Implications of a possible resolution to the Russia-Ukraine war on emerging markets

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

We do not take a view on the course of the Russia-Ukraine war or if/how it may be resolved, but recognise that recent discussions between presidents Trump and Putin have heightened expectations that a ceasefire is nearing. Whilst we recognise that the nature of any peace deal will ultimately influence the likely post-war course – with possible forms of resolution to the war ranging from a loose de facto ceasefire, to a robust peace agreement that includes credible security guarantees – we assess what a potential resolution would signal for emerging markets. There are three central transmission channels which a resolution could impact emerging markets – (i) the reconstruction efforts in Ukraine; (ii) a rebound in Ukrainian and Russian economic activities; and (iii) the wider reverberations of an increase in natural gas supply. Given the close geographical proximity of the war on central and eastern European (CEE) economies, we believe these jurisdictions (particularly Poland) stand to gain the most from a potential resolution to the war, while the implications for the rest of the emerging markets space should be somewhat muted.

FX views

The key question for the US dollar (USD) index is whether we are heading for a 2017-style repeat. That year saw relatively muted changes on US tax and trade policy, set against more balanced global growth that was helped by foreign fiscal expansion, and the USD had its largest drawdown in the post-2008 Great Financial Crisis (GFC) period. The parallels to today are resolute, and the risk of a repeat is on the table. From an EM FX perspective, CEE currencies, together with the broader European asset complex, have been buoyed by rising expectations of a ceasefire deal in Ukraine, with recent central bank decisions and upside inflation surprises being additional tailwinds.

Week in review

Qatar and Kuwait have been reclassified as developed markets (DM) and will no longer be eligible for the J.P. Morgan Emerging Market sovereign bond, and will be removed from the EMBI Index suite (including all associated sub-indices and custom indices) – the UAE may be upgraded in 2026 if its cost-of-living ratio continues to surpass EM index thresholds. The Central Bank of Egypt (CBE) kept all policy rates on hold, in line with our (and consensus) expectations. Qatar sold USD3bn of international bonds with demand ~4x oversubscribed. Israel’s annualised GDP growth slowed from 45.3% q/q annualised in Q3 2024 to 2.5% q/q annualised, in Q4 2024, lower than our expectation (6.5%) and consensus (5.3%). Finally, Fitch revised Bahrain’s outlook from stable to negative, while affirming its B+ rating.

Week ahead

In the week ahead, we will have interest rate decisions in Israel (MUFG and consensus: on hold at 4.50%) and Hungary (MUFG and consensus: on hold at 6.50%). CPI data for January will be released in South Africa (MUFG and consensus: +0.2ppts to 3.2% y/y). Finally, Q4 2024 GDP will be released in Turkey (MUFG: 2.6% y/y: consensus: 2.5% y/y).

Forecasts at a glance

The external backdrop for EM has shifted abruptly – the soft-landing pro-risk environment and pricing of non-recessionary Fed cuts has given way to concerns around tariff risks (and likely retaliatory action), higher-for-longer US rates and a strong US dollar. This sets the stage for a challenging EM backdrop in 2025. There are dimensions that could make Trump 2.0 less disruptive. Given the reduced direct trade exposure of the Chinese economy to the US and expectations that there will be a monetary and fiscal response by Chinese policymakers to offset the tariff growth shock, the economic and financial market disruptions will, on aggregate, be less severe than Trump 1.0.

Core indicators

The latest monthly IIF flow data signalled that EM securities attracted USD35.4bn in January 2025 driven by USD45.0bn into debt markets, while equities faced USD9.6bn in outflows.