However, the legacy of higher government debt, high levels of economy-wide foreign-currency debt and banking sector weaknesses leave sovereigns in the CIS vulnerable to negative shocks, which could stem from sharply rising interest rates and/or significant local-currency depreciation in 2018.

Furthermore, political tensions remain an ongoing source of risk to economic stability and reform momentum in the region.

Moody’s conclusions are contained in its just-released report on the CIS, "Sovereigns — Commonwealth of Independent States: 2018 outlook stable as healthy growth balances debt, banking and political risks". As of 30 January 2018, the ratings for 8 of 10 CIS sovereigns carry stable outlooks, with ratings for Russia (Ba1 positive) and Ukraine (Caa2 positive) carrying positive outlooks.

Vulnerabilities to shocks are highest for those CIS sovereigns which exhibit high and rising debt levels and lower fiscal flexibility. In this context, Moody’s estimates that the median level of government debt as a share of GDP in the CIS will rise to around 55% in 2018 from around 32% in 2013.

In terms of specifics, fiscal space has diminished significantly in Ukraine, Armenia (B1 stable), Azerbaijan (Ba2 stable), Belarus (Caa1 stable) and Tajikistan (B3 stable), where government debt has risen sharply and interest payments have increased from low levels. Fiscal flexibility is also constrained by the existence of large operating spending commitments, which tend to be difficult to curb.

Moody’s further notes that Russia’s recovery will boost exports and remittances across the region. Moreover, the fact that most trade is intra-regional will help reinforce demand for goods and services exports across the CIS.

Current levels of oil prices relieve pressure on terms of trade in Russia, Kazakhstan and Azerbaijan. However, range-bound oil prices will prevent a return to pre-2014 growth rates beyond the initial recovery. Moody’s expects oil prices to remain within a range of $40 to $60 per barrel over the medium term, which will support modest growth for oil exporters in the coming years.

The favourable economic backdrop provides an opportunity for policymakers to rebuild fiscal buffers following the widening of deficits and rise in government debt since 2014, accelerate economic and institutional reforms and address weaknesses in banking sectors. But weak institutional frameworks overall, and compared to other regions, will continue to constrain policy effectiveness.

Moody’s also notes that the credit implications of a gradual shift in financing conditions are embedded in its ratings. However, a sudden change would have material credit implications for many CIS sovereigns, given elevated public debt, low reserve coverage of forthcoming maturities, a large share of foreign currency debt and highly dollarised banking systems.

In addition, geopolitical and domestic political risks — representing largely moderate to high-probability and high-impact events in the region — will remain prominent in 2018 and could threaten economic stability and reform momentum.