Country Risk And Political Instability: A Vuca World Approach

The last three years were characterized by a climate of drastic change due to a cumulus of disturbances and crises, namely the COVID-19 pandemic, inflation, energy crisis, military conflicts, banking fragilities, populism, disinformation, and the idea of deglobalization. These types of events may be interpretated either as antecedents of new and complex categories of risks or as stimulus for certain risks that have long been ignored. One central focus for worldwide policymakers is presently the country risk with all its components (sovereign risk, political risk, market risk, or systemic risk). Furthermore, due to the increase in public and private debt, the risks to which economies are exposed have multiplied. Is this the end of an era or just a temporary disequilibrium? This is one of the key questions among economists, academics, and policy makers around the world. The main purpose of this research is to analyse whether the Russian invasion of Ukraine negatively impacted the country risk of countries situated in the geographical proximity of the conflict area (Romania, Bulgaria, Estonia, Hungary, Czechia, Latvia, Lithuania, Poland, and Slovakia), as well as to determine whether relevant macroeconomic indicators such as debt/GDP, GDP/capita, inflation, or trade openness were deteriorated due to the war. The findings of this research reveal that all the analysed macroeconomic indicators deteriorated as a consequence of the high degree of uncertainty concerning the future economic prospects of these countries, especially inflation and debt/GDP. The results also indicate that the country ratings of the investigated group of countries were severely impacted by the Russian invasion of Ukraine. Although data corresponding for year 2023 show a slight improvement, the existing uncertainty continues to generate a disruptive effect on the markets.