Will existing users be able to update the app if the app is blocked in their Play Store country
Probably, because in my country I have no access to some Google apps when I install custom ROM and want to download them, but if I use stock ROMs that come bundled with them, I can normally update them as I have them under "My Apps" in my Google account. 

Think of it also from security reasons. It would be very bad if someone shipped an app with a security hole and then can't update it because it isn't available for that market.