Russian Isolation Chills Debt Market for Ex-Soviet Neighbors

(Bloomberg) -- Russia's invasion of Ukraine risks sparking a wave of financial hardship and market losses from the Black Sea to the edge of the Himalayas.

Sweeping sanctions have put the world's biggest energy exporter on track for a deep, two-year recession that will endanger trade ties, tourism and billions of dollars of remittances for its ex-Soviet neighbors.

While a potential cease-fire deal in Ukraine sparked a relief rally this week, warning signs are still flashing in the $17 billion pool of eurobonds from Tajikistan, Georgia, Belarus, Armenia, Uzbekistan, and Kazakhstan. Debt from Belarus, Russia and Ukraine has handed emerging-market investors the biggest loss since Moscow's invasion on Feb. 24 -- and the others are close behind.

“Extensive economic links” could “affect the ability of former Soviet republics to repay their external debt,” said Claudia Calich, head of emerging market debt at M&G Investments in London. They're “risky as they're still very dependent on the conflict.”

Bonds issued by the countries directly involved in the crisis -- Russia, Ukraine and Belarus -- are already at pre-default levels. Elsewhere, routes for contagion vary.

Tajikistan is most at risk from a drop in remittances as its migrant workers in Russia contribute about 25% of gross domestic product, Calich said. About $13 billion is sent home each year from Russia by laborers from the Central Asian republic. The yield on the country's 2027 debt is up almost 400 basis points since Feb. 23.

A “sharp and prolonged” economic downturn in Russia “may lead to a sustained deterioration of Tajikistan's growth potential, primarily through a projected fall in remittance inflows,” Moody's Investors Service said in a report on Wednesday, in which it put the country's credit rating on review for downgrade.

Western Union Suspends Operations in Russia and Belarus

Tourism, Banking

In Georgia, tourism is key. The travel industry accounts for about one third of the economy, with Russian holidaymakers comprising 15% of the total. Yields on April 2026 notes have climbed about 300 basis points in the period.

Belarus has supported Moscow throughout the invasion and faces international sanctions of its own. But Russia also accounts for around half of its imports and exports and a sharp slowdown there would hit it hard, according to M&G.

The nation's eurobonds have handed emerging market investors the biggest loss since the invasion, Bloomberg indexes show. S&P Global Ratings warned on March 18 that the country's credit score could be cut further.

Debt Crisis Grips Russia's Most-Loyal Ally as Dollar Bonds Dive

Energy-rich Kazakhstan's main vulnerability is its financial ties with Russia, according to a JPMorgan report on March 25.

The Institute of International Finance named Tajikistan, Mongolia, Kazakhstan, and Uzbekistan as the frontier markets most at risk of trade disruption from the conflict. Total exports and imports with Russia and Ukraine account for more than 10% of those countries' gross domestic product, it said in a report.

JPMorgan analysts point to Belarus, Kyrgyzstan and Armenia as the most exposed based on their exposure to Russia in terms of trade, remittances, direct investment and their banking industries. Workers' money transfers home could plunge as much as 40% this year, analysts wrote.

“The region's level of connectivity to the Russian economy and the channels of contagion vary, but economic spillovers will be material,” Fitch Ratings said in a report dated March 9. The currencies of the former republics have tumbled with the ruble, potentially hindering their ability to pay foreign debts, Fitch said.