London, 04 June 2021 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Russia's Baa3 long-term issuer
and senior unsecured ratings as well as its Prime-3 (P-3)
domestic currency other short-term rating. The outlook remains
stable.
The factors supporting the decision to affirm Russia's ratings are:
1) The relative resilience demonstrated by the Russian economy to the
pandemic and oil-price shock, although potential growth remains
low;
2) The government's very low debt and rebuilt fiscal buffers,
although the state's dominant role in the economy poses risks to
the sovereign's balance sheet; and
3) Russia's susceptibility to political event risks, and in
particular the persistent risk of new sanctions
The stable outlook reflects a balance of risks at the current rating level.
The government's demonstrated focus on preserving its fiscal and
external buffers will continue to add resilience to Russia's credit
profile against potential shocks, including from a worsening of
the pandemic and further sanctions on sovereign debt. At the same
time, Russia's exposure to commodity price volatility alongside
the persistent risk of new sanctions results in a stricter than otherwise
monetary and fiscal policy setting, weighing on the government's
budget flexibility, investments prospects and potential growth.
Russia's local- and foreign-currency country ceilings
remain unchanged at Baa1 and Baa2, respectively. The two-notch
gap between the local-currency ceiling and the sovereign rating
reflects the relatively large footprint of the government in the economy
and financial system, relatively strong reliance on a common revenue
source from the oil sector and elevated political risk, which is
set against moderate policy predictability and limited external imbalances.
The one-notch gap between the foreign-currency ceiling and
the local-currency ceiling reflects low external debt and a moderately
open capital account, which reduce the incentives to impose transfer
and convertibility restrictions.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Baa3 RATINGS
FIRST FACTOR: THE RELATIVE RESILIENCE DEMONSTRATED BY THE RUSSIAN
ECONOMY TO THE PANDEMIC, ALTHOUGH POTENTIAL GROWTH REMAINS LOW
The first factor supporting the rating affirmation is the relative resilience
demonstrated by Russia's economy to the impact of the pandemic which
reflects a number of factors, including the support provided by
the authorities' discretionary fiscal response, monetary easing
and macroprudential measures, Russia's strengthened capacity
to adjust to shocks and a low reliance on those sectors most impacted
by the pandemic. While Russia experienced a marked economic contraction
in 2020, with real GDP declining by 3% as the pandemic-related
restrictions impacted on private consumption and exports fell in the face
of weaker external demand and the cuts to oil production under the arrangement
between Organisation of Petroleum Exporting Countries (OPEC) and other
major oil-exporting countries (the so-called OPEC+),
the fall in growth was relatively mild compared to other G20 economies.
The economy entered the crisis with improved macroeconomic stability as
well as larger external and fiscal buffers, while a flexible exchange
rate regime and the fiscal rule introduced in 2018 have strengthened Russia's
capacity to adjust to shocks relative to 2014-15. Greater
exchange rate flexibility has helped conserve foreign exchange reserves,
while the conservative fiscal rule has helped to reduce the economic volatility
stemming from the government's spending of hydrocarbon revenues.
That said, the limited role played by discretionary services and
small and medium-sized enterprises (SMEs), as well as the
ability for the industrial and construction sectors to continue to operate
to a large degree through the pandemic-imposed restrictions,
also help to explain the economy's relatively better performance.
Moody's expects the moderate economic contraction, limited
exposure to sectors most impacted by the pandemic and policy support which
has helped prevent a prolonged period of high unemployment will likely
limit the extent of longer-term scarring effects on the economy.
Moody's forecasts a modest economic recovery from 2021 as the support
from a strengthening oil price is balanced by only a gradual lifting of
the constraints on oil production, continuing pandemic uncertainty
and tightening monetary policy in response to rising inflationary pressures,
while a focus on budget consolidation will limit the extent to which fiscal
policy can support growth after this year.
Over the medium term, Moody's sees limited prospects for a
material improvement in Russia's potential growth which is expected
to remain in the lower half of the 1.5%-2%
range. Investment rates will remain low as institutional constraints,
including weaknesses in the rule of law and control of corruption,
weigh on the business environment and as the unpredictable nature of western
sanctions weighs on access to foreign capital, hindering efforts
to diversify Russia's exports and government revenues. The
pandemic will likely reinforce the degree of state dominance in the economy
as the SME sector, which remains a key driver of private sector
development, has been disproportionately impacted by the crisis.
The country's adverse demographics, given an ongoing contraction
in its young working-age population, will continue to pose
headwinds to growth.
Furthermore, efforts to sustainably raise medium term growth through
the national projects initiative -- which is the cornerstone of Russia's
economic policy objectives and envisages higher public spending in areas
such as infrastructure, demographics and digitalization --
will, in Moody's view, continue to face implementation
challenges, including from deficiencies in the procurement process,
mobilising adequate private investment in the face of budget constraints
and ensuring regions have sufficient capacity and funding for these projects,
and these challenges have been exacerbated by the pandemic.
SECOND FACTOR: VERY LOW GOVERNMENT DEBT AND REBUILT FISCAL BUFFERS,
ALTHOUGH STATE'S DOMINANT ROLE IN THE ECONOMY POSES FISCAL RISKS
The second factor supporting the affirmation of Russia's credit
rating is the sovereign's very strong fiscal position, supported
by low levels of government debt and rebuilt fiscal buffers, which
will provide a degree of resilience to its fiscal strength as the budget
gradually recovers over the next two years from the impact of the pandemic.
Russia experienced a deterioration in its fiscal balance last year,
given the impact of lower oil prices and the broader economic effects
of the pandemic on government revenue as well as the government's
discretionary fiscal response. Moody's forecasts the general
government debt ratio to peak at around 20% of GDP by the end of
2021, which remains modest relative to rating and emerging market
peers. Unlike many regional peers, Russia also benefits from
a modest share of foreign-currency denominated debt.
Furthermore, the savings accumulated within the National Wealth
Fund (NWF) under the fiscal rule -- which totaled 12.1%
of projected 2021 GDP as at end April, of which around an estimated
7.6% of projected 2021 GDP is expected to be liquid --
will provide a sizeable backstop in the event of a sustained period of
low oil prices. Despite the government's ambitious investment plans,
Moody's expects any use of the NWF's excess liquid reserves
for domestic investment in the coming years to be limited, in line
with the authorities' revealed preference to preserve fiscal buffers.
That said, Moody's expects the codification of existing sanctions
and the persistent risk of new measures, including the potential
for further restrictions on sovereign debt, will serve to constrain
Russia's budgetary options by limiting financing flexibility,
weighing on overall fiscal strength.
While government debt remains low, the public sector's dominant
and pervasive role in the economy, with the government taking full
or part ownership in entities across a range of sectors, will continue
to pose contingent liability risks for the sovereign balance sheet.
According to the latest estimates by the International Monetary Fund (IMF),
the Russian state accounted for 33% of output in 2016[1].
While the Russian banking system remains moderate in size relative to
GDP, the government's dominance in the financial sector and
its demonstrated willingness to provide support exposes the sovereign's
balance sheet to the risk of a systemic financial crisis.
THIRD FACTOR: RUSSIA'S SUSCEPTIBILITY TO POLITICAL EVENT RISKS,
AND IN PARTICULAR THE PERSISTENT RISK OF NEW SANCTIONS
The final factor supporting the affirmation of Russia's Baa3 ratings
is the sovereign's susceptibility to political event risks,
which arise primarily from geopolitical tensions and associated sanctions
given Russia's heightened tensions with Ukraine (B3 stable) as well
as its alleged interference in foreign elections, use of chemical
weapons and role in malign cyber activities. These sanctions have
resulted in significant negative economic and financial costs, while
ongoing tensions between Russia and the United States (US, Aaa stable)
and European Union (Aaa stable) keep open the possibility for new measures
to be imposed.
Moody's expects Russia would be able to manage the immediate impact
of most new sanctions -- which was a driver of the upgrade in Russia's
rating to Baa3 in February 2019 -- given its accumulated financial
buffers, low government debt and an enhanced policy toolkit.
Furthermore, Moody's considers the authorities ability to
plan for, respond to, and operate under sanctions has strengthened.
For example, the country's low borrowing needs help to limit
the immediate credit impact from the recently announced prohibition on
US investors' participation in the primary market for Russian sovereign
debt. That said, harder than expected sanctions which materially
disrupt the Russian economy or public finances, and therefore impair
Russia's ability to refinance its debt, pose a risk to the
credit profile.
Importantly, Moody's considers the sanctions environment,
including the persistent threat of new measures, will remain a feature
of Russia's credit profile and continue to hinder investment prospects,
constrain the government's budgetary options and reinforce cautious
policy making, weighing on Russia's financing flexibility
and the economy's growth potential.
Both domestic and foreign investment are likely to remain meaningfully
lower as sanctions weigh on funding options. Furthermore,
limitations on access to technological knowhow act as a headwind to efforts
to modernise and diversify Russia's economy. While Moody's
considers such steps unlikely, the possibility of new restrictions
on Russia's access to international payment systems add to the uncertainty
surrounding sanctions, impacting economic and policy decisions.
Russia will also continue to face domestic political risks which has resulted
in sporadic protests in the capital and other regions in recent years,
and in Moody's view reflects public dissatisfaction across a range
of economic and social issues. These domestic political dynamics
will continue to add to pressures to increase social spending, diverting
budgetary funds from public investment. Moody's assessment
also incorporates the political uncertainty in relation to the process
for presidential succession, and in particular the potential for
changes in the government's policy priorities that can accompany
leadership changes. The risk of imminent and disorderly regime
change remains very low at this stage, but the political system's
robustness will be tested as the time for transition in senior leadership
approaches, particularly given President Vladimir Putin's
dominance of Russian politics for more than two decades. That said,
the package of constitutional changes approved by referendum in July 2020
included a reset of the presidential terms, thereby allowing the
president to serve another two terms when his current mandate ends in
2024.
RATIONALE FOR THE STABLE OUTLOOK
The decision to maintain the stable outlook reflects a balance of risks
at the Baa3 rating level.
The government's demonstrated focus on preserving its fiscal and
external buffers will continue to add resilience to Russia's credit
profile against potential shocks, including from a worsening of
the pandemic and further restrictions on sovereign debt. At the
same time, Russia's vulnerability to developments in the oil
sector alongside the persistent risk of new sanctions results in a stricter
than otherwise monetary and fiscal policy setting, weighing on the
government's budget flexibility and potential growth.
The demonstrated ability of the industrial sector to operate through the
pandemic will add resilience to the economic recovery underway.
However, the slow vaccination progress, with only around 11%
of the population having received a first dose of a vaccine, will
reduce the country's ability to limit the health and economic impact
of a renewed worsening in the pandemic. Furthermore, the
recent sharp rise in consumer prices amid elevated household inflation
expectations and the potential for a further weakening in the ruble to
feed through to inflation, given the heightened sanctions environment,
poses a risk to the still fragile economic recovery.
Furthermore, Moody's considers there are limited prospects
for reforms which help to materially address Russia's structural
credit constraints. For example, Moody's expects initiatives
to reduce business regulations as part of the so-called regulatory
guillotine will not materially alleviate the challenges in the country's
investment environment, while increased financial support to larger
sized families is unlikely to address Russia's acute demographic
challenges. Efforts to address deficiencies in Russia's infrastructure
as part of the national projects initiative will face funding constraints,
as the pandemic necessitates a reallocation in spending to other needs,
in addition to implementation challenges.
Moody's expects a gradual fiscal consolidation, with a return
to the pre-pandemic formulation of the fiscal rule by 2022 alongside
limited drawdowns from the NWF over the coming years, will help
to preserve buffers. Resilient non-oil revenues may result
in a stronger fiscal performance in the near term. However,
the government's fiscal consolidation strategy will still face risks
from the uncertain economic (and hence oil price) outlook and the potential
need to extend discretionary support measures, as well as rising
pressures to further improve social welfare given uneven healthcare provisions
between regions, low real disposable income growth in recent years
and the forthcoming 2021 legislative elections.
Moody's expects the government's accumulated financial buffers
and low borrowing needs will help to limit the immediate negative effects
in the event of a further tightening in sovereign debt sanctions,
which could potentially prohibit US financial institutions from participating
in the secondary market for ruble or non-ruble denominated debt.
The recent incremental extension of US sanctions on sovereign debt to
cover ruble dominated bonds in the primary market included a directive
to allow the US government to expand sovereign debt sanctions as appropriate,
keeping open the possibility for more punitive measures which extend to
the secondary market.
A further extension of sovereign debt sanctions to include the secondary
market would likely result in some short-term financial market
dislocation, as investors seek to understand the implications of
the new restrictions with the possibility of forced sales exerting pressure
on government bond prices and the currency. That said, Moody's
expects the domestic banking sector would have the capacity to absorb
higher levels of sovereign debt in the extreme scenario that all foreign
investors exit Russia's domestic bond market, while the Central
Bank of Russia has demonstrated its willingness to provide additional
liquidity support to the financial sector if needed. The Ministry
of Finance would likely draw upon its sizeable cash balances to limit
the impact on its funding plan in such a scenario.
However, a marked reduction in foreign investor participation would
further restrict the government's financing options and increase
its cost of funding, reducing its flexibility to respond to new
shocks. The expected tightening in financial market conditions,
reduced access to foreign capital and the crowding out of financing available
from the banking sector to the domestic economy would also weigh on investment
and the country's medium term growth prospects.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Russia's ESG Credit Impact Score is moderately negative (CIS-3),
reflecting high exposure to environmental risks, moderate exposure
to social risks, and a moderately negative governance issuer profile
score, in part mitigated by financial resilience.
Moody's assesses Russia's exposure to environmental risks
as high (E-4 issuer profile score), reflecting high exposure
to carbon transition risk given the important role played by hydrocarbons
for exports and government revenue. While global transition towards
lower consumption of hydrocarbons will proceed over several decades,
Russia is likely to see the impact from a shift in policies in the near
term as other countries begin to position their economies to reach their
own carbon-neutral targets. Russia also faces moderate risks
from the management of waste and pollution which can lead to regional
tensions.
Exposure to social risks is moderately negative (S-3 issuer profile
score), driven by highly unfavorable demographic trends, which
limit growth potential. A rapidly shrinking population of young
workers is likely not only to weigh on the country's aggregate labour
input but also reduce the economy's dynamism. Russia also faces
moderate social risks from relatively low income growth and uneven access
to basic services.
The influence of Governance on Russia's credit profile is moderately
negative (G-3 issuer profile) and risks are mainly related to weaknesses
in the rule of law, property rights and control of corruption,
reflected in relatively lower scores on international surveys compared
with rating peers. However, the governance profile is supported
by credible monetary policy and an effective fiscal rule that limits government
spending-induced economic volatility. These aspects of governance,
combined with a strong fiscal position underpinned by the government's
very low debt burden and very strong debt affordability, support
the sovereign's resilience to E and S risks, mitigating the
impact of ESG on the rating.
GDP per capita (PPP basis, US$): 27,903 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -3% (2020 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.9%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -4.1%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.3% (2020 Actual) (also
known as External Balance)
External debt/GDP: 31.5% (2020 Actual)
Economic resiliency: ba1
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 01 June 2021, a rating committee was called to discuss the rating
of the Government of Russia. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
An upgrade of Russia's ratings would likely be conditioned in part
on further declines in the country's vulnerability to external shocks.
A marked further strengthening in Russia's fiscal buffers,
helping to reduce the susceptibility of government finances and the broader
economy to sustained periods of low oil prices and providing additional
flexibility to manage rising budgetary demands, could provide upward
pressure on the rating. A sustained reduction in geopolitical tensions,
which reduces the likelihood of new disruptive sanction measures being
imposed and creates the conditions for stronger investment prospects,
would also be positive for the rating. A further condition is likely
to be the enactment of policies which enhance other aspects of Russia's
credit profile, for example reforms which help to lessen structural
constraints on Russia's medium term growth, including from
adverse demographics and weaknesses in the business environment.
FACTORS THAT COULD LEAD TO A DOWNGRADE
The imposition of harder-than-expected sanctions which materially
disrupts the Russian economy or public finances, and thereby impairs
the government's ability to service and refinance its debt, poses
a risk to Russia's credit profile. While unlikely,
such credit-negative disruption could arise from sanctions which
restrict Russia's access to international payment systems and in
turn hinders international trade, or the ability of large state-owned
Russian banks to execute cross border payments. A marked deterioration
in the country's public finances or external position, for
example from a sustained period of low oil prices which depletes fiscal
buffers and triggers significant pressure on the exchange rate,
resulting in sizeable negative confidence and income effects, would
place downward pressure on the rating. Negative rating pressure
could also arise if the lending capacity of the banking system were to
be impaired such that banks could not provide adequate financing to the
government and Russian companies.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies 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 credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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
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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 credit rating action,
and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] IMF Working Paper 02-Mar-2019
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.
Evan Wohlmann
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Alejandro Olivo
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
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United Kingdom
JOURNALISTS: 44 20 7772 5456
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