Azerbaijan’s banking sector has the lowest exposure to geopolitical risks among banks in Central Asia and the South Caucasus, according to a recent report by Moody’s. The rating agency attributes the sector’s resilience to Azerbaijan’s limited economic and financial ties with Russia, the support provided by hydrocarbon revenues amid higher oil prices, and the stability offered by the manat’s effective peg to the US dollar. More broadly, Moody’s said economies across Central Asia and the South Caucasus remain vulnerable to the indirect effects of geopolitical developments, particularly through inflation.
Higher prices for energy, food and other commodities could delay monetary policy easing, keeping interest rates and borrowing costs elevated. Kazakhstan’s banking sector would be particularly sensitive to a further increase in inflation, Moody’s said, as higher prices would put additional pressure on household purchasing power. A prolonged period of high interest rates could also exert pressure on banks in Kyrgyzstan, where large and rapidly growing retail loan portfolios increase sensitivity to changes in household financial conditions,” Moody’s analysts said.
The agency also warned that a rise in regional geopolitical risks or a significant global economic slowdown could trigger capital outflows from Central Asian and Caucasian economies, putting pressure on national currencies. Moody’s does not currently anticipate such a scenario. Banks in Azerbaijan are the least exposed to this risk, as the manat is effectively pegged to the US dollar, which helps shield the economy and the banking system from exchange rate volatility,” the report states.
According to Moody’s, exporters across the region, particularly oil and gas producers, are generally better positioned to withstand currency depreciation because foreign-currency revenues provide a natural hedge against expenses denominated in local currencies. Kazakh companies are also considered relatively resilient. Following several currency shocks, non-export-oriented firms have reduced the risk of mismatches between revenues and debt obligations by shifting toward local-currency financing.
Uzbek companies, by contrast, remain more exposed to currency risks because they continue to hold significant amounts of foreign-currency debt, Moody’s said. Higher oil prices strengthen Azerbaijan’s fiscal position Moody’s said operating conditions for banks and companies across Central Asia and the South Caucasus remain broadly favorable, with the region benefiting from economic opportunities created by the changing geopolitical landscape. Furthermore, higher oil prices are fostering increased trade flows and strengthening the fiscal positions of oil-exporting nations such as Kazakhstan (Baa1, stable outlook) and Azerbaijan (Baa3, positive outlook).
We also expect that strengthened regulation will support banking sector performance,” the report states. At the same time, Moody’s cautioned that geopolitical uncertainty continues to present risks that may have a relatively low probability but potentially significant consequences. A decline in economic activity in Russia could lead to increased risks regarding bank assets and funding.
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