasefire scenario, we expect many businesses would continue to operate abroad given the likely prolonged geopolitical uncertainty and enduring political and economic ties between Russia and its immediate neighbors.
Our current economic growth forecasts already somewhat capture the normalization of growth from the highs of 2022. We expect real GDP growth will moderate in the Caucasus and Central Asia in 2025-2027, relative to 2022-2024, as the temporary surge in trade, remittances, and capital inflows from Russia stabilizes (chart 1). We expect Georgia and Armenia's growth will almost halve over the next three years, from 9.4% and 8.8%, respectively, during 2022-2024, but will remain solid.
Chart 1
Remittance inflows will likely decline. A sharp rise in remittance inflows and money transfers in 2022 helped to improve the current account balance by an average of 6.5 percentage points for Uzbekistan, Georgia, Armenia, Azerbaijan, Kazakhstan, and Tajikistan. For Azerbaijan and Kazakhstan, the improvement also reflected higher oil prices. This impact was mostly reversed in 2023 due to banks' stricter compliance processes and the movement of Russian money to other jurisdictions. We observed a significant increase in remittances again in 2024, for example in Uzbekistan and Armenia, but expect this to gradually normalize. That said, remittances from migrants (mostly in Russia) will continue to be an important source of household income, particularly for Uzbekistan, Georgia, and Armenia (charts 2 and 3).
Chart 2
Chart 3
Rerouting trade flows will depend on the timing and extent of sanctions on Russia being relaxed. Since the Russia-Ukraine war started, a significant portion of European export flows to Russia have diverted to Central Asia and the Caucasus. The impact on these countries' current accounts has been broadly neutral because the higher-valued-added imports were re-exported to Russia. However, these trade flows declined markedly in 2024, particularly for Kazakhstan, due to more stringent sanctions and domestic compliance requirements. Overall, increased investment in transport and logistics, trade services, and local production should continue to provide longer-term economic gains for Central Asia and the Caucasus even if trade flows to Russia decline.
Immediate Risks To Regional Banking Sector Stability Expected To Be Contained
We do not foresee any material risks to banking sector stability in 2025 should a ceasefire materialize. In addition to the moderate impact on the region's economic growth, we have identified the following potential channels through which the region's banking sectors could be affected:
A moderation of inflows or an acceleration of outflows of non-resident deposits and capital. Inflows of non-resident deposits, primarily from Russia, to the region have been gradually diminishing after their 2022-2023 peak (see chart 4). Even if some funds are channeled back to Russia or to other countries, we see the risk of accelerated deposit outflows as contained. This is because uncertainties about Russia's macroeconomic and policy outlook, including transfer and convertibility restrictions, will remain high in the near term.
Chart 4
An anticipated normalizing of banks' fee income growth. Exceptionally strong growth in fees and commissions related to currency exchange and transfers in 2022-2023 has been gradually diminishing; this normalization could accelerate slightly in 2025. Non-interest income will revert to normal levels.
No expected material effects on loan growth. We view the individuals and businesses that relocated to the region because of the conflict as more likely to use regional banks as savings and payment services providers rather than for loans. Therefore, if some of them were to leave the region this would not have a meaningful impact on banks' lending growth.
A limited expected impact on housing prices. Over the past three years, housing prices have been growing in the region. To some extent, this was due to Russia-related migrant inflows. However, since not many newcomers committed to buying property, this impact was largely indirect, through increasing rental prices, especially in Georgia and Armenia and likely more pronounced in larger cities. Therefore, because we expect foreigners will not abruptly leave Armenia, Georgia, and other countries of the region if a ceasefire materializes, the overall impact on house price dynamics should be contained.
Related Research
| Primary Credit Analysts: | Annette Ess, CFA, Frankfurt + 49 693 399 9157; annette.ess@spglobal.com |
| Zahabia S Gupta, Dubai (971) 4-372-7154; zahabia.gupta@spglobal.com | |
| Secondary Contacts: | Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com |
| Karen Vartapetov, PhD, Frankfurt + 49 693 399 9225; karen.vartapetov@spglobal.com | |
| Amr Abdullah, London 2071760857; amr.abdullah@spglobal.com |
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