Frankfurt am Main, March 28, 2014 -- Moody's Investors Service has today placed Russia's Baa1 government
bond rating on review for downgrade.
The decision was triggered by the following factors:
1.) The weakening of Russia's economic strength, as
the conflict with the Ukraine and the related uncertainty over future
policy actions further weigh on Russia's already impaired investment
climate and medium-term economic outlook.
2.) The upward revision in Moody's assessment of Russia's
susceptibility to event risk, owing to the heightened geo-political
risk implied by the potential for the conflict in the Ukraine escalating
further.
During its ratings review, Moody's will seek to obtain greater
clarity on (1) the extent to which the current crisis will exacerbate
the country's medium-term growth challenges; (2) the
level of risk that the crisis escalates further; and (3) the consequent
impact on Russia's economy, public finances and external position.
Should the review lead to a downgrade, the most likely outcome would
be a one-notch adjustment. However, Moody's
would consider a downgrade of more than one notch were the probability
to rise of events occurring which could lead to more severe economic shocks.
Moody's would consider confirming Russia's sovereign rating
at its current Baa1 level if the current tensions were to dissipate and
if a possible resolution of the crisis were to emerge with the potential
to improve the country's growth outlook.
Russia's Prime-2 short-term debt rating is not affected
by this review and remains unchanged.
RATINGS RATIONALE
RATIONALE BEHIND REVIEW FOR DOWNGRADE
-- FIRST DRIVER: WEAKENING OF RUSSIA'S ECONOMIC STRENGTH
IN LIGHT OF AN IMPAIRED INVESTMENT CLIMATE
The first driver behind the decision to place Russia's sovereign
rating on review for downgrade is the potential for the current crisis
to further exacerbate the recent weakening of the country's economic
strength and medium-term growth potential. Moody's
already expects that the increased economic uncertainty triggered by the
conflict with Ukraine will contribute to an economic GDP contraction of
around -1.0% in 2014, against pre-crisis
expectations of growth of around 2%.
Moody's expectation that Russia will slide into recession comes
against the background of an ongoing deceleration in GDP growth since
September 2011 that reached a low of 1.2% year-on-year
in Q3 2013. Factors responsible for this deceleration -- namely,
sluggish consumption growth, stagnating investment and a weak external
environment -- will be further exacerbated by the elevated political
and economic uncertainty.
The rating agency believes that the current crisis could significantly
dampen investor sentiment for several years to come by adding to existing
deterrents to investment posed by Russia's weak rule of law and
high levels of corruption. This could further damage the country's
economic outlook given its large investment needs. It could also
further constrain its ability to diversify the economy away from overreliance
on oil and gas. Overall, the crisis with Ukraine could therefore
further weaken Russia's medium-term growth prospects,
which had already been lowered by the Russian authorities in 2013.
-- SECOND DRIVER: RUSSIA'S INCREASED SUSCEPTIBILITY TO
EVENT RISK AS A RESULT OF THE CONFLICT WITH UKRAINE
The second driver underlying the review for downgrade is Moody's
concern regarding the country's rising susceptibility to political
and financial event risk, primarily driven by the risk of further
escalation of hostilities.
Moody's acknowledges Russia's large foreign-currency
reserves and limited external debt repayments and the current strength
of the government's balance sheet. However, wider economic
sanctions and potential countermeasures by Russia could, were they
to materialise, erode those financial buffers. That said,
the agency notes that the exposure of the corporate and banking sectors
to external refinancing risks this year appears to be manageable.
FOCUS OF THE REVIEW
During its ratings review, Moody's will seek to obtain greater
clarity on (1) the extent to which the current crisis will exacerbate
the country's medium-term growth challenges, (2) the
level of risk that the crisis escalates still further; and (3) the
resilience of Russia's economy, public finances and external
position to such a scenario.
Related to the latter point, the rating agency notes that Russia's
fiscal metrics compare favourably with countries in the same rating category.
Russia's debt-to-GDP ratio remains very low (estimated
at around 13% in 2013) and Moody's expects that its debt-servicing
costs will remain lower than those of its peers in the same rating category.
In addition, Russia's oil funds (equivalent to around 9%
of GDP) provide a cushion to a potential fall in oil prices and any associated
shortfall of revenues or problems with market access. Russia also
compares well to its rating peers in terms of external metrics.
While the country's current account balance has declined,
it remains in surplus. Russia's external vulnerability indicator,
which measures a country's short-term and currently maturing
long-term external obligations in relation to its foreign exchange
reserves, compares favourably to rating peers.
WHAT COULD MOVE THE RATING DOWN/UP
Moody's would downgrade Russia's sovereign rating were it
to conclude that the financial, diplomatic and political consequences
of the crisis will materially undermine Russia's medium-term
economic strength, whether by further discouraging foreign investor
sentiment, undermining exports or weakening domestic consumption
and investment still further. In that event, the most likely
outcome would be a one-notch downgrade given the current state
of the crisis. However, Moody's would consider a downgrade
of more than one notch were the probability of more severe economic shocks
to rise.
While an upgrade is unlikely over the medium term given the current review
for downgrade, Moody's would confirm Russia's sovereign
rating at its current Baa1 level were the crisis to stabilise, current
tensions to dissipate and a possible resolution of the crisis with Ukraine
to emerge, given that this could be conducive to improving the country's
growth outlook and investor confidence.
GDP per capita (PPP basis, US$): 17,518 (2012
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% (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 25 March 2014, 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 decreased. The issuer has become
increasingly susceptible to event risks.
The principal methodology used in this rating 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.
Thorsten Nestmann
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's places Russia's Baa1 government bond rating on review for downgrade
