Caucasus Squeezed By The Bear (pt. 1)

The countries of the southern Caucasus are no strangers to uncertainty or crisis: Their location, sandwiched between a revanchist Russia to the north and Iran to the south, is virtually a guarantee against an easy life. However, even by local standards, the past few months have been pretty tough, more than confirming last October’s IMF forecast for the region that external shocks will continue to weaken growth prospects and heighten financial vulnerabilities.

“After a few years of relative calm and some economic progress, the region finds itself at the mercy of a deteriorating geopolitical environment and falling growth,” says Simon Quijano-Evans, head of emerging markets research at Commerzbank. “This has impacted on already-fragile investor confidence.”

Azerbaijan, Armenia and Georgia have all been hit by the latest geopolitical bomb—the growth in tensions between two of the three regional powers, Russia and Turkey. Russia’s economic crisis—reinforced by the collapse in energy prices and continuing Western sanctions following Moscow’s incursion into eastern Ukraine—has hit exports and led to a major drop in remittances, a problem that is particularly serious for Armenia, but also Georgia. Meanwhile, the slowing of Turkey’s economy has impacted on Georgia and Azerbaijan, both important trading partners with that country. 

All three economies have also been impacted by fast-growing private, corporate and, in some cases, government debt, with rising nonperforming loans (NPLs) putting pressure on already-fragile and undercapitalized banking systems; Azerbaijan’s credit rating was downgraded to junk by S&P at the end of January. All three have experienced major currency devaluations, with the strength of the dollar reinforcing this; meanwhile, growing dollarization is storing up more problems for the future. Political risk is rising even after elections in Azerbaijan (January saw demonstrations at falling living standards) and ahead of the rather freer parliamentary elections scheduled for October in Georgia. Opinion polls suggest indecision between the incumbent party, Georgia Dream, and its anti-Russian predecessor, Mikheil Saakashvili’s former party, the United National Movement.

“Policymakers are doing what they can, but the sheer volume of risk in this region will continue to dampen business confidence,” says Neil MacFarlane, associate research fellow in the Russia-Eurasia program at London analyst firm Chatham House.  

Source: Global Finance Magazine