Fitch: Sudden Halt to Russian Gas Supply Could Pressure Some CEE Ratings

Slovakia, Hungary and Czech Republic are most exposed among Central and Eastern European (CEE) sovereigns to a sudden cessation of Russian gas supplies to EU countries, Fitch Ratings says. Poland, Lithuania and Romania appear least exposed.A sudden cessation is not Fitch’s base case, but is a risk. Bulgaria and Poland have already been cut off and supplies to other EU members have been reduced. Supply and infrastructure constraints mean it could take the EU more than three years to offset a full loss of Russian gas supply.Fitch has constructed a vulnerability matrix showing EU countries’ reliance on Russian gas imports. We have also considered EU and national policy responses, holding discussions with national authorities, usually energy ministries of all CEE EU members. These responses would probably involve supply- and demand-side management and centralised price-setting. We also look at mitigating factors for the 11 Fitch-rated CEE sovereigns.The region would face a significant macro shock, including in many cases negative growth and higher inflation: energy generally has a higher weight in the harmonised consumer price basket in CEE than in Western European countries). But differences in mitigating factors mean the impact would vary widely. Slovakia, Hungary and Czech Republic combine high reliance on Russian gas with a lack of viable short-term alternative energy supplies. In contrast, Poland, Lithuania and Romania have largely secured alternative supplies or have significant domestic production.   Assessing mitigants and understanding policy responses is key to understanding the potential rating implications of cessation: important offsetting factors are not always visible in the vulnerability matrix.The impact on public finances from the macro shock and potential offsetting measures could pressure sovereign ratings, particularly where credit metrics are already weak relative to rating peers. The Negative Outlook on the Czech Republic’s ‘AA-’ rating since May partly reflects risks from its dependence on Russian energy.