New York, October 17, 2014 -- Moody's Investors Service has today downgraded the government of
Russia's debt rating by one notch to Baa2 from Baa1. The
short-term rating is affirmed at Prime-2 (P-2).
The outlook on the rating remains negative.
The key drivers for the downgrade and for maintaining the negative outlook
are the following:
1) Russia's increasingly subdued medium-term growth prospects,
exacerbated by the prolongation of the Ukraine crisis, including
through the impact of expanded international sanctions.
2) The gradual, but ongoing erosion of the country's foreign-exchange
buffers due to capital flight, Russian borrowers' restricted
international market access and low oil prices.
In a related decision, Moody's has lowered Russia's
long-term country ceilings for local and foreign-currency
debt and for local currency deposits by one notch to A3 from A2 and its
short-term country ceilings for foreign-currency debt to
P-2 from P-1. The long-term country ceiling
for foreign-currency bank deposits was lowered to Baa2 from Baa1
while the short-term country ceiling for foreign currency bank
deposits was unchanged at P-2.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Baa2
The first driver for the downgrade of the Russian government's debt
ratings to Baa2 relates to the longer term damage the already weak Russian
economy is likely to incur as a result of the ongoing crisis in Ukraine
and, relatedly, the additional sanctions imposed against Russia
since Moody's confirmation of the government's Baa1 rating
in June 2014. That confirmation reflected Moody's view at
the time that harsher and prolonged sanctions were unlikely. However,
the assignment of a negative outlook reflected the rising risk of further
conflict and the possibility of economic sanctions. Since then,
sanctions have been extended and now include Russian majority state-owned
banks and key companies in the defense and energy sector. Additional
restrictions include limits or bans on the provision of goods, services
and technologies to these and other companies as well as asset freezes
and visa bans on individuals.
The military confrontation in Ukraine and escalating sanctions against
Russia are likely to have an increasingly negative macroeconomic impact
on Russia's investment climate and consequently on its medium-term
growth prospects. Even prior to the crisis in Ukraine, the
potential growth rate of the Russian economy was falling, constrained,
according to the IMF, by economic rigidities such as infrastructure
bottlenecks and shortfalls in labor skills and education. Additional
constraints are posed by the high degree of dependence on the hydrocarbon
sector, which has not materially decreased despite the government's
diversification strategies, and demographic shifts. Much
needed domestic and external investment was already being undermined by
the challenges posed by the Russian business climate and by Russia's
weak institutions.
The tightening of sanctions against Russia has already begun to aggravate
the slowdown in economic growth and to undermine consumer and investor
confidence in the country. Domestic demand slumped in the second
quarter, including a notable decline in inventories and investment.
Consumer confidence has been undermined, aggravated by the acceleration
of inflation and higher interest rates resulting from, among other
things, the depreciating exchange rate.
Moody's expects this trend to continue the longer that the conflict
in Ukraine and sanctions against Russia persist. While Moody's
does not currently expect the Russian economy to contract this year,
the rating agency expects real growth to start to decline by around the
end of the year and continue to do so at least until mid-2015.
The longer the conflict in Ukraine and sanctions against Russia last,
the more significant will be the damage to investors' confidence
in Russia as a source of profitable investment opportunities, leading
to the loss of economic output over the medium term. Even at today's
levels, sanctions are likely to undermine medium-term growth
somewhat, for example by impeding exploration activities in the
hydrocarbon sector. Any widening in the scope of the sanctions,
as would be increasingly likely the longer the crisis persists,
would magnify the medium-term effect.
The second factor behind the downgrade in Russia's rating to Baa2
is the negative impact on the government's balance sheet of the
gradual erosion of the country's foreign-exchange (FX) buffers,
resulting from capital flight, Russian borrowers' restricted
international market access and low oil prices. Even if trade and
current account balances are temporarily strengthening, due in part
to the 20% fall in the exchange rate this year, the current
account surplus has financed only around 60% of the $85.2
billion of capital outflows in the first nine months of this year.
The Russian government and Russian-domiciled entities have been
largely shut out of the international capital markets since the second
quarter. This has increased their demand for onshore FX liquidity
and contributed to a $60 billion decline in the Central Bank of
Russia's (CBR's) FX reserves to $396 billion since
the end of last year, despite a current account surplus that the
CBR estimates came to $52.3 billion in January-September.
The CBR has been proactive in its response to the situation, raising
interest rates by 250 bps to try to stem the outflow of capital.
It has also established an overnight swap facility to relieve onshore
FX liquidity shortages and is standing ready to provide the FX needed
by important public and private sector companies to pay their foreign-currency
obligations. The CBR also has used the exchange rate as a flexible
tool, adjusting the trading bands as needed to deal with sustained
downward pressure on the ruble.
The government's FX reserves remain substantial, but the need
to provide both the public and private sector with liquidity will place
them under significant strain. Until now, the very high strength
of the government's balance sheet -- including its
large FX reserves -- has sustained Russia's credit
profile notwithstanding its weak institutions, exposure to geopolitical
event risk and worsening medium-term economic prospects.
However, while government finances remain extremely strong,
the recent and prospective erosion of FX buffers accentuates those other
weaknesses in the government's credit profile.
RATIONALE FOR NEGATIVE OUTOOK
The tensions between Russia and Ukraine have not been alleviated by the
announcement of a cease-fire in September, with military
activity in eastern Ukraine continuing. While the situation remains
fluid and unpredictable, it is increasingly difficult to see what
might bring the conflict in Ukraine, and the international sanctions
against Russia, to an end in the foreseeable future. The
negative outlook reflects the downside risk to Russia's economic
and fiscal strength from a sustained crisis involving broader sanctions
and wider economic dislocation. It also reflects uncertainty regarding
potential Russian reactions to additional sanctions that could be imposed,
leading to decisions that further undermine Russia's economic strength
and its ability to service its debt.
WHAT COULD CHANGE THE RATING -- UP
Given the negative outlook on the rating, Moody's sees limited
upward pressure in the next 12-18 months. A stabilization
of the rating outlook could be triggered by a resolution of the crisis
in Ukraine, or if Moody's were to observe institutional or
structural changes that it believed could herald a reversal of the downward
trend in Russia's medium-term growth potential.
WHAT COULD CHANGE THE RATING -- DOWN
Russia's rating would come under downward pressure if the crisis in Ukraine
were to escalate further, particularly if this resulted in harsher
sanctions, as well as accelerated capital flight and the likelihood
of more prolonged lack of market access for Russian corporates and banks.
Russia's rating would also come under downward pressure from a prolonged
period of low commodity prices, given the lack of progress on economic
diversification.
Moody's would also consider downgrading Russia's sovereign rating
if the domestic growth outlook were to deteriorate further, and
in particular if lower growth and/or sanctions were to further undermine
Russia's fiscal and external accounts. A material deterioration
of the government's net worth (higher debt, lower assets) would
erode its stronger position relative to similarly-rated governments
that have more robust institutional strength.
Finally, we would consider downgrading the rating if we believe
that the institutional framework becomes less predictable, potentially
damaging creditors' interests.
GDP per capita (PPP basis, US$): 24,298 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.3% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.5%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -1.3%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.6% (2013 Actual) (also
known as External Balance)
External debt/GDP: 34.8% (2013 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 15 October 2014, a rating committee was called to discuss the
rating of the Russia, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has decreased. The issuer has become increasingly susceptible to
event risks.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Alastair Wilson
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Downgrades Russia's Ratings to Baa2; Outlook Negative
