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Rating Action:

Moody's changes outlook on Russia's ratings to positive from stable; Ba1 ratings affirmed

25 Jan 2018

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

No Related Data.
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