New York, January 25, 2018 -- Moody's Investors Service ("Moody's") has today
changed the outlook on Russia's Ba1 long-term issuer and
senior unsecured debt ratings to positive from stable. Concurrently,
Moody's affirmed Russia's long-term ratings at Ba1 and its short
term rating at Not Prime (NP).
The change in the outlook on Russia's Ba1 ratings was driven by
the following rating factors:
(1) Growing evidence of institutional strength. Russia's macroeconomic
framework coped well with the oil price shock and with the impact of sanctions
imposed to date, and enhancements have been made to the government's
rule-based fiscal framework.
(2) Relatedly, increased evidence of economic and fiscal resiliency
that has reduced Russia's vulnerability to further external shocks arising
from geopolitical tensions or from renewed declines in oil prices.
At the same time, Moody's affirmed the Russian government's
Ba1 local and foreign currency debt ratings. In Moody's view,
that rating appropriately balances Russia's fiscal strength,
somewhat improved economic prospects and effective policy-making
against the combination of longer-term economic challenges and
continued nearer-term exposure to external events. The outlook
horizon will allow Moody's to assess whether that balance will continue
to shift in Russia's favor.
In a related decision, Moody's has raised Russia's country
ceilings for foreign currency debt to Baa3/P-3 from Ba1/NP to reflect
diminished concerns that the government might impose capital controls
or otherwise ration foreign exchange reserves. Moody's also
raised the country risk ceilings for local currency-denominated
debt and deposits to Baa2 from Baa3 while the country ceilings for foreign
currency deposits remain at Ba2/NP.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE
FIRST DRIVER: A MORE SUSTAINABLE MACRO POLICY MIX DEMONSTRATES STRONGER
INSTITUTIONS
In Moody's view, the Russian authorities have forged pragmatic
monetary, exchange rate and fiscal policy responses to the recent
crisis in the context of collapsing oil prices and the imposition of international
financial sanctions. The government's macro strategy,
recently supplemented by the new fiscal rule limiting the amount of oil
and gas revenues spent in annual government budgets, should result
in a more sustainable and stable growth model over time, i.e.
one that is better able to withstand oscillations in global commodity
demand and prices. Moody's expects these changes to lessen,
but not eliminate, the economic volatility seen in recent years.
The various elements of the new policy framework are each important to
securing macroeconomic sustainability and stability, especially
in an environment where sanctions remain in place in relation to many
Russian quasi-sovereign entities and oil prices are still only
about 60% of their June 2014 levels. The floating exchange
rate has become a crucial shock absorber that helps both the government
and exporters adapt to volatile oil and commodity prices. The monetary
policy stance has enhanced the credibility of the central bank.
Accordingly, inflation expectations are falling, albeit at
a slower pace than the decline in inflation.
Prudent fiscal policy has largely protected the government's balance
sheet, with the government debt-to-GDP ratio remaining
very low, although fiscal savings are lower and the Reserve Fund
has been fully depleted. Moody's considers the implementation
of the new fiscal rule to be an extremely important structural reform
that also speaks to policy credibility and government effectiveness,
both important components of institutional strength. The premise
of the rule is that the government will spend only the oil and gas revenue
associated with a price of $40/barrel (indexed annually by 2%).
Aside from mitigating economic volatility induced by government spending,
the fiscal rule helps to insulate the budget itself against another oil
price shock.
Although the Russian economy's medium-term growth prospects
remain quite weak, at this stage they appear not to have been further
impaired by the crisis, again likely attributable to the effective
macro policy response. Furthermore, the credit strengths
of very low government debt and a robust external position have been maintained.
Given potential US sanctions, the government's plan to lower
its deficits to a level sustainably below what can be financed in the
domestic financial market and its efforts to rebuild its fiscal reserves
increase the likelihood that Russia could be upgraded, driving the
positive outlook.
SECOND DRIVER: RUSSIA'S IMPROVED ECONOMIC AND FISCAL RESILIENCY
Russia's medium-term macroeconomic perspective is also better
than forecast a year ago when Moody's changed the rating outlook
to stable from negative.
Near-term developments have been supportive, with the economy
having grown faster, inflation dropping lower and both the public
finances and external finances having remained healthier than anticipated,
thanks to stronger global and domestic demand. The terms of trade
also improved by more than expected when oil prices tracked higher after
Russia joined with other oil producers for the so-called "OPEC+"
agreement to cut back global oil production. The positive global
backdrop, the extension of the oil production cuts until the end
of 2018 and ongoing real wage and employment gains suggest that the Russian
economy will record a similar pace of growth this year as in 2017,
with potential upside should oil prices remain at levels above Moody's
forecast range of $40-$60/barrel. We expect
2018 growth will largely overcome the adverse base effect caused by the
industrial output-led slowdown in Q4-2017.
More importantly from a credit perspective, Moody's expects
the recent macro gains to be sustained over the longer term. A
gradual easing in monetary policy, to the extent permitted by further
falls in inflation expectations, is likely to support a broader-based
economic expansion, including a pickup in the construction sector
thanks to higher mortgage lending.
The fiscal consolidation continues with the 2018-20 medium-term
budget framework, which projects a continued narrowing of the deficit
that will bring the primary budget position into balance by next year.
At current and expected oil price levels, Moody's expects
lower government deficits and more modest financing needs that can be
met in the domestic market. The Ministry of Finance has been buying
foreign exchange nearly the whole of 2017, and is stepping up the
pace of purchases in light of the current level of oil prices.
These purchases will offset drawdowns that might be made from the government's
National Welfare Fund to finance the budget deficit.
Challenges remain, and Moody's still expects potential growth
to be subdued, at around 1.5%. The emergence
of large capital shortfalls at three systemically important banks reinforces
concerns about the resilience of parts of the Russian banking system.
Structural reforms to boost potential growth have been mooted, but
their content and impact remains uncertain.
RATIONALE FOR AFFIRMING RUSSIA'S GOVERNMENT BOND RATING AT Ba1
Notwithstanding the improvements seen, Moody's considers that
the current Ba1 rating reflects appropriately the balance of strengths
and weaknesses in Russia's credit profile. Russia's
government balance sheet remains very strong. The very large economy
affords relatively high average wealth, although with structural
flaws such as wide income differentials and an ageing population that
continue to impair potential growth. Its institutional framework
balances emerging strengths related to effective policymaking and governance,
against significant challenges evidenced by other important institutional
indicators such as the rule of law and control of corruption. The
sovereign remains vulnerable to external shocks, whether economic
-- another oil price fall -- or geopolitical, i.e.
the nearer term potential for expansion of international sanctions,
although recent experience suggests that the country's vulnerability
to such events may be gradually receding.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Russia's ratings would be upgraded should Moody's conclude
that the country's vulnerability to external shocks will indeed
continue to diminish, for example, as the government establishes
a track record abiding by its new fiscal rule, should sanctions
ease, or, more likely, should the economy and public
finances demonstrate their ongoing resilience to any additional international
measures imposed. Further steps by the government to rebuild fiscal
and foreign exchange buffers, and to continue to reduce its deficits
to a level sustainably below what can be financed in the domestic financial
market, would be credit positive in this respect.
Subsequent upgrades could occur if structural adjustments such as are
currently being considered by the government were to be enacted that could
sustainably address the underlying sources of Russia's growth constraints,
such as relatively short working lives, underinvestment and the
large government involvement in the economy. In this regard,
increasing incentives to diversify the economy, reducing poverty,
lowering the structural pension system deficit and generally improving
the investment climate are among the goals of policymakers.
Although unlikely given the positive rating outlook, Russia's rating
could come under downward pressure if the country's credit metrics or
external position deteriorate to the point that its capacity to absorb
another oil price shock or other shocks were materially diminished.
Also negative would be if the lending capacity of the banking system is
impaired such that banks could not provide adequate financing to the government
and Russian companies, which is increasingly important should additional
sanctions be imposed, further limiting access to international capital
markets.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 26,926 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.2% (2016
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.4%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3.7%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2% (2016 Actual) (also known
as External Balance)
External debt/GDP: 40.1% (2016 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 23 January 2018, a rating committee was called to discuss the
rating of the Russia, Government of. The main point raised
during the discussion was: The issuer's institutional strength/framework
have increased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. 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 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 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 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 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.
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: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
