Top ten risks in Eurasia
- Profound social instability
- Interstate conflict
- Energy price shock
- Fiscal crises
- Unmanageable inflation
- Failure of financial mechanism or institution
- Data fraud or theft
- Unemployment or underemployment
- State collapse or crisis
- Illicit trade
Societal risks are the top concern for businesses in the region, followed closely by economic risks.
The Eurasia region is characterized by economic slowdown, strong reliance on gas and oil exports and complex political situations. It is against this background that “profound social instability” tops the region’s list, ranking number one in Ukraine and in the top three in five other countries. Two countries in the region recently held presidential elections (Ukraine, Kazakhstan), one is going through a peaceful revolution that started in early 2018 (Armenia), and in one (Moldova), political instability followed recent elections. The latter two countries also rank “failure of national governance” high. At the same time, political demonstrations have taken place in Nur-Sultan, Moscow, Bishkek and Baku in recent months, showing a certain degree of social tension.
Furthermore, continued geopolitical tensions and unresolved territorial disputes in the region persist as a source of risk, with two ongoing armed confrontations resulting in deaths in 2019 (in Ukraine and the disputed Nagorno-Karabagh region). It is therefore no surprise that “interstate conflict” ranks as the second biggest risk for doing business in the region. It is number one in two countries (Russia and Armenia), third in one (Ukraine), and in the top ten in seven of the eight countries surveyed. The recent developments in the Ukraine conflict — a two-sided prisoners exchange13 — have sparked hope for continued improvement of the situation, whereas, on the other side, recent local elections in the Nagorno-Karabagh region could lead to increased tensions.14
Economic concerns also dominate the rankings, with “energy price shock”, “fiscal crises”, “unmanageable inflation” and “failure of financial mechanism or institution” making up the third through sixth most important concerns. As Russia, the largest economy in the region, is forecast to have a real GDP growth of only 1.2% in 2019, compared to 2.3% the previous year15, all other countries in the region, whose trade with Russia is key for economic health, see a similar economic slowdown projected for 2019. Six out of the eight surveyed countries are projected to have their GDP growth rate drop compared to 2018 (the only two with a projected increase are Azerbaijan and Kyrgyzstan).16
Ranked third, “energy price shock”, is the top economic risk in the region. It was top of the list in Tajikistan, number two in Ukraine and number three in Russia. Several of the region’s economies are largely dependent on stable energy prices, as some countries’ exports are more than 90% energy-related commodities,17 or energy-intense extraction goods, such as copper or gold. Despite slightly rising oil prices since the beginning of the year, they are predicted to fall,18 and natural gas prices have been at historically low levels throughout 2019.19 At the same time, non-regional geopolitical tensions in the Gulf region have sent oil prices on a rollercoaster in 2018–2019. These circumstances, on which the countries of the region have limited influence, make them vulnerable to unexpected shocks.
Considering this economic slowdown, coupled with the region’s vulnerability to global energy markets and rising discontent among the general populace – including concerns about a stagnating middle class20 – it is not surprising that respondents ranked “fiscal crises” fourth overall across the region. It was ranked high in Central Asia, Ukraine and Russia.
As a fiscal crisis can be triggered by various causes (slower growth, unbalanced public finances or commodity price shocks), respondents ranked “unmanageable inflation” as the fifth risk for doing business. This ranking is somewhat surprising as inflation is expected to slow in some countries, such as Ukraine, Armenia, Kyrgyzstan and Kazakhstan, but there is still uncertainty over whether central bank targets will be met. At the same time, the end of 2018 brought higher-than-expected inflation in many economies, which preceded significant currency depreciations across the region during the first quarter of 2019. End-of-year inflation in Russia for 2018 topped 5%21 – in part due to a two-percentage-point increase in Value Added Tax (VAT) – while the rouble depreciated by a little over 20% against the US dollar during 2018.22 Eurasia’s exchange rate markets are strongly linked to the Russian rouble, meaning that external financial shocks over which national monetary authorities have little control tend to spread quickly across the region.
In ranking “failure of financial mechanism or institutions” as number six, business leaders in Eurasia appear to be expressing concern regarding the strength of institutions and their ability to respond appropriately amid economic uncertainty and financial volatility. Russia, for instance, has seen a drop of citizen trust in national institutions in 2019 and ranks below other G20 countries.23