New York, February 08, 2019 -- Moody's Investors Service ("Moody's") has today upgraded the Russia,
Government of issuer and unsecured senior debt ratings to Baa3 from Ba1
and its other short-term rating to Prime-3 (P-3)
from Not Prime (NP). The outlook on its issuer rating has been
changed to stable from positive.
The upgrade of Russia's ratings reflects the positive impact of
policies enacted in recent years to strengthen Russia's already
robust public finance and external metrics and reduce the country's
vulnerability to external shocks including fresh sanctions. The
stable outlook reflects evenly balanced upside and downside credit risks.
In a related decision, Moody's has raised Russia's country
ceilings on foreign currency debt to Baa2/P-2 from Baa3/P-3,
its country ceilings on foreign currency bank deposits to Baa3/P-3
from Ba2/NP and its country ceilings for local currency debt and deposits
to Baa1 from Baa2. Generally speaking, each of these ceilings
indicates the highest possible ratings level that can be assigned to the
relevant liabilities.
RATINGS RATIONALE
Recent actions on Russia's credit rating -- to change to a
stable outlook in February 2017 and a positive outlook in January 2018
-- reflected effective governance by policy institutions which successfully
contained the economic and financial impact of the twin shocks created
by the fall in the oil price and the imposition of international sanctions.
However, the underlying vulnerability to further external shocks,
whether reflecting Russia's ongoing, albeit reduced,
exposure to the oil price or still-high geopolitical tensions,
slowed a return to investment grade.
The main driver behind today's upgrade of Russia's ratings
to Baa3 with a stable outlook is Moody's conclusion that the sovereign's
vulnerability to such shocks has indeed materially diminished and no longer
constrains the rating to sub-investment grade. More specifically,
the impact of likely new sanctions -- which is the most likely source
of such a shock in the coming months -- could, in the rating
agency's view, be contained without material damage to the
country's credit profile.
In Moody's view, there is a reasonably high likelihood of
further sanctions being applied by the US Congress in the coming months.
Any additional sanctions are likely to include prohibitions on US and
US-domiciled entities from buying, and possibly from holding,
local- and foreign-currency government bonds and bonds issued
by some state-owned banks and non-financial companies.
Further sanctions beyond those cannot be ruled out.
However, in Moody's view, the government's capacity
to withstand external shocks including further sanctions has improved
since the sovereign rating was downgraded to Ba1 in 2015. The ongoing
reduction in external vulnerability is reflected in the sovereign's
still-strong balance sheet and increasingly robust external position,
both of which Moody's expects to be sustained. These strengths
are attributable in large part to the authorities' policy response
to the terms of trade and sanctions shocks that have negatively impacted
the economy since 2014. More recently, the adoption of pension
reforms shifts labor force trends in a positive direction and will support
fiscal strength over the longer term.
Russia's external finances are more robust than a year ago and in
some respects stronger than in 2014 when the external shocks initially
struck the country. The central bank's foreign exchange reserves
cover 80% of external debt (including direct investment),
compared to 57% of external debt in June 2014. Even though
capital outflows including net external debt payments rose last year,
they were more than covered by the current account surplus, which
widened to $115 billion or 7% of GDP, significantly
strengthened by higher oil prices and a strong performance from non-oil
exports.
A core element in the government's response has been its new fiscal
rule, which limits the amount of oil revenues allowed to be spent
in the budget and mandates that the excess is saved in foreign currency.
Adherence to the fiscal rule last year was one of our criteria for an
upgrade: as well as supporting the government's efforts to
contain the stock of debt -- at an estimated 15% of GDP --
and replenishing the government's cash reserves that were heavily
depleted between 2015 and 2017, continued adherence reflects revealed
strengths in its policy apparatus that support the credit.
Fiscal consolidation and shifts in sources of investors in government
debt mean that the government's borrowing plans could, if
needed, be executed domestically. Uncertainty related to
sanctions has already sharply reduced cross-border financing of
Russian entities. Non-resident holdings of Russian sovereign
domestic debt have dropped by roughly one-third since April 2018,
and roughly two-thirds of remaining non-resident holdings
are denominated in rubles. Moreover, with the introduction
of the fiscal rule and oil prices above the budget's breakeven price,
the budget is currently in surplus so the government's net borrowing
needs are in any event very small.
Even were sanctions to be expanded beyond primary auctions or beyond sovereign
debt holdings, or in the event of other external shocks such as
a further fall in the oil price, the fiscal space available to the
government and the buffers in place offer considerable capacity to respond
without undermining core strengths of the sovereign's credit profile.
The central bank's very large FX reserves offer further latitude
to support other sectors should that be needed.
RATIONALE FOR CHANGING THE OUTLOOK TO STABLE
The stable outlook on the Baa3 rating captures the balance of Russia's
credit strengths against the ongoing pressures exerted by domestic and
international sources. Very low public debt, substantial
public assets and steadily shrinking national external debt vis-a-vis
the country's foreign currency assets provide a significant degree
of resilience amidst ongoing structural challenges the country faces.
These include slow growth potential, the lack of popular support
for structural economic reform and the imminent risk of expanding US sanctions.
WHAT COULD CHANGE THE RATING UP/DOWN
Any further upgrade of Russia's ratings will likely be conditioned
in part on further declines in the country's vulnerability to external
shocks including through the continued build-up of fiscal space
and financial buffers and the avoidance of actions which materially increase
geopolitical tensions and therefore the likelihood of shocks. However,
a further condition is likely to be the enactment of policies which enhance
other aspects of Russia's credit profile including through economic
reform to raise productivity and potential growth, and through fiscal
reforms to secure the government's finances in the coming years
including against demographic shifts.
Russia's ratings could be downgraded if the country's public
finance or debt metrics were to deteriorate, such that its capacity
to absorb another oil price shock or unexpectedly severe sanctions were
materially diminished. A downgrade could also result from a severe
and unanticipated external shock, including the imposition of harder-than-expected
sanctions that materially impair the government's ability to service
and refinance its debt or that undermine Russia's finances or economy
in some other way. 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.
GDP per capita (PPP basis, US$): 27,893 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.6% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.5%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -1.5%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2.1% (2017 Actual) (also
known as External Balance)
External debt/GDP: 32.8% (2017 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 05 February 2019, a rating committee was called to discuss the
rating of the Russia, Government of. The main points raised
during the discussion were: The issuer has become less susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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
