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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
CEE well prepared for ‘Russian winter’
CEE is becoming more supportive of Ukraine and less opportunistic towards Russia.
Sanctions imposed by Russia bark but do not bite. Falling demand from Ukraine and
Russia had limited impact on total exports. Financial markets proved resilience of
CEE amid new geopolitical instability. CEE prepared for temporary outage of gas
supply via Ukraine.
Friedrich Mostboeck, CEFA
Head of Group Research
[email protected]
Juraj Kotian
Head of CEE Macro/FI Research
[email protected]
Tamas Pletser, CFA
EMEA Oil & Gas Analyst
[email protected]
For different reasons, Russian –
Ukrainian conflict is likely to
stay for longer period of time
The recent parliamentary elections in Ukraine strengthened the pro-Western
parties overall, but resulted in a surprisingly weak outcome for President
Poroshenko’s Solidarity party. The president’s party thus had to form a
coalition with the other pro-Western parties, with Arseniy Yatsenyuk staying
on as prime minister. This relative weakening of Poroshenko within the proWestern bloc might impair his willingness and ability to compromise with
Russia and the pro-Russian rebels. On the other hand, Putin’s actions since
the overthrow of Ukrainian ex-President Viktor Yanukovych show a strong
focus on strategic geopolitical interests, with little regard for the economic
consequences of these actions for now. The truce between the pro-Russian
rebels and the new Ukrainian government is a positive sign, but the harsh
conditions demanded by Russia, alongside the separate elections held in the
rebel-occupied territories, leave little hope for a quick resolution of the crisis.
Putin seems to view the former Soviet countries as within Russia’s sphere of
influence and therefore may have little interest in a negotiated solution that
would leave the Donbass region under the control of a pro-Western Ukrainian
government. Instead, the status quo seems to fit his goals much better, as an
ongoing conflict ensures that Russia “keeps a foot in the door” and can
continue to exercise influence over Ukrainian politics, despite an
overwhelming majority of pro-Western parties in the Ukrainian parliament. If
the Russian-backed de facto independent regions of Transnistria, Abkhazia
and South Ossetia serve as a model for Russia’s approach to the eastern
Ukrainian regions of Donetsk and Luhansk, the conflict is likely to stay with us
for a considerable amount of time.
Despite the fact that Russian-Ukrainian relationships are at a low point, the
two sides were able to sign an agreement on October 30, 2014, concerning
natural gas payment in arrears and the winter delivery of natural gas. Based
on the agreement, Ukraine will pay some USD 3.1bn in two tranches by the
end of the year to cover the debt for previous supplies from Russia. Kiev will
buy up to some 4bn cubic meters of natural gas for USD 1.5bn by the end of
1Q15, to be covered by an IMF loan. The Ukrainian side will pay some USD
378/thousand cubic meter in 4Q14 and 365 USD/thousand cm in 1Q15 for the
potential deliveries. The volumes will be enough for Ukraine to survive the
winter without any significant cut in consumption. The country actively
purchased natural gas from Slovakia, Poland and Hungary via the so-called
reverse flow, so the Ukrainian storage capacities of approx. 20Bcm were filled
up before the winter. The recent Russian decision to scrap the South Stream
project (which was supposed to reduce the role of Ukraine in gas deliveries to
Europe) will speed up the creation of the Common Energy Market in EU and
reduce the extent to which Russia can use gas for political purposes in
Central and Eastern Europe.
Erste Group Research
Page 1
Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
Sanctions: Bark but no bite
Russian ban on food imports
Bans on the import of food products applied by Russia to EU countries which
has negligible impact on growth supported the sanctions against Russia were doomed to fail to hit CEE
in CEE
economies. CEE exports of food products to Russia are very small, ranging
from 0.1-0.3% of GDP (Hungary, Poland 0.3%, others less than 0.05%) which
determined the maximum potential hit on an annual basis. However, exports
of food products to Russia have not been declining by 100% but by a
maximum of 50%, according to trade statistics for August-September 2014.
Furthermore, the impact will be split into two years, so the ban on food imports
1
will shave off less than 0.1pp from growth in CEE in 2014 and 2015 .
Export of food products to Russia
(% of GDP, 2013)
Average monthly exports of food products to Russia
(EURmn, % y/y, Aug-Sep)
Source: Eurostat, Erste Group Research
CEE political leaders becoming
more supportive towards
Ukraine
Recent political events have led to a much more coherent approach on the
part of CEE representatives towards the Ukraine-Russia conflict. Apart from
Poland, which supported imposing severe sanctions on Russia since the
beginning of the conflict, the initial resistance of other CEE countries towards
sanctions has been eroded, as it became pretty clear that sanctions were the
only viable tool left to stop Russia from a further redrawing of the borders in
Europe. President Iohannis, winner of the recent presidential election in
Romania, has already expressed his strong support for the European
aspirations of Ukraine, but first and foremost for those of Moldova, with whom
Romania has very strong historical and cultural roots. President Kiska of
Slovakia confirmed his strong commitment to supporting Ukraine during his
speech to the UN in September and has already managed to host Ukrainian
President Poroshenko in Slovakia. Both Iohannis and Kiska won the popular
vote against the current PMs (V. Ponta and R. Fico), who had been hesitant to
openly criticize Russia’s involvement in the eastern part of Ukraine. Czech
President Milos Zeman has been heavily criticized by a majority of
government officials and also by the general public for his considerably pro2
Russian stance and excesses . After a worsening of relations with the US and
EU, Hungarian PM Orban has also adjusted his formerly strongly pro-Russian
tone, noting that he does not want history to be repeated - when Hungary had
common borders with the Soviet Union.
1
Moreover, agriculture has been supported with EU compensations.
Supporting the removal of sanctions imposed by the EU and US and describing the conflict in Ukraine as a “civil war“.
Erste Group Research
2
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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
Russia, slowly becoming a common threat, also unified Europe, which is
heavily dependent on Russian gas supply, to speak with one voice in
supporting Donald Tusk’s proposal to set up an energy union to counter the
dependence of some European countries on Russian gas. Although the battle
for a common energy market is not going to be easy, having Donald Tusk in
the position of European council president may help to push the agenda
through. His nomination may also be seen as a signal of the European stance
towards Russia, as Poland has been known for its sharp view on how Europe
should behave in the conflict.
Erste Group Research
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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
Falling demand from Ukraine and Russia
Ukrainian and Russian
economies pay tremendous
costs for conflict
The Ukraine-Russia conflict has had a tremendous impact on the economies
of the two countries. The Ukrainian economy is in free fall and the Russian
economy is suffering from capital outflows and the plunge in oil prices, while
the purchasing power of households has been eroded by high inflation and
the sliding currency. Domestic demand has been weakening, with striking
implications for imports.
Oil prices and Russian Ruble
Source: Bloomberg
Spillover of costs to CEE very
limited
Fortunately, CEE exporters are not heavily exposed to Russia and Ukraine.
Thus even a sharp decline of exports, i.e. 35% drop of exports to Ukraine and
10% drop of exports to Russia shaved off only 1pp from the export dynamics
of CEE countries. Poland was the only country where the impact on export
dynamics was larger than 1pp, but this was mitigated by the fact that Poland
is a relatively closed economy (with a lower share of exports in GDP).
Sinking exports to Russia and Ukraine
(%, last 3M y/y*)
… had limited impact on overall export growth
(%, last 3M y/y*)
Source: Bloomberg, *July-September 2014
Erste Group Research
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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
CEE economies more resilient towards
weaker external environment
Growth in CEE surprised on
positive side
The direct impact of the sanctions imposed by Russia is close to zero. Falling
demand in Ukraine and Russia shaved off about 1pp from export growth but
had no visible impact on the growth dynamics in CEE in 3Q14. GDP surprised
on the positive side and diverged from the relatively weak data for the euro
area. Leading indicators, such as PMIs in manufacturing, have recently
remained solid in CEE, hinting that growth will remain strong in 4Q.
Breakdown of GDP growth in 3Q14
(%,y/y*)
PMIs in manufacturing
Source: Bloomberg
Revival of domestic demand
makes growth more resilient to
external demand fluctuations
How is it possible that CEE is growing almost 2pp faster than the euro area
this year (2.5% on average vs. 0.6%)? The explanation can be found in the
structure of growth. After a long period, domestic demand has started to kick
in, becoming the major source of growth in CEE. Household consumption
grew more than 2% in the Czech Republic, Poland and Romania in 3Q14 and
investments are finally contributing to growth, by 1.4pp on average. Thus, the
growth in CEE is not solely export-driven, as it was in the first stage of the
economic recovery. That increases the resilience of growth in CEE against
potentially worsening external demand.
Erste Group Research
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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
CEE well prepared for potential outage in gas
supply
Impact of 3-6 month cut in
Ukrainian transit manageable
for most CEE economies
Croatia
Czech Republic
Hungary
Poland
Romania
Slovakia
We believe that CEE economies can cope with a stoppage in the delivery of
natural gas via Ukraine for a 3-6 month period. Gas storage facilities were at
90% in Europe before the winter season, while among CEE countries,
Hungary was at 71% (some 4.3Bcm gas stored out of 6.1Bcm capacity),
Romania at 87% (some 2.7 Bcm out of 3.1 Bcm capacity), while Poland had
almost filled its 2.9Bcm capacity. Some 130Bcm of natural gas was stored
throughout Europe before the winter period.
Significantly, in 2013 some 49% of Russian import gas, or some 82.1Bcm,
went via the Ukrainian gas system, mostly by means of the Brotherhood
pipeline (52.5Bcm). However, this can be partially compensated for by the
Nord Stream, the capacity of which was only 43% utilized in 2013 (23.5Bcm).
This is why the halting of the South Stream project is not such a great worry
for the EU; building interconnectors, creating a common EU energy market
and further diversification are the key priorities.
Natural gas
consumption
Indigenious
production
Import
requirement
Direct Russian
import
Underground
storage
capacity
Maximum
withdrawal
capacity
Bcm - 2013
Bcm - 2013
Bcm - 2013
Bcm - 2013
Bcm - 2013
MCM/day - 2013
%
2.6
8.6
9.5
17.0
12.8
6.0
1.8
0.2
1.9
4.6
11.2
0.1
0.8
8.4
7.6
12.4
1.6
5.9
0.2
7.9
6.0
12.9
1.6
5.5
0.5
3.5
6.3
2.5
3.1
3.1
5.8
57.3
80.0
36.6
30.3
43.0
89%
91%
70%
91%
76%
84%
Estimated fill
up by 01-12
Sources: Erste Group Research, Eurostat, Oxford Energy, GIE, Eurogas
CEE region concentrates on
In October, Slovak gas supplier SPP signed a new five-year contract on gas
building better interconnections deliveries with Germany’s E.ON Global Commodities. The contract should
between countries
enable the import of gas to Slovakia from Western Europe if need be. The
pipeline, worth EUR 150mn, has already been built, connecting Slovakia and
Hungary. It was funded partly by EU funds and partly by the Hungarian State
Development Bank (MFB) through refinancing via EIB (EUR 75mn). The
pipeline is planned to officially start operation around the beginning of next
year. The connection is not just a single direction pipeline but a true
interconnector: it has a capacity of roughly 4bcm per annum from Slovakia to
Hungary, and 1.6bcm p.a. from Hungary to Slovakia. This is a notable size
compared to the consumption of the countries as, for example, Hungary’s
annual gas consumption is roughly 9-10bcm a year. There are two other
interconnector projects between Poland and Czech Republic and Slovakia;
these were supposed to be funded via the Connecting Europe Facility
Programme, but will likely get top priority in Junker’s EUR 315bn investment
package. There is still a lack of inter-connectors in South East Europe.
However, in order to deal with this situation, Romania is planning a EUR
1.1bn strategic investment to construct by the end of the decade a pipeline for
connecting the gas transportation network of Bulgaria with that of Hungary
and subsequently link it to the Black Sea shore. The project is envisaged to be
funded with a mix of EU funds (EUR 300mn), own resources (EUR 400mn)
and bank debt (EUR 400mn). While Hungary and Slovakia is likely to receive
enough gas (Hungary had a 4.4Bcm western pipeline called HAG), Serbia and
Bulgaria may receive less gas than needed. Romania is in a particular
position, having the third largest gas reserves in the EU (excluding the recent
Erste Group Research
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Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
discoveries from the Black Sea). Starting with 2014, less than 1bn cm
(representing 10% of domestic gas demand) is covered via Russian gas.
Romanian consumption is thus largely independent of imported gas.
Russia cannot afford to
completely stop natural gas
supply to Europe
Russia’s European natural gas supply, which was 161.5Bcm in 2013 out of
the total 541Bcm EU-28 consumption, cannot be stopped due to technical and
financial reasons. Technically, Russia cannot cope with this large quantity of
gas in the long term – the current 80Bcm Russian storage capacity is already
filled up to cope with winter demand. Neither is there any flaring capacity for
such a large volume. The only potential decision would be to cut the natural
gas flow in the wells, which could do permanent harm to Russia’s gas
production capacities. Gazprom gets 40% of its revenues and roughly 80% of
its EBITDA from WE gas sales, while Russia receives 7% of its budget
revenue from natural gas production. Completely cutting gas exports to the
EU would result in a 3-4% drop in budget revenue for decades. Gazprom
could cut supplies to certain countries for political or economic reasons, but
we see no likelihood of it stopping all sales to the EU.
Erste Group Research
Page 7
Erste Group Research
CEE Special Report | Fixed Income | CEE
December 15, 2014
Contacts
Group Research
Head of Group Research
Friedrich Mostböck, CEFA
Major Markets & Credit Research
Head: Gudrun Egger, CEFA
Ralf Burchert (Agency Analyst)
Hans Engel (Senior Analyst International Equities)
Christian Enger, CFA (Covered Bonds)
Margarita Grushanina (Economist AT, CHF)
Alihan Karadagoglu (Senior Analyst Corporate Bonds)
Peter Kaufmann, CFA (Corporate Bonds)
Stephan Lingnau (International Equities)
Carmen Riefler-Kowarsch (Covered Bonds)
Rainer Singer (Senior Economist Euro, US)
Elena Statelov, CIIA (Corporate Bonds)
Gerald Walek, CFA (Economist Euro)
Katharina Böhm-Klamt (Quantitative Analyst Euro)
Macro/Fixed Income Research CEE
Head CEE: Juraj Kotian (Macro/FI)
Zoltan Arokszallasi (Fixed income)
Katarzyna Rzentarzewska (Fixed income)
CEE Equity Research
Head: Henning Eßkuchen
Chief Analyst: Günther Artner, CFA (CEE Equities)
Günter Hohberger (Banks)
Franz Hörl, CFA (Basic Resources)
Daniel Lion, CIIA (Technology, Ind. Goods&Services)
Thomas Unger; CFA (Insurance, Miscellaneous)
Vera Sutedja, CFA (Telecom)
Vladimira Urbankova, MBA (Pharma)
Martina Valenta, MBA (Real Estate)
Editor Research CEE
Brett Aarons
Deniz Gurgen
Research Croatia/Serbia
Head: Mladen Dodig (Equity)
Head: Alen Kovac (Fixed income)
Anto Augustinovic (Equity)
Ivana Rogic (Fixed income)
Milan Deskar-Skrbic (Fixed income)
Davor Spoljar, CFA (Equity)
Research Czech Republic
Head: David Navratil (Fixed income)
Head: Petr Bartek (Equity)
Vaclav Kminek (Media)
Jiri Polansky (Fixed income)
Dana Hajkova (Fixed income)
Martin Krajhanzl (Equity)
Lubos Mokras (Fixed income)
Jan Sedina (Fixed income)
Research Hungary
Head: József Miró (Equity)
Gergely Gabler (Fixed income)
András Nagy (Equity)
Vivien Barczel (Fixed income)
Tamás Pletser, CFA (Oil&Gas)
Research Poland
Head: Magdalena Komaracka, CFA (Equity)
Marek Czachor (Equity)
Tomasz Duda (Equity)
Adam Rzepecki (Equity)
Ludomir Zalewski (Equity)
Research Romania
Chief Economist, Director: Radu Craciun
Head: Mihai Caruntu (Equity)
Head: Dumitru Dulgheru (Fixed income)
Chief Analyst: Eugen Sinca (Fixed income)
Dorina Cobiscan (Fixed Income)
Raluca Florea, CFA (Equity)
Marina Alexandra Spataru (Equity)
Research Turkey
Head: Can Yurtcan
Evrim Dairecioglu (Equity)
M. Görkem Göker (Equity)
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Erste Group Research
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