Fitch Ratings expects a limited near-term impact on the banking sectors in the CIS+ region (Georgia, Armenia, Azerbaijan, Kazakhstan, Uzbekistan, and Kyrgyzstan) in the event of a potential settlement of the military conflict in Ukraine, Report informs.
Overall, while a potential settlement of the conflict and a reduction in geopolitical risks would mark a positive development for the broader CIS+ region, bringing a reduced risk of secondary sanctions for banks, we expect its direct impact on the banking sectors – and more broadly banks’ credit profiles – to be minimal, according to the agency.
"Regional banks have benefited since 2022 from positive macroeconomic spillover effects stemming from the Russia-Ukraine conflict and the imposition of sanctions against Russia. This was due mainly to the boost to economic growth, earnings, and liquidity resulting from the migration of people and funds from Russia.
There has been some reversal to these flows, but we consider the changes to be largely structural and unlikely to reverse significantly in the event of a peace settlement. Consequently, the implications of a settlement for CIS+ banks’ credit profiles under our base case are limited, and we see their performance as primarily sensitive to domestic factors rather than geopolitical developments," reads the statement.
"Strong economic growth has supported credit growth in the CIS+ region over the past three years, with banks’ earnings (notably in Armenia, Georgia, and Kyrgyzstan) benefiting from higher foreign currency conversions and settlement fees associated with increased trade with Russia, intermediated by the CIS+ countries.
We anticipate that these trade routes, developed initially in response to shifting geopolitical dynamics, will remain largely intact even if sanctions on Russia are lifted, as Russia seeks to maintain its supply lines for strategic reasons, and particularly in view of likely persistent geopolitical risks.
Material capital outflows could exert depreciation pressures on local currencies, heightening risks notably to the highly dollarised Georgian and Armenian banking sectors, but this is not our base case. By contrast, we expect accounts held at CIS+ banks to remain important in servicing foreign-currency transactions that may otherwise be restricted through Russian banks," Fitch noted.