New York, March 04, 2016 -- Moody's Investors Service has today placed Russia's Ba1 government
bond and issuer ratings on review for downgrade.
During the review, Moody's will assess the extent of the impact
of the further sharp fall in oil prices, which Moody's expects
to remain low for several years, on Russia's economic performance
and government balance sheet, including the government's deficit
financing options, in the coming years.
Moody's expects to complete the review within two months.
RATINGS RATIONALE
RATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE OF RUSSIA'S Ba1
RATING
Russia is highly dependent on hydrocarbons to drive economic growth and
to finance government expenditure. Oil and gas account for close
to 60% of goods exports and roughly 17% of GDP. Hydrocarbons
still provided around 43% of federal government revenues in 2015.
Between September 2014 and September 2015, global oil prices roughly
halved. Since then, oil prices have fallen a further 40%
to around US$30/barrel. Moody's recently revised its
oil price assumptions for Brent crude to average US$33 per barrel
in 2016 and US$38 per barrel in 2017, rising only slowly
thereafter to US$48 by 2019.
The structural shock to the oil market is weakening Russia's economy
and its government balance sheet and therefore also its credit profile.
Assuming no policy response and other factors being equal, Moody's
estimates that depressed oil prices for the coming years would imply a
further gradual decline of three 3 percentage points to 15.5%
in the federal government revenue to GDP ratio, federal government
deficits of 3% of GDP or more and around a 12-percentage-point
rise in Russia's debt burden over a four-year period.
That would shift down our assessment of the government's balance
sheet strength from 'Very High' to 'Very High (-)'.
The roughly 27% depreciation in the exchange rate against the US
dollar since the start of 2015 has contained the impact of the terms of
trade shock on the Russian government's revenues somewhat.
The country's current account balance relative to GDP has stayed
in surplus, largely due to a compression of imports of nearly 35%.
However, this was at the cost of higher inflation, which rose
from 11.4% in 2014 to a high of nearly 17% in March
2015, before subsiding to 8.1% in February 2016 as
the base effect from the initial spike in inflation in December 2014/January
2015 passed.
Meanwhile, Moody's expects real growth over the next four
years to be just 0.4%, unchanged from the last four
years. Although the Russian government envisages improved competitiveness
afforded by the weaker exchange rate to stimulate investment in non-oil
sectors of the economy, Moody's expects that the potential
growth rate will not rise meaningfully given the structural problems facing
the economy, in particular chronic underinvestment, which
persists despite depreciation-inflated profits at Russian companies
given their fears of pending corporate tax hikes. Meanwhile,
exports are subject to capacity constraints across sectors, including
oil. In addition, the significant loss of income for workers
due to double-digit real wage cuts is likely to continue to depress
consumption and as mentioned previously, the government's
budget constraints are now binding.
The move to a floating exchange rate has helped to conserve foreign exchange
reserves. At US$310 billion (or 28% of forecast 2016
GDP) as at the end of January 2016, the country's foreign
currency reserve assets remain large, representing 13 months of
imports of goods and services, which is an increase from nine months
at the end of 2014, due to the 35% fall in imports last year.
However, calls on these funds would grow if substantial capital
outflows were to resume for example due to financial or political volatility
or in the event that the central bank were called upon to support the
banking industry.
Fiscal reserves have declined markedly. The US$38 billion
drawdown from the government's Reserve Fund in 2015 contained the
rise in debt, but at the cost of reducing the government's
fiscal buffer from US$88 billion at the end of 2014 to US$50
billion at the end of January 2016.
Given pressures on the government's finances, Moody's
sees risks that the government would become overly reliant on a weak currency
to offset the lower oil prices or else resort to central bank financing,
both of which would keep inflation at relatively high levels and threaten
the recovery of the domestic banking system.
During the review, Moody's will assess the government's
ability to mitigate the impact of the recent fall in oil prices on Russia's
credit standing. It will assess the clarity, scope and ambition
of the government's plans relative to the scale of the task,
the time required for them to bear fruit, and the reliance that
can therefore be placed on them to sustain Russia's credit strength.
The government has announced its intention to undertake a range of measures
to mitigate the impact of the renewed fall in oil prices on its fiscal
deficit and credit standing. The plans include immediate cuts to
expenditure, hikes in excise taxes, the further tightening
of tax enforcement and administration and higher dividend payments from
state-owned enterprises (SOEs).
However, the plans announced to date are unlikely to be sufficient
to contain entirely the impact of the shock on the government's
balance sheet. One major driver of the government's shortfall
in revenues is the pensions deficit, and over the longer term,
Russia's policymakers have acknowledged the need to undertake pension
reforms that would involve both raising and unifying the retirement age
of men and women. For now, however, the political sensitivity
of any such reform is likely to postpone its enactment until after the
upcoming parliamentary election in September and possibly even until after
the presidential election in early 2018.
Russia's policymakers have also indicated their intention to partially
privatize a handful of SOEs for later this year, selling minority
stakes, in the expectation of raising R800 billion or more.
These plans look optimistic. Amongst other things, any such
acquisitions would probably require buyers to repatriate capital from
overseas in order to avoid putting pressure on banking system liquidity.
Furthermore, Russia has historically been reluctant to pursue privatization,
so Moody's remains somewhat skeptical about whether this program
will proceed as envisaged at the present time.
Moreover, the government is using an average oil price of US$40/barrel
this year and US$45/barrel next year to prepare its revised budget
plans -- significantly above Moody's own forecasts of US$33/bbl
and US$38/bbl, respectively. As a consequence,
the deficits actually registered are likely to be much larger than the
official 3% of GDP target. Questions regarding whether the
financing is available to cover the larger deficits will be a key focus
of Moody's review.
In Moody's opinion, the government will need to rely heavily
on domestic sources of financing as long as international sanctions remain
in place, constricting access to foreign finance for the government,
state-owned enterprises and banks (even though the government itself
is not sanctioned). The liquidity of the domestic banking system
has improved because of banks' deleveraging over the past two years
and the strong growth of the deposit base, despite low profitability.
Assessing the extent to which domestic credit will be sufficient to fill
the funding gap will be an important element in Moody's rating review.
Moody's will also assess how much positive weight should be placed
on the country's remaining fiscal buffers (including the government's
savings funds), given the likelihood that the Reserve Fund will
be mostly depleted within the next year. While there is still roughly
US$48 billion (4.3% of forecast 2016 GDP) in liquid
funds in the National Wealth Fund to support the local economy,
these funds will be stretched since Moody's expects that a number of enterprises
will come under financial pressure and will seek support from government
coffers to endure the protracted recession.
Moody's expects to conclude its review for downgrade of Russia's
rating within two months. Where appropriate as part of the review,
Russia's country ceilings -- the Ba1 foreign-currency
bond ceiling, the Ba2 foreign-currency deposit ceiling and
the Baa3 domestic-currency bond and deposit ceilings -- may
also be reassessed.
WHAT COULD RESULT IN A DOWNGRADE
Moody's would downgrade Russia's Ba1 rating if its rating
review were to conclude that the government's plans are probably
inadequate to sustain Russia's economic or government balance sheet
strength at its current level. Signs of an emerging fiscal or balance-of-payments
crisis would also exert downward pressure on the rating. Those
signs might include a further sustained fall in the price of oil,
significant capital outflows and pressure on the exchange rate and foreign-currency
assets, a marked worsening in the fiscal balance for which there
was no clear reversal, or further stress in/support for the banking
system. Deterioration in the domestic or regional political environment,
resulting in disruptions to oil production and/or foreign investments
in the economy, would also be highly credit negative. Given
the extent of the negative impact and the current strength of the government
balance sheet, however, a rating downgrade would most likely
be limited to one notch.
WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL
Although currently less likely, Moody's would maintain and
confirm Russia's current Ba1 rating if its rating review were to
conclude that there is evidence of institutional strength, as reflected
in the enunciation of a clear, credible fiscal and economic policy
response, such that the government could contain its fiscal deficits
to a size that can be readily financed from its own savings or other domestic
or external resources without relying upon central bank monetization.
GDP per capita (PPP basis, US$): 24,449 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -3.7% (2015
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 13.5%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -3.5%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5% (2015 Actual) (also known
as External Balance)
External debt/GDP: 39% (2015 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 29 February 2016, 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 decreased. The issuer's fiscal
or financial strength, including its debt profile, has decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings 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: 212-553-0376
SUBSCRIBERS: 212-553-1653
Yves Lemay
MD - 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 places Russia's Ba1 rating on review for downgrade
