Russia 'BBB-/A-3' Foreign Currency And 'BBB/A-2' Local Currency Ratings Affirmed; Outlook Stable

  • We have significantly lowered our oil price assumptions for 2020 and 2021.
  • The global economic outlook has weakened significantly amid the coronavirus pandemic.
  • However, Russia's strong policy framework, including a flexible exchange rate and the stringent fiscal rule, amid solid external and public balance sheets, should enable its economy to absorb these shocks.
  • We are therefore affirming our 'BBB-/A-3' foreign currency and 'BBB/A-2' local currency sovereign credit ratings on Russia.
  • The outlook is stable.

Rating Action

On March 26, 2020, S&P Global Ratings affirmed its 'BBB-/A-3' long- and short-term foreign currency sovereign credit ratings on Russia, as well as its 'BBB/A-2' long- and short-term local currency sovereign credit ratings. The outlook is stable.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Russia are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is S&P Global Ratings' revision of its hydrocarbon price assumptions for 2020 and 2021. The next scheduled rating publication on the sovereign rating of Russia will be on July 17, 2020.

Outlook

Our stable outlook on Russia balances fiscal and financial stability risks stemming from lower oil prices and the coronavirus outbreak against Russia's robust external and fiscal balance sheet.
Downside scenario
We could take a negative rating action in the next 24 months if we saw a risk of a material deterioration of Russia's budgetary performance, either due to a looser fiscal framework or fiscal pressure stemming from policy efforts to mitigate the effects of COVID-19. Global market dislocation triggering accelerated capital outflows and causing elevated financial stability risks could also put downward pressure on the ratings. Finally, a negative rating action could follow geopolitical events resulting in materially tighter international sanctions. These could, for example, target large state-owned energy companies, systemically important banks, or the secondary market for Russian sovereign debt.
Upside scenario
In the absence of additional major external shocks, we could take a positive rating action if Russia's GDP per capita trend growth reaches rates comparable with that in countries with similar income levels, for instance as a consequence of government pro-growth policy measures. Faster accumulation of fiscal buffers, mitigating commodity-related revenue volatility, and effective measures to address long-term fiscal pressures from an aging population, could also lead us to take a positive rating action.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumptions for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Russia ("Summary: Russia," published Jan. 17, 2020), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50/bbl in 2021, and $55/bbl from 2022 (see " S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try to maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.
Nevertheless, at present the global economy is facing the escalating coronavirus pandemic, with growth rapidly decelerating against a backdrop of volatile markets and growing credit stress. We now forecast a global recession this year.
The rapidly evolving external environment and uncertainly over the ultimate negative impact of COVID-19 on the domestic economy as well as the likely policy response (both its size and effectiveness), make any forecast challenging. However, we think that Russia should be able to mitigate these shocks.
First, the economy maintains a strong net external asset position (around 25% of GDP), with liquid external assets exceeding external debt by some 80% of current account payments. In tandem with the flexible exchange rate regime, this provides a substantial buffer against balance of payments risks (including the combination of the oil price decline and the potential acceleration of nonresident outflows from the government local currency debt market). At 18% of GDP, Russia's gross external debt is almost half its level at the onset of the previous sharp oil price decline in 2014. With the current account remaining in surplus, we estimate Russia's gross external financing needs (payments to nonresidents) will stay at a moderate 60% of current account receipts plus usable reserves, even after netting out foreign-currency investments made by the central bank of Russia (CBR) on behalf of the government from the officially reported foreign exchange reserves; we do not think the CBR would use these funds to tackle balance of payments pressures.
Second, Russia has ample fiscal space. Its public debt is very low, the government finances itself in local currency, whereas the conservative fiscal framework in place since 2017 anchors the federal budget to a benchmark oil price of $40/bbl (in 2017 prices, adjusted 2% annually). The latter suggests that a scenario with oil price of $40/bbl would lead to a modest primary budget deficit of 0.4%-0.5% of GDP. For this reason, our new oil price assumption for 2020 would represent only a moderate stress to the federal budget, primarily via eliminating windfall oil revenue (i.e. revenue generated from an oil price above the benchmark level) that the fiscal rule requires the government to save in the national wealth fund (NWF). The liquid part of the NWF now exceeds 9.4% of GDP, by our estimate, and we do not expect it to dip below 8% of GDP even if the government taps it to make up for the shortfall of oil revenue in 2020. Importantly, unlike in some other oil exporting sovereigns, the Russian currency floats, which supports the ruble value of dollar-denominated oil revenue.
Even though we now expect the Russian economy to contract by 0.8% in 2020 triggered by weakness in external demand as well as shrinking investment, growth is likely to rebound to 3.8% in 2021, reflecting our current assumption of strongly recovering global growth and oil prices. Under this scenario and our current expectation of some emergency fiscal support to distressed corporates and financial institutions (beyond what could be funded from the already budgeted emergency fund of about 0.3% of GDP), we project the federal budget will run a deficit of 2.8% of GDP in 2020 and 0.4% in 2021 compared with our previous projection of modest surpluses. With a negative balance at the subnational level, the general government will likely post a slightly wider deficit of 3.2% of GDP in 2020 and 0.7% in 2021, before the government sector returns to a roughly balanced position in 2022-2023. These fiscal flows will still keep general government debt net of liquid assets below a modest 6% of GDP.
Third, the CBR has a strong track record of maintaining financial stability under adverse macroeconomic conditions. The institution has earned credibility over the past few years for its effective disinflation efforts and policy response to shocks related to declining oil prices, international sanctions, and financial market volatility. We believe the CBR has the full arsenal of tested tools to mitigate potential financial stability risks, such as emergency liquidity assistance (including in foreign currency), temporary regulatory forbearance, as well as outright foreign exchange interventions. We understand that the banking system currently maintains adequate capital and liquidity buffers.
We view the proposed sale of Sberbank from the CBR to the government as neutral for the sovereign rating. The deal appears to present a possible way of using a portion of liquid assets accumulated in NFW to finance additional fiscal spending, announced by President Putin in January, without formally breeching the fiscal rule (for more details see "Playing By, Or With, The Rule? The Sberbank Deal Won't Weaken Russia's Fundamentals But Questions Policy Credibility," published on Feb. 19, 2020). The transaction rather reinforces our view that Russia's experience with rules-based policy making remains mixed.
More broadly, we view longer-term policy predictability as limited, partly because of the highly centralized institutional setting. Contrary to our previous understanding, the constitutional reform proposed by the president in January and adopted by parliament on March 11, 2020, appears to have further concentrated power with the presidency. It has also removed the term limit for President Putin, allowing him to run for another two terms in office after his existing term expires in 2024. The lack of public discussion as well as the speed at which constitutional amendments were passed suggest that Russia's weak checks and balances will likely persist and continue to weigh on the sovereign ratings.
Additional rating constraints include geopolitical tensions and resulting international sanctions, the economy's dependence on revenue from oil and gas exports, as well as its subdued long-term growth outlook. The ratings are supported by Russia's commitment to conservative macroeconomic management, its formidable net external asset position, low net general government debt, and considerable monetary flexibility.

Key Statistics

Table 1

Russia Selected Indicators
(Mil. RUB)2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)79,03083,08785,61691,843104,335109,362108,598119,574127,677135,159
Nominal GDP (bil. $)2,0821,3701,2801,5751,6681,6901,3921,6841,7861,851
GDP per capita (000s $)14.29.48.710.711.411.59.511.512.212.6
Real GDP growth0.7(2.0)0.31.82.51.3(0.8)3.81.91.9
Real GDP per capita growth(1.1)(2.2)0.11.72.51.4(0.7)3.81.91.9
Real investment growth(1.8)(10.6)1.34.70.11.4(6.0)5.73.53.5
Investment/GDP21.821.523.123.622.823.223.123.723.824.1
Savings/GDP24.626.525.025.729.627.423.825.326.026.1
Exports/GDP27.128.725.926.130.628.525.626.326.526.2
Real exports growth0.53.73.25.05.5(2.1)(2.0)4.02.42.4
Unemployment rate5.25.65.55.24.84.65.24.64.54.5
External indicators (%)
Current account balance/GDP2.84.91.92.16.84.20.71.72.22.0
Current account balance/CARs9.215.46.46.919.813.32.25.77.46.9
CARs/GDP30.132.129.829.734.331.429.329.429.529.2
Trade balance/GDP9.110.87.07.311.79.76.77.27.47.0
Net FDI/GDP(1.7)(1.1)0.8(0.5)(1.4)(1.3)(0.4)(1.0)(1.0)(0.7)
Net portfolio equity inflow/GDP(0.7)(0.4)(0.2)(0.5)(0.3)(0.3)(0.3)(0.3)(0.3)(0.3)
Gross external financing needs/CARs plus usable reserves73.170.272.169.956.558.360.262.663.063.7
Narrow net external debt/CARs(26.4)(48.3)(52.9)(52.1)(57.7)(78.3)(96.9)(80.5)(79.1)(80.2)
Narrow net external debt/CAPs(29.0)(57.1)(56.6)(56.0)(72.0)(90.3)(99.1)(85.4)(85.5)(86.1)
Net external liabilities/CARs(49.9)(77.0)(57.6)(60.0)(64.9)(82.2)(108.9)(95.3)(96.8)(101.3)
Net external liabilities/CAPs(55.0)(91.0)(61.5)(64.4)(81.0)(94.8)(111.4)(101.0)(104.6)(108.7)
Short-term external debt by remaining maturity/CARs23.923.829.224.415.615.721.618.417.917.6
Usable reserves/CAPs (months)7.57.79.08.810.410.512.110.29.89.5
Usable reserves (mil. $)239,101267,904318,623397,468401,453401,602396,415397,210398,465403,600
Fiscal indicators (general government; %)
Balance/GDP(2.3)(3.4)(4.5)(1.5)2.91.9(3.2)(0.7)0.20.1
Change in net debt/GDP(0.4)4.24.51.7(3.2)(3.1)3.50.5(0.1)(0.0)
Primary balance/GDP(1.7)(2.5)(3.6)(0.6)3.82.7(2.4)0.11.00.9
Revenue/GDP33.932.432.133.835.835.831.733.634.834.7
Expenditures/GDP36.235.836.635.332.933.834.934.334.634.6
Interest/revenues2.02.72.82.62.42.12.52.52.32.2
Debt/GDP13.615.215.316.716.116.420.219.219.319.5
Debt/revenues40.146.947.649.444.945.963.657.255.456.2
Net debt/GDP(0.1)4.28.59.75.32.05.55.55.04.7
Liquid assets/GDP13.711.06.87.010.714.414.613.714.314.8
Monetary indicators (%)
CPI growth7.815.57.03.72.94.54.34.04.04.0
GDP deflator growth7.37.22.75.410.83.40.16.14.83.9
Exchange rate, year-end (LC/$)56.2672.8860.6657.6069.4761.9172.0070.0072.0074.00
Banks' claims on resident non-gov't sector growth29.38.2(1.6)7.812.39.110.08.08.08.0
Banks' claims on resident non-gov't sector/GDP60.462.259.459.759.061.468.066.767.568.9
Foreign currency share of claims by banks on residents17.521.715.913.312.910.410.610.710.810.9
Foreign currency share of residents' bank deposits39.241.234.728.328.524.924.924.924.924.9
Real effective exchange rate growth(8.4)(16.5)(0.5)15.9(7.7)2.5N/AN/AN/AN/A
Sources: Federal State Statistics Service - Russian Federation (Economic Indicators), Bank of Russia (External Indicators), The Federal Treasury - Russian Federation, Ministry of Finance of the Russian Federation (Fiscal Indicators), and Bank of Russia, Kuap.ru, International Monetary Fund (Monetary Indicators).
Adjustments: Usable reserves adjusted by subtracting government’s external fiscal reserves from reported international reserves. These fiscal assets are added to the stock of government external assets. Government debt adjusted by including debt liabilities of bank resolution entities and the external debt of a state development bank, and by excluding state pension fund holding of government debt. General government liquid financial assets adjusted by deducting the domestically invested portion of the National Welfare Fund.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Russia Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment5Future policy responses are difficult to predict because of highly centralized decision-making as well as an uncertain and untested succession process. Respect for the rule of law and transparency are not assured, owing to high perceived corruption and rent seeking, yet the quality of economic and financial data is relatively high.
Economic assessment5Based on GDP per capita ($) as per the Selected Indicators table above.
Weighted average real GDP per capita trend growth over a 10-year period is at 1.4%, which is below the weigted average for sovereigns with an initial economic score of '4', '5', and '6'.
External assessment1Based on narrow net external debt and gross external financing needs as per Selected Indicators in Table 1.
Fiscal assessment: flexibility and performance4Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1.
Volatile revenue base since about one-third of general government revenue is from oil and gas.
The sovereign faces significant medium-term fiscal pressures from age-related expenditure.
Fiscal assessment: debt burden1Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenue) as per Selected Indicators in Table 1.
Monetary assessment3The ruble is a free-floating currency, but with a relatively short track record.
The central bank is operationally independent, uses market-based monetary instruments, and has the ability to act as a lender of last resort. Consumer price index as per Selected Indicators in Table 1. Real effective exchange rate is somewhat volatile over the economic cycle.
Indicative ratingbbbAs per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility-1Substantial risks coming from possible new international sanctions, which could have a negative effect on creditworthiness and are not fully captured in the indicative rating.
Final rating
Foreign currencyBBB-
Notches of uplift1Default risks apply differently to foreign-and local-currency debt. The sovereign has a flexible exchange rate and relatively deep local-currency capital markets.
Local currencyBBB
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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