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Russia's outlook appears stable on 'robust' finance metrics

Publication Date: 12 Feb 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

Equity Fixed Income/Credit Global

Russia has seen its sovereign rating upgraded with a stable outlook for 2019, by a leading rating agency. 

In a recent move, Moody's Investors Service upgraded Russia’s unsecured senior debt ratings to Baa3 from Ba1 and its other short-term rating to Prime-3 (P-3) from Not Prime (NP), but changed its outlook 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, Moody’s said. 

The stable outlook reflects evenly balanced upside and downside credit risks, it added.

“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, Moody’s added 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.

On balance, the agency said 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.

Moody’s also said 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 our 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 Russia'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 labour 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, Moody’s said. 

“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 $115b or 7% of GDP, significantly strengthened by higher oil prices and a strong performance from non-oil exports.”

 

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