While relatively unlikely, there are a large number of risks in the region—which could occur abruptly
For a brief video overview of these events, please click here.
Under our base-case forecast, the Commonwealth of Independent States (CIS) region will again be defined by the negative impact of the war on the primary markets of Russia, which will see another steep recession in 2023, and Ukraine in light of the continuation of the war across the year. Similar to 2022, the core eastern CIS markets of Kazakhstan, Azerbaijan, and Uzbekistan will continue to provide solid growth potential thanks to elevated commodity prices, albeit with some weakness in the first half of 2023 on account of persistently high levels of inflation eating into demand. Relative to the global portfolio in 2023, the Central Asia & Caucasus region will provide some of the better opportunities available. Still, clear risks emanating from the war and Russia’s revanchism will pose threats to the outlook during the year.
- Ukraine wins war, Russia pulls out (30%): After further major military defeats across 2023, Russia is forced to end the war and pulls troops back to pre-2014 borders. There is a negotiation over the status of Crimea, while the regions Russia annexed most recently are brought back under Ukrainian control. This event also likely involves the departure of Russian President Vladimir Putin from power, as his rule was staked on success in the war in Ukraine. Positively, this event would allow for a revitalization of growth in Ukraine as well as potential sanctions relief on Russia should Putin be removed and a more Western-oriented leader eventually come to power.
- Pre-existing conflicts ignite (25%): Russia’s declining power in the CIS region has removed the primary guarantor of security in the region, with particular implications for the various pre-existing conflicts, from Nagorno-Karabakh in the Caucasus, to the border of Kyrgyzstan and Tajikistan, or the spillover of violence from Afghanistan into Turkmenistan, Uzbekistan, and/or Tajikistan. Any one of these conflicts could erupt into full-fledged fighting, creating executional issues on top of currency weakness across the region.
- Kazakhstan oil exports stopped by Russia (25%): Having interrupted Kazakhstan’s oil exports via Russian territory four times in 2022, Russia has demonstrated its willingness to threaten these exports more permanently in 2023. With ~80% of Kazakhstan’s oil exports transiting through Russian territory via the Caspian Pipeline Consortium (CPC), and oil amounting to some 25% of GDP and 60% of budget revenues, closure of this transit route with no viable alternatives would be devastating to the Kazakhstani economy. This event would occur in the case of an escalation of the energy war between Russia and the West, whereby Moscow would retaliate against energy sanctions and the price cap on Russian oil by stopping Astana’s ~1 mb/d of oil exported by the CPC, making Kazakhstan collateral damage in its energy war with the West.
- Putin pushed out of office (20%): This event would most likely be triggered by the “Ukraine wins war” event, as Putin will have lost the war he has staked his regime to, while also overseeing the international isolation of Russia and permanent decline of its economy from the extreme sanctions. Resulting elite resentment, backed by increased popular dissatisfaction with long-term economic decline and the failing war, eventually consolidates in a rebellious faction within the defense, intelligence, or central government apparatus that threatens Putin’s rule directly. Putin is displaced and likely succeeded by a hardline security official, at least initially. Positively, this event could create some sanctions relief for Russia should the Kremlin opt to end the war, allowing for economic improvements. Negatively, this event also could lead to the less-likely potential for the disintegration of the Russian Federation, with non-ethnic Russian regions (e.g., the North Caucasus, Tatarstan, Bashkortostan, Karelia, or Komi) declaring independence, causing immeasurable economic and financial havoc.
- Drastic drop in Russian oil output (15%): Lacking Western financial investment, equipment, and know-how resulting from the extreme Western sanctions and departure of Western oilfield services firms, Russia’s oil output is under considerable pressure. Base-case expectations foresee oil output averaging ~9.75 mb/d in 2023, compared to pre-war production levels of over 11 mb/d. In this downside scenario, oil output would decline to well below 9 mb/d, which matched with a low Urals price of oil, would cause a sharp drop in oil revenues to the budget and therefore a much steeper economic decline in 2023. For the broader CIS region, we would see a mass return of migrant laborers and severe drops in remittances and exports to Russia.
- Russia and NATO go to war (15%): NATO and Russia are directly involved in a military confrontation, including several NATO members and the US vs. the Russian military. The confrontation takes place largely over Ukraine, within Russian territory, and potentially in NATO states neighboring Ukraine. The West would respond with an overwhelming conventional response, raising the potential for a Russian nuclear retaliation. This event would be initiated by Russia either using a tactical nuclear weapon in Ukraine over a populated area or attacking a NATO member state directly to disrupt supplies to Ukraine. A direct confrontation would result in further escalation via conventional weapons on both sides and an eventual NATO victory, as NATO would use overwhelming force to drive a rapid Russian surrender, regime change in Moscow, and an immediate end to the war.
- Collapse of Lukashenko regime (10%): This event would require several other events to occur to initiate the downfall of Belarusian President Alexander Lukashenko. Already unpopular at home, should Lukashenko’s hand be forced by Putin and enter his country into an unpopular war in Ukraine, Lukashenko would be threatening the stability of his regime. Should Moscow be unable to provide the financing and security services to sustain the Belarusian state, particularly in the event of Russia’s defeat in the war and threats to Putin’s regime itself, Lukashenko would then be unable to sustain his regime independent of Russia’s support, causing a political and economic collapse in the country.
- Severe political instability in Kazakhstan (10%): Following the historic anti-government protests, initially rooted in cost-of-living angst, in January 2022, President Kassym-Jomart Tokayev’s hold on power has been under some question. As inflation levels continue to escalate, should Tokayev struggle to consolidate power among the elites, the potential for renewed anti-government protests capitalized upon by elite factions could threaten the regime’s hold on power. This event could be hastened by possible Russian meddling, particularly as Russia seeks to weaken Tokayev’s hold on power and Kazakhstan’s overall sovereignty. The economy would decline notably amid drops in investment and consumer spending, with the tenge falling precipitously.
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