New York, February 20, 2015 -- Moody's Investors Service has today downgraded the government of
Russia's sovereign debt rating to Ba1/Not Prime (NP) from Baa3/Prime-3
(P-3). The rating outlook is negative. This rating
action concludes the review for downgrade that commenced on January 16,
2015.
Moody's downgrade of Russia's government bond rating to Ba1
is driven by the following factors:
(1) The continuing crisis in Ukraine and the recent oil price and exchange
rate shocks will further undermine Russia's economic strength and
medium-term growth prospects, despite the fiscal and monetary
policy responses;
(2) The government's financial strength will diminish materially
as a result of fiscal pressures and the continued erosion of Russia's
foreign exchange (FX) reserves in light of ongoing capital outflows and
restricted access to international capital markets;
(3) The risk is rising, although still very low, that the
international response to the military conflict in Ukraine triggers a
decision by the Russian authorities that directly or indirectly undermines
timely payments on external debt service.
The assignment of the negative outlook reflects the potential for more
severe political or economic shocks to emerge, related either to
the military conflict in Ukraine or a renewed decline in oil prices,
which would further impair Russia's public and external finances.
In a related decision, Moody's has lowered Russia's
country ceilings for foreign currency debt to Ba1/NP from Baa3/P-3;
its country ceilings for local currency debt and deposits to Baa3 from
Baa2; and its country ceiling for foreign currency bank deposits
to Ba2/NP from Ba1/NP. A country ceiling generally indicates the
highest rating level that any issuer domiciled in that country can attain
for instruments of that type and currency denomination.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO Ba1
FIRST DRIVER -- IMPAIRED PROSPECTS FOR RUSSIA'S ECONOMY
The first driver for the downgrade of Russia's government bond rating
to Ba1 relates to the effects of the ongoing crisis in Ukraine,
as well as the fall in oil prices and of the ruble exchange rate on the
country's economic strength and financial stability.
In Moody's view, the existing and potential future international
sanctions, the erosion of the country's foreign exchange buffers
and persistently lower oil prices plus high and rising inflation will
take a negative toll on incomes as well as business and consumer confidence.
As a result, Russia is expected to experience a deep recession in
2015 and a continued contraction in 2016. The decline in confidence
is likely to constrain domestic demand and exacerbate the Russian economy's
already chronic underinvestment.
It is unlikely that the impact of recent events will be transitory.
The crisis in Ukraine continues. While the fall in the oil price
and the exchange rate have reversed somewhat since the start of the year,
the impact on inflation, confidence and growth is likely to be sustained.
The authorities' policy response is gradually coalescing. However,
policymakers confront a multi-faceted dilemma characterized by
a falling exchange rate, sizeable capital outflows, declining
economic activity and rising inflation. In Moody's view policymakers
are unlikely to be able to resolve these policy tensions in order to reverse
the economic decline.
The monetary authorities face the conflicting objectives of keeping interest
rates high enough to restrain the exchange rate and bring down inflation
and keeping rates low enough to reinvigorate economic growth and bank
solvency. While the interest rate cut in January coincided with
a rise in oil prices that cushioned the otherwise negative initial reaction
of the exchange rate, a too-rapid reduction in interest rates
risks further currency depreciation and higher inflation, which
would further compress domestic purchasing power and extend and/or deepen
the economic downturn.
Meanwhile, the authorities' revamped fiscal strategy will
attempt to consolidate the budget to achieve balanced budgets at the lower
oil prices and devalued exchange rates that now prevail. Details
of this strategy will be made public in coming months. However,
Moody's believes that financial conditions in Russia are inherently
vulnerable to renewed volatility, which would in turn trigger fresh
capital flight and further downward pressure on the exchange rate and
the balance of payments.
As a consequence, Moody's believes that the government will
face substantial difficulty in dealing with the wide range of economic,
fiscal and monetary challenges that the country is facing.
SECOND DRIVER -- FURTHER EROSION OF FISCAL STRENGTH AND FX RESERVES
The second driver for the downgrade of Russia's government bond
rating to Ba1 is the expected further erosion of Russia's fiscal
strength and foreign exchange buffers. As the rating agency noted
in January when initiating its review for downgrade, the government's
ability to sustain its fiscal and financial strength was the main factor
supporting Russia's investment grade rating. Following the
review, Moody's expects further deterioration in the government's
financial strength despite the authorities' fiscal policy responses.
Taking at face value the government's plans to proceed with its planned
fiscal consolidation for 2015, Moody's expects a consolidated
government deficit of approximately RUB1.6 trillion (2%
of GDP) as well as a widening of the non-oil deficit. The
deficit would likely be financed by drawing on the Reserve Fund,
which is specifically designed for circumstances when oil prices fall
below budgeted levels. Moody's also expects that widespread
demands for fiscal easing are likely to emerge if, as the rating
agency projects, the recession persists into 2016. In a scenario
in which the government would turn to borrowing in the domestic market
to finance at least a share of these deficits, higher spending could
result in an increase of the debt-to-GDP ratio to 20%
or more.
In the rating agency's view, therefore, the government's
debt metrics are likely to deteriorate over the coming years, albeit
from low levels. Low debt and robust external buffers have been
the key factors sustaining the rating in investment grade until now,
given the country's relatively lower economic and institutional strength
and higher exposure to event risk than Baa-rated sovereigns.
Moreover, under the stress exerted by a shrinking economy,
wider budget deficits and continued capital flight -- in part reflecting
the impact of the Ukraine crisis on investor and depositor confidence
-- and restricted access to international capital markets,
Moody's expects that the central bank's and government's
FX assets will likely decrease significantly again this year, cutting
the sovereign's reserves by more than half compared to their year-end
2014 level of approximately USD330 billion.
In a more adverse but not unimaginable scenario, which assumes smaller
current account surpluses and substantially larger capital outflows than
in Moody's baseline forecast, FX reserves including both government
savings funds would be further depleted. While the government might
choose to mobilise some form of capital controls to impede the outflow
of capital and reserves, such tools are not without consequences.
Capital controls, which might include a rationing of retail deposit
withdrawals and/or prohibition upon repatriation of foreign investment
capital, would weaken the investment climate further and undermine
confidence in the banking system.
THIRD DRIVER -- UNPREDICTABLE POLITICAL DYNAMICS
The third driver for the downgrade of Russia's government bond rating
to Ba1 relates to the very low but rising risk that the international
response to the conflict in Ukraine triggers a decision by the Russian
authorities that directly or indirectly undermines timely payments on
external debt service.
Moody's acknowledges the current and prospective efforts by the country's
policymakers to contain the economic and financial consequences of the
many challenges they face: the Ukraine crisis as well as the collapse
in global oil prices and the ruble exchange rate. However,
the sovereign faces predicaments that few would have predicted six months
to a year ago, and the government's reaction to a possible escalation
of these challenges is difficult to foresee. In Moody's view,
the risk of policy decisions being taken that pose a threat to the repayment
of Russian debt obligations remains very low, but that risk is rising.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on the Ba1 rating reflects Moody's view that the
balance of economic, financial and political risks in Russia is
slanted to the downside, with scenarios incorporating either an
escalation of the Ukraine crisis and/or damage caused by recent shocks
being greater than in Moody's baseline scenario. Essentially,
the probabilities associated with the downside scenarios are higher than
those associated with an upside scenario in which the recession is shorter
and shallower than Moody's baseline.
For example, it seems more likely that Russia will face additional
sanctions than that current sanctions are lifted in the coming months.
The associated economic risks are also biased to the downside.
Similarly, the likelihood of a further shock to confidence,
with associated capital outflows and damage to investment and consumption
intentions, seems greater than that of a return of confidence and
a cessation of capital outflows or a material resumption of inflows.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's is unlikely to upgrade Russia's sovereign debt rating
in the near term given the negative outlook. However, Moody's
would consider stabilizing the outlook on the Russian government rating
if the macro-economic and financial market conditions were to stabilize,
if the risks of financial market volatility were to subside, and/or
if there was a serious prospect of the Ukraine crisis being resolved in
such a way that the risk of ongoing or escalating military hostilities
and further sanctions were to dissipate.
Moody's would consider downgrading Russia's government bond
rating if the macroeconomic and financial market conditions were to deteriorate
substantially below the rating agency's base case, or were the government
to water down or abandon its fiscal and structural reform plans.
The rating agency might also downgrade if the military conflict were to
escalate and result in the introduction of additional sanctions that further
undermine the country's economic strength. Finally, actions
that create greater uncertainty around the government's capacity or willingness
to continue to service its debt would also likely result in a downgrade.
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: 35.1% (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 17 February 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's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks.
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
Alastair Wilson
MD-Global 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 sovereign rating to Ba1 from Baa3; outlook negative
