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January 23, 2022

BCR: Limited impact on Romania from a possible default by Ukraine

Heightened rumours about a potential debt restructuring of Ukraine as well as commercial sanctions on Russia raise questions on the magnitude to which Romania could be affected by such developments. “Only to a very limited extent, in our opinion”, according to a BCR Research Special report.
“So far, we have witnessed rather limited short-term contagion in the region, mainly last Monday, after President Putin issued an ultimatum to the Ukraine forces to withdraw from Crimea. The RON- national currency and PLN – Polish zloty were quick to react, but then climbed back after Putin backtracked on his previous warlike statement”, said BCR analysts Radu Craciun, Chief Economist and Dumitru Dulgheru, Senior Analyst. Except for belligerent statements or a conflict escalation between Russia and Ukraine, which is less likely, bearing in mind the huge difference in the balance of military forces, BCR do not see significant risks to the price of Romanian assets.
“The RON could take a short knock, shedding no more than 1-2 percent, if indeed things take a turn for the worse. The exit of foreign investors from local bonds might put some pressure on the FX rate, but the central bank should stand guard and make use of its managed floating regime in the case of volatilities running high. Romanian bond prices should be affected short-term, moving by no more than 20-30bp, but so far no major moves on the local market have been reported. The fact that Romania has turned from the periphery into an emerging market for fixed income investors and the solid macro picture should provide sufficient confidence,” BCR Research says.
Under a worst-case scenario, the main risks for Romania stemming from potential economic restrictions on Russia could be transmitted directly or indirectly via a number of channels: shrinking exports, cutting natural gas supply, impact on global commodity market (e.g. oil price). The share of Romanian exports to the Russian Federation currently stands at 2.8 percent (rank 9), while the share of imports is 4.1 percent (rank 6). Trade deficit with the Russian Federation amounts to EUR 0.7 bn. Main exporting industries are: transport equipment, electric equipment and chemical products. As for imports, natural gas takes the lion’s share in terms of volumes, accounting for no less than 88 percent of total imports from Russia.
Regarding an eventual natural gas shutoff, it is worth emphasizing that it could be triggered not only by a commercial embargo on Russia, but potentially sooner (and more likely) by a Russian decision to stop deliveries to Ukraine, due to the unpaid USD 2 bn bill, a repeat of the 2009 scenario. The impact of such a development on the energy security of Romania should be judged in the following context: the annual natural gas consumption of the country stands at 145 TWh, of which 80 percent is covered by domestic resources; Romania is the third least energy-dependent country in the EU; the consumption of natural gas shows a high seasonal profile, making it possible for Romania to entirely draw upon its own resources to meet consumption needs.
An embargo on oil could have an impact on the global oil price and on Romania’s import prices as well. “Although other producers would be ready to increase production, the disruption could still trigger some fuel price adjustment and, consequently, some inflationary pressures in Romania, albeit from an already low level,” BCR analysts estimate.

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