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ACRA affirms and withdraws LT A- and ST S1 of the Russian Federation, outlook Stable

ACRA has affirmed and withdrawn the following ratings of the Government of the Russian Federation (hereinafter, Russia, or the country) under the international scale:

  • Long-term foreign currency credit rating at A- and local currency credit rating at A-;
  • Short-term foreign currency rating at S1 and local currency credit rating at S1.

The outlook on the long-term foreign currency credit rating is Stable and local currency credit rating is Stable.

The credit ratings are unsolicited and ACRA has withdrawn them for business reasons.

Credit rating rationale

For more information about the scenarios, see ACRA’s updated macroeconomic forecast for Russia “Questions and lessons from the 2020 economic crisis” from April 21, 2020.

Russia’s A- sovereign credit rating is supported by the low level and sustainable structure of public debt, strong external position, and an effective monetary policy coordinated with fiscal policy that significantly improves macroeconomic stability. The rating is constrained by the relatively low potential for and lack of stability of economic growth, limited diversity of exports, lack of transparency of the Russian Government’s obligations to a number of state-owned companies, weakness of institutions, and the threat of new sanctions capable of limiting investment and hindering technology-based cooperation and trade with potential foreign partners.

Amid the economic downturn associated with the coronavirus pandemic and the unfavorable external environment, the Russian Government has a wider range of opportunities to conduct countercyclical fiscal policy in comparison with the governments of many other countries. The room to maneuver is provided by the relatively small direct public debt of the consolidated budget (12% of GDP at the beginning of 2020) and a slightly negative structural balance. According to ACRA, if oil prices remain in the range of USD 30–35 per barrel in 2020–2021, the federal budget deficit will not exceed 6% of GDP on average (if the fiscal rule is followed) with financing largely provided by the liquid part of the National Wealth Fund (NWF). In each of the three scenarios of ACRA’s macroeconomic forecast, which takes into account the costs of oil companies and the specifics of the competitive environment, the actual oil price returns to the base price stipulated in the budget rule (USD 40 per barrel in 2017 dollars) no later than 2022.

The Russian Government’s limited access to external financial markets due to sanctions imposed by a number of developed countries is offset by a very significant amount of liquid funds in the NWF and other liquid assets of the federal budget (in total, about 12% of GDP as of January 1, 2020), which is comparable to the direct debt of the  consolidated budget. According to ACRA, following the fiscal rule is very likely to enable the Russian Government to maintain relatively high levels of internal liquidity, even if the NWF is used to finance deficits in 2020–2021 and purchase a stake in Sberbank (AAA(RU), outlook Stable).

Russia’s stable external position is supported by international reserves exceeding the external debt of the government, other sectors (125% as of April 1, 2020), and the external debt partially denominated in national currency (30% as of January 1, 2020). Despite the commitment to a floating exchange rate regime (with restrictions, given the rule of intervention of the Ministry of Finance), this amount of reserves is more than sufficient both to compensate for excessive exchange rate volatility and to refinance the short-term foreign exchange debt of Russian companies if the external financial situation gets worse (even for a long time).

Coordinated economic policies and their long-term nature have significantly reduced the dependence of the national currency exchange rate on fluctuations in world prices for traditional Russian exports. Due to currency interventions under the fiscal rule, ACRA believes that the elasticity of the ruble exchange rate of oil prices in the future will remain low compared to the period before 2017. As a result, ACRA estimates that the amplitude of inflation fluctuations caused by falling commodity prices in 2020 will be significantly lower than during the episodes of economic stress in 2008–2009 and 2014–2015. According to ACRA’s base case scenario, inflation will not exceed 5.5% throughout 2020 and real GDP will decline by 4–4.5% this year. The base case scenario of the macroeconomic forecast assumes that quarterly real GDP will exceed the pre-crisis level in the middle or at the end of 2021. ACRA’s pessimistic scenario, which allows for the possibility of repeated coronavirus outbreaks and more stringent restrictive measures, indicates a recovery in mid to late 2022. According to the optimistic scenario, Q4 2020 will not differ much from the pre-crisis period. However, this will require a complete medical solution for COVID-19 and expanded anti-crisis measures from the government and the Bank of Russia in comparison with those announced in mid-May.

ACRA estimates the potential for Russian economic growth at 1.5–2% yearly until 2024. The country’s declining working-age population, the relatively low level of export diversification, threat of new foreign economic sanctions, low labor mobility, and high domestic transport expenditures play a general role in constraining economic growth potential. In theory, the growing focus of economic policy on transport infrastructure and improving the quality of human capital may mitigate some of these limitations, albeit further into the future (after 2023).

The low diversification of exported goods is a fundamental vulnerability in Russia’s balance of payments. In this regard, global oil prices and competition, as well as regulation in the European gas market have a significant impact on Russia’s macroeconomic indicators. ACRA estimates that the balance of payments will remain vulnerable until at least 2022–2023, although it could be partly offset by current economic policies. The geographical reach of Russian exports is likely to expand in the future as China and other Asian countries strengthen their positions as important trading partners.

ACRA notes that the size of the Russian Government’s contingent liabilities can be significantly higher than general government direct debt. This is due to the relatively large size and social importance of state-owned banks, non-financial state corporations, and development institutions not included in the consolidated budget. State-owned companies in the financial sector tend to be more resilient due to their strong market position; the amount of support they require is limited and necessary only during stress scenarios. The relations between the Russian Government and a significant part of state-owned non-financial companies, as well as their financial conditions, are usually less transparent.

According to ACRA, the weakness of important public institutions poses a long-term risk to the creditworthiness of the Russian Government. Strong, sustained presidential power has made it possible to introduce long-term guidelines for state policy and implement essential but unpopular economic measures. At the same time, however, the duration of this period creates uncertainty regarding a possible change of power in 2023–2024.

In ACRA’s opinion, the probability of new economic and financial sanctions against the Russian Government and Russian companies has significantly decreased compared to 2015–2019. However, the persistence of this threat has a negative impact on relations with potential trading partners, limits Russia's participation in major international projects, and makes importing technology more problematic. This ultimately reduces the potential for economic growth.

Sovereign model application results

Russia has been assigned an A Indicative credit rating in accordance with the core part of ACRA’s sovereign model. A number of modifiers in the modifiers part of the model allow the Indicative credit rating to be increased. These include the following, which are determined by the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale:

  • Efficacy of structural, economic and monetary policies;
  • Fiscal policy framework and fiscal flexibility;
  • Debt sustainability;
  • External debt sustainability.

Negative modifiers include the following:

  • Potential economic growth;
  • Sustainability of economic growth;
  • Contingent liabilities and the risk of them materializing on the sovereign’s balance sheet;
  • Balance of payment vulnerabilities;
  • Exposure to geopolitical risks.

The Assigned credit rating of A- is one notch lower than the Indicative credit rating as the total effect of negative adjustments exceeds the total effect of positive adjustments. There are no extraordinary factors that could adjust the Final credit rating.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The sovereign credit ratings have been affirmed to the Russian Federation under the international scale based on the Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The sovereign credit ratings of the Russian Federation were published for the first time on September 23, 2019.

The sovereign credit ratings were affirmed based on information from publicly available sources, as well as ACRA’s own databases. The sovereign credit ratings are unsolicited. The Government of the Russian Federation did not participate in the credit rating affirmation.

ACRA provided no additional services to the Government of the Russian Federation. No conflicts of interest were discovered in the course of the sovereign credit rating affirmation.

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