New York, December 03, 2015 -- Moody's Investors Service ("Moody's") has today
changed the outlook on Russia's Ba1 government bond rating to stable
from negative. At the same time, Moody's has affirmed
Russia's government bond rating at Ba1/Not Prime (NP).
The key drivers for the decision to change the rating outlook to stable
from negative are the following:
1. The stabilization of Russia's external finances,
resulting from a macroeconomic adjustment that has helped to mitigate
the effect of the fall in oil prices on official FX reserves.
2. The diminished likelihood of the Russian economy or finances
facing a further intense shock in the next 12-18 months,
such as from additional international sanctions given some easing of the
conflict in eastern Ukraine.
Moody's says the decision to affirm Russia's current Ba1 rating
acknowledges the government's very high fiscal strength tempered
by the erosion of its savings buffers due to persistently low oil prices.
Moreover, the country's structurally weak growth potential
remains an important rating constraint. Overreliance on the oil
and gas industry makes the economy vulnerable to shocks to that sector,
and to its highly cyclical nature. While this dependence is not
new, the likelihood that oil prices will stay low for several more
years significantly constrains the government's room for budgetary maneuver.
Russia's country ceilings remain unchanged at Ba1/NP (foreign currency
bonds), Ba2/NP (foreign currency bank deposits) and Baa3 (long-term
local currency debt and deposits).
RATIONALE FOR THE STABLE OUTLOOK
First driver: continued stabilization in the country's external
position
The first driver for changing the rating outlook to stable from negative
is Moody's expectation that Russia's external financial position
will remain relatively robust despite ongoing pressures on public and
external finances exerted by weak oil and gas prices. The negative
effect of low oil prices, in addition to the sanctions-related
impact of the Ukraine conflict, on Russia's foreign exchange
reserves this year has not been as severe as Moody's initially expected
due to a combination of macro policy adjustments that helped mitigate
the shocks.
The resilience of official foreign exchange reserves was partly due to
the introduction of the floating exchange rate in November 2014,
and the steep depreciation of the ruble exchange rate which that permitted.
FX reserves have dropped by USD20 billion to about USD308 billion between
the end of 2014 and October 31, 2015, a much smaller decline
than the losses Moody's had anticipated and a significant contrast
to the USD129 billion drop in reserves that occurred in 2014.
Although the government is drawing down its accumulated savings in its
Reserve Fund in order to finance the budget deficit this year, in
an amount expected to reach RUB 2.6 trillion (USD40 billion),
the withdrawals from its deposits at the central bank have been made almost
entirely in rubles. So, while the government's savings
are being depleted, the official foreign exchange reserves have
been left largely intact.
As regards Russia's external liabilities, Moody's notes
that a steep fall in imports as a consequence of constrained household
finances and a plunge in investment spending meant that the current account
surplus largely covered external debt repayments made by the government,
banks and corporate issuers in the first nine months of 2015. As
a consequence, gross external debt declined by USD77 billion in
the period (and more than USD200 billion since external debt peaked in
June 2014), further reducing refinancing risks facing Russian corporates
and banks.
Second driver: diminished likelihood of a further shock, e.g.
from tighter international sanctions
The second driver for changing the rating outlook to stable is that the
likelihood of a further economic or financial shock has diminished relative
to earlier in the year. In particular, the relative stability
in eastern Ukraine suggests a lower likelihood of sanctions being tightened
as a consequence of that conflict in the near future. Tensions
in the region have lessened significantly and, as per the Minsk
II agreement, local elections are scheduled to take place in the
contested regions early in 2016 after being held elsewhere in Ukraine
in October (and in November in Mariupol, the port city close to
the contested eastern regions). At the same time, we do not
expect existing sanctions to be loosened or removed until such time that
the parties involved in the conflict demonstrate their willingness to
abide by the terms of Minsk II for a sustained period of time, especially
with Crimea's status remaining a potentially insoluble impediment
to any final resolution of the impasse between Ukraine and Russia.
RATIONALE FOR THE AFFIRMATION OF RUSSIA'S Ba1 GOVERNMENT BOND RATING
Moody's assessment of Russia's creditworthiness balances very
strong although weakening government finances against low growth potential,
weak institutional strength and still elevated geopolitical risks.
Russia has a low level of general government gross debt, which Moody's
estimates at 19% of GDP as of year end 2015, combined with
the presence of substantial accumulated financial assets. However,
the government balance sheet is weakening as the authorities are using
significant amounts of fiscal reserves to finance wider government budget
deficits and, to a lesser extent, to support local companies
and banks. The government projects that the Reserve Fund and the
eligible portion of the National Welfare Fund will be fully depleted by
the end of 2017.
The uncertainty surrounding the economic situation, including the
oil price, led the government to drop formal medium-term
budget planning temporarily. The authorities intend to introduce
a revised fiscal rule before formulating the next three-year budget
framework, which if approved would base revenue forecasts on lower
average oil prices and provide for rebuilding fiscal reserves should oil
prices subsequently recover.
The affirmation of Russia's Ba1 government bond rating also reflects
the country's increasingly limited growth potential, a key
rating constraint. Overreliance on the oil and gas industry makes
the economy vulnerable to shocks to that sector, and to its highly
cyclical nature, which creates significant economic distortions
regardless of whether prices are elevated or low. While this dependence
is not new, the likelihood that oil prices will stay low for several
more years during a period in which we expect to see the government's
financial assets largely depleted, significantly constrains the
room for budgetary maneuver.
Moreover, the dominant oil and gas sector has limited room to expand
capacity due to the lack of sufficient investment over a number of years.
The international sanctions make investment capital more scarce,
so that companies must rely on their own funds or in some cases,
assistance from the government. The sanctions also prevent Russian
companies from obtaining advanced technology to explore for oil offshore
and other areas that are more difficult to reach, which will be
needed if the anticipated decline in oil output is to be reversed.
Against this backdrop, we expect Russia's growth will remain
modest even when the economy starts to recover. The economy's
potential growth rate is estimated at only 1%-1.5%,
constrained by declining oil output capacity, underinvestment,
fiscal consolidation and highly indebted households. The one-off
boost from net exports in 2015 is not expected to recur, since it
was driven by a sharp contraction in imports, so further support
from this source is unlikely. Finally, the availability of
investment capital and technology transfer will be limited as long as
sanctions remain in place.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's would consider a positive outlook on Russia's government
bond rating should the government's fiscal consolidation and structural
reform plans be advanced, enhancing growth and limiting the risk
of further depletion of its financial assets. The rating agency
said other positive rating developments would come from a further diminution
of Russia's exposure to financial or economic shocks, such
as might be expected were there to be further progress on resolving the
Ukraine conflict such that international sanctions were loosened or removed.
Moody's says that Russia's government bond ratings would come
under negative pressure should volatile macroeconomic and financial market
conditions return or if progress on fiscal consolidation and structural
reforms does not take place. In addition, the rating agency
says it might downgrade the rating if the military conflict in Ukraine
were to escalate and result in the introduction of additional sanctions,
which would undermine Russia's economic strength. Finally,
actions that create greater uncertainty around the government's capacity
or willingness to continue to service its debt would most likely put negative
pressure on the rating.
GDP per capita (PPP basis, US$): 24,449 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.6% (2014 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 11.4%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -1.2%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3.1% (2014 Actual) (also
known as External Balance)
External debt/GDP: 32.2% (2014 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 30 November 2015, a rating committee was called to discuss the
rating of the Russia, Government of. The main points raised
during the discussion were: The issuer has become less susceptible
to event risks and the country's external finances are expected
to continue to stabilize. The likelihood of tougher international
sanctions diminished.
Outlook Actions:
..Issuer: Russia, Government of
....Outlook, Changed To Stable From
Negative
Affirmations:
..Issuer: Russia, Government of
.... Issuer Rating (Foreign Currency),
Affirmed Ba1
.... Issuer Rating (Local Currency),
Affirmed Ba1
....Short-Term Issuer Rating (Local
Currency), Affirmed NP
....Senior Unsecured Regular Bond/Debenture
(Local Currency), Affirmed Ba1
....Senior Unsecured Regular Bond/Debenture
(Foreign Currency), Affirmed Ba1
The principal methodology used in these ratings 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
Yves Lemay
MD-Banking & Sovereign
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 changes outlook on Russia's Ba1 government bond rating to stable from negative; affirms rating
