Ratings:
Foreign Currency: BBB-/Stable/A-3
Local Currency: BBB/Stable/A-2

For further details see ratings list.

Overview

  • Demonstrated commitment to conservative macroeconomic policies will likely keep Russia's external and fiscal balance sheets strong and, alongside the flexible exchange rate, will enable the economy to absorb shocks that could come from tighter sanctions or weaker commodity prices.
  • Recent failures of a number of private banks have not undermined financial stability, and we see early signs of a lending recovery.
  • We are therefore raising our foreign and local currency sovereign credit ratings on Russia to 'BBB-/A-3' and 'BBB/A-2', respectively.
  • The outlook is stable.

Rating Action

On Feb. 23, 2018, S&P Global Ratings raised its foreign currency long- and 
short-term sovereign credit ratings on Russia to 'BBB-/A-3' from 'BB+/B'. We 
also raised our local currency sovereign credit ratings on Russia to 'BBB/A-2'
from 'BBB-/A-3'. The outlook is stable.

At the same time, we have revised our Transfer and Convertibility (T&C) 
assessment to 'BBB' from 'BBB-'.

The upgrade reflects the track record of prudent policy response that has 
allowed the Russian economy to adjust to lower commodity prices and 
international sanctions. Demonstrated commitment to fiscal restraint and an 
enhanced fiscal policy framework have reduced medium-term risks of fiscal 
slippage. Finally, despite the ongoing clean-up of the banking system, the 
Central Bank of Russia's (CBR's) measures have preserved financial stability. 
Credit to the private sector has started to recover, which we view as a sign 
of improved monetary transmission.

Outlook

The stable outlook reflects our view of balanced risks to the ratings.

We may take a positive rating action on Russia if the economic recovery 
gathers momentum and GDP per capita trend growth reaches rates comparable with
countries at similar development levels. Faster-than-expected fiscal 
consolidation and sustained compliance with the fiscal rule, weakening the 
impact of volatile commodity prices on public finance, could also support a 
positive rating action.

We could take a negative rating action should geopolitical events result in 
foreign governments introducing materially tighter sanctions on Russia. We 
could also take a negative action if we consider there is a risk of a material
deterioration in Russia's budgetary trajectory, either due to spending 
pressures and/or the crystallization of contingent liabilities in the banking 
sector or state-owned enterprises.

Rationale

The ratings are supported by Russia's commitment to conservative macroeconomic
management, its strong net external asset position, low government debt, and 
relatively high monetary flexibility, including the flexible exchange rate 
regime. The ratings are constrained by our assessment of Russia's economy, 
which remains dependent on revenues from oil and gas exports, as well as by 
wider institutional and regulatory weaknesses. Further constraints include 
geopolitical tensions, and resulting international sanctions, creating a drag 
on Russia's long-term economic growth prospects.

Institutional and Economic Profile: Sanctions and weak institutions hinder potential growth
  • Economic growth has picked up and the recovery is set to continue, although at a slow pace.
  • The sovereign's track record of addressing structural impediments to growth is limited, reflecting Russia's institutional weaknesses.
  • Despite post-presidential election reform momentum, the government's policies are likely to focus on preserving macroeconomic stability.

We expect Russia's economic recovery to continue through 2021, having exited 
recession in 2017. Similar to our previous forecast, we project that real GDP 
growth will likely increase to 1.8% in 2018, followed by a modest 1.7% on 
average over 2019-2021. Economic recovery will likely be supported by the 
rebound in oil prices, a moderate expansion of domestic demand backed by 
gradual monetary easing, and the global economic upswing. At the same time, 
adverse demographics and low productivity continue to weigh on Russia's 
long-term growth potential. Structural impediments to productivity-driven 
growth include the state's dominant role in the economy, the challenging 
investment climate, and relatively low level of competition and innovation.

We acknowledge the prudent macroeconomic policy response that enabled the 
economy to absorb a severe terms-of-trade shock in 2014-2015. In addition, 
Russia has improved its position in the World Bank's "Doing Business" ranking,
having now risen to No. 35 out of 190 from No. 120 a few years ago. Moreover, 
we understand the government has initiated a number of reforms to enhance 
productivity, boost investments, and alleviate pressures coming from the aging
population and declining labor force. Although these initiatives do not 
address key structural obstacles, they could still contribute to lifting 
Russia's per capita trend growth, which is currently only one-half of the 
average for the sample of over 30 rated sovereigns with similar income levels 
(measured by US$ GDP per capita).

Although the currently high public approval ratings could give the authorities
room to carry out additional but potentially unpopular reforms, our base-case 
assumption is that the government will opt to use this momentum to cement 
macroeconomic stability and rebuild fiscal buffers to brace for future shocks.
We base this on our view of a limited effectiveness of past reform 
initiatives. We remain guarded about prospects for substantial strengthening 
of Russia's business environment, including improvements in the judicial 
system and law enforcement. While authorities have discussed privatization and
demonopolization regularly in the past, implemented policies and measures 
point in the opposite direction, leading us not to expect any notable 
reduction in the state's role in the economy. Russia suffers from weak checks 
and balances between institutions and the high centralization of power. We 
have observed this in recent restrictive actions toward independent mass media
and elevated constraints on genuine political participation. Although we 
expect some broad policy continuity and macroeconomic stability after the 
presidential elections in March 2018, in the longer term, the limited track 
record and uncertainty surrounding the succession of power could undermine 
predictability of policy priorities.

The U.S. administration has so far refrained from imposing meaningful 
additional sanctions on Russia or materially tightening the existing sanctions
after passing the "Countering America's Adversaries Through Sanctions Act" in 
August 2017. At the same time, we believe that the shape and timing of 
additional sanctions will likely stem from Russia's foreign policy actions as 
well as the U.S. domestic political debate, both being difficult to predict. 
Nevertheless, the recent codification of sanctions by the U.S. puts up 
additional barriers to their removal. As such, we continue to think that 
existing international sanctions--which the EU and the U.S., among other 
countries, imposed in 2014--will remain in place through our forecast horizon.
Sanctions will continue to limit Russia's trend growth and economic 
diversification efforts due to high investor uncertainty and constraints on 
technology transfer.

Flexibility and Performance Profile: Strong external and fiscal balance sheets
  • Russia's net external asset position, flexible exchange rate, and low government debt support the state's creditworthiness.
  • Commitment to cost containment, improved tax compliance, and adherence to the new fiscal rule will likely keep net government debt low.
  • The Central Bank of Russia (CBR) has achieved disinflation and maintained financial stability; and we acknowledge a recovery of private-sector lending, on the back of improving monetary transmission.

Russia's external position remains a credit strength. After years of external 
deleveraging--partly driven by international sanctions that severely 
restricted the access of some sectors of the economy to global financial 
markets--the country maintains a strong net external asset position. We expect
liquid external assets to exceed external debt by about 50% of current account
payments on average through 2021. At the same time, Russia's gross external 
financing needs (payments to nonresidents) will likely average 65% of current 
account receipts plus usable reserves. This is a moderate level even after 
deducting foreign currency investments made by the CBR on behalf of the 
government from the officially reported foreign currency reserves, which we 
think the CBR would not be able to use to tackle balance-of-payments 
pressures.

We expect the current account balance to stay in surplus at about 2% of GDP on
average over the coming three to four years. Despite the surge in imports 
driven by the ruble appreciation and gradually recovering domestic demand, 
stronger oil prices resulted in a higher-than-expected current account surplus
of about 2.6% of GDP in 2017. We expect a similar performance in 2018, given 
our recently revised oil price assumption for 2018 to $60 per barrel (/bbl) 
from $55/bbl last year (see "S&P Global Ratings Raises 2018 Brent And WTI Oil 
Price Assumptions," published Jan. 18, 2018, on RatingsDirect), followed by a 
moderate reduction in surpluses on the assumption of slightly lower oil prices
at $55/bbl in 2019 and a continuing recovery in imports. The financial account
has largely stabilized after two years of material capital outflows driven by 
sanctions and weak investor sentiment. We expect external deleveraging of the 
private sector to be broadly over by 2019, since corporate and financial 
entities not under sanctions will likely increasingly tap international 
capital markets.

The ruble has appreciated by about 11% in real effective terms since mid-2016,
partly owing to higher oil prices and portfolio investors' appetite for 
Russia's high-yielding assets. We consider the ruble to be largely free 
floating, which provides an important cushion for the economy against volatile
commodity markets, and we have not seen signs that the government (via its 
regular foreign exchange purchase) or CBR are targeting any particular level 
of exchange rate. At the same time, prolonged and consistently higher 
commodity prices and the resulting currency appreciation might challenge the 
credibility of the existing exchange rate regime.

We believe that the government's medium-term fiscal policies are focused on 
rebuilding fiscal buffers to mitigate revenue volatility (oil and gas related 
revenues account for one-third of general government revenue budget) and 
tackling potential risks coming from new sanctions or contingent fiscal 
liabilities. We assume the government will seek to achieve this goal by fiscal
consolidation aimed at adjusting public finances to the persistently low oil 
price. The newly legislated fiscal rule mandates that authorities forecast 
federal budget revenues based on a conservative Urals oil price assumption of 
$40/bbl (adjusted annually by 2%). The government's medium-term federal fiscal
target is a primary balance and a headline deficit of 0.8% of GDP by 2020. At 
the same time, the deficits of the general government (i.e., including social 
security funds and subfederal budgets) are planned to reduce to 1%. These 
improvements rely on the government's intentions to freeze expenditures in 
nominal terms for 2018-2020.

We acknowledge that so far the government has maintained these major 
consolidation efforts and, if consistently applied, they could result in a 
faster consolidation and higher fiscal buffers. Since early 2017, the 
government has contained spending proposals within the medium-term fiscal 
framework despite the upcoming presidential elections, strengthened non-oil 
tax collection, and used its extra oil revenues to purchase foreign currency 
in the market to replenish fiscal buffer. This led to a stronger general 
government performance in 2017, which we estimate at about 1.5% of GDP against
the initially budgeted 2.3% of GDP.

Meanwhile, the new policy framework will have to withstand the test of time 
and varying oil prices, especially given material demography-related and 
infrastructure spending needs, political pressures to provide fiscal stimulus 
to unimpressive growth, and a relatively poor track record in complying with 
fiscal rules in the past. As such, our estimates are slightly more 
conservative than the government's, because we expect accumulated spending 
pressures to feed through, first, regional government balances, and second, 
the materialization of contingent liabilities in the state-owned sectors of 
the economy. In our view, over 2018-2021, the general government deficit will 
stay near 2.0% of GDP on average, which is still a sizable adjustment compared
with deficits of about 4.5% of GDP in 2016.

We expect that much of the fiscal financing, especially after 2018, will come 
from domestic market issuance. Under the assumption that the government 
complies with the fiscal rule, we expect fiscal buffers to start expanding 
already in 2018, after they shrank in 2017 to one-third of their size in 2014.
This will keep government debt net of liquid assets below a modest 15% of GDP 
through 2021. Our government debt estimates factor in debt liabilities of a 
number of entities closely linked to the state, such as the Deposit Insurance 
Agency (DIA) and the state-owned development agency Vnesheconombank.

Although the government's contingent liabilities remain limited, the sizable 
and increasing state-owned sector could weigh on Russia's public finance in 
the longer term. The state has recently expanded its role in both the 
financial and non-financial sectors, with a number of entities holding 
material amounts of commercial debt (we estimate debt of nonfinancial 
government-related entities to approach 15% of GDP in 2017, for example). 
Given the growing concentration of the domestic banking system on large 
state-owned enterprises, including those under sanctions, there is a risk that
the government will have to ultimately provide financial support to some of 
them (see "Sanctions Increase Concentration Risks For Russian Corporates And 
Banks," published Dec. 4, 2017).

Furthermore, additional costs to public finance could come from the ongoing 
resolution of three failed private banks (with total assets of some 5.0%-5.5% 
of GDP), which the CBR took over in the second half of 2017. The size of the 
rescue package for Bank Otkritie, B&N, and Promsvyazbank so far amounts to 
some 1% of GDP, with a potential to increase further in 2018-2019. We also 
cannot exclude the possibility that additional aid might be needed for some 
other private banks if the CBR decides that supporting them is critical for 
the sector's stability. The CBR has recently changed its bank resolution 
framework to the one under which the central bank itself now taking over a 
problem bank via a newly established asset management company instead of the 
previous mechanism that was administered by the DIA, which also provided 
subsidized loans to problem banks to support their restructuring. Although the
government has not explicitly used budget funds to accommodate these expenses,
the CBR's activities are essentially quasi-fiscal, with some resolution costs 
potentially migrating to the government balance sheet.

At the same time, we consider that CBR's efforts to maintain stability in the 
banking sector, at a time when funding volatility re-emerged, have been 
largely effective. Together with gradually recovering demand for credit, this 
has ushered in a gradual improvement in new lending in 2017, which expanded by
3.5% after a contraction in 2016. Although growth was concentrated in 
household lending (including a double-digit expansion of mortgage lending), 
loans to the corporate sector have also started showing signs of gradual 
recovery. We expect this process to continue in 2018. With lending growth now 
returning to the positive territory and loan and deposit rates responding well
to the CBR's policy rate decisions, we now believe that the monetary and 
credit transmission mechanism to the real economy is largely repaired.

Recovery in lending could support business growth and lessen pressures on the 
Russian banking system's profitability and capitalization. Although the 
banking sector remains vulnerable (see our "Banking Industry Country Risk 
Assessment: Russia," published June 22, 2017), we think that asset quality 
deterioration reached its lowest point and that a gradual recovery is under 
way.

The CBR has earned credibility over the past few years for its policy response
to the oil price shock and effective disinflation efforts. Supported by the 
ruble appreciation and low food prices, inflation declined to a historical low
of 2.5% at year-end 2017 from 12.9% in 2015, despite still elevated inflation 
expectations. We believe that in the medium term, rising demand, higher food 
prices, as well as a fading effect of exchange rate appreciation will likely 
spur headline inflation back to the CBR's target of 4%.

Key Statistics

Table 1

Russian Federation Selected Indicators
2012201320142015201620172018201920202021
ECONOMIC INDICATORS (%)
Nominal GDP (bil. RUB)68,16473,13479,20083,38785,91892,08296,873101,239106,079111,138
Nominal GDP (bil. $)2,1932,2972,0641,3681,2811,5781,6421,6601,7051,750
GDP per capita (000s $)15.516.014.49.48.710.811.211.311.611.9
Real GDP growth3.71.80.7(2.5)(0.2)1.51.81.71.71.7
Real GDP per capita growth3.61.60.5(4.3)(0.3)1.31.81.61.71.6
Real investment growth5.01.3(1.8)(11.2)0.83.63.22.82.82.8
Investment/GDP24.523.122.221.923.824.323.924.223.923.5
Savings/GDP27.824.625.026.925.826.926.626.025.725.0
Exports/GDP26.925.827.128.625.826.127.326.426.526.6
Real exports growth1.44.60.53.73.25.43.73.23.23.2
Unemployment rate5.55.55.25.65.55.25.25.25.15.1
EXTERNAL INDICATORS (%)
Current account balance/GDP3.21.52.85.02.02.62.81.81.81.5
Current account balance/CARs10.95.19.215.66.78.69.05.95.95.1
CARs/GDP29.628.430.432.229.829.630.629.930.330.6
Trade balance/GDP8.77.99.210.87.07.37.76.76.56.2
Net FDI/GDP0.1(0.8)(1.7)(1.1)0.8(0.3)(1.0)(0.9)(0.8)(0.8)
Net portfolio equity inflow/GDP0.0(0.3)(0.7)(0.4)(0.2)0.1(0.4)(0.4)(0.4)(0.4)
Gross external financing needs/CARs plus usable reserves73.779.874.770.172.366.565.664.864.364.6
Narrow net external debt/CARs(34.3)(24.9)(26.4)(47.8)(49.9)(48.9)(54.4)(61.2)(60.7)(59.9)
Narrow net external debt/CAPs(38.5)(26.3)(29.0)(56.7)(53.5)(53.5)(59.8)(65.0)(64.6)(63.1)
Net external liabilities/CARs(21.8)(20.2)(52.6)(80.2)(63.3)(61.2)(65.8)(72.7)(75.6)(78.1)
Net external liabilities/CAPs(24.5)(21.3)(57.9)(95.1)(67.9)(67.0)(72.4)(77.3)(80.4)(82.3)
Short-term external debt by remaining maturity/CARs28.232.423.623.929.519.318.116.614.914.2
Usable reserves/CAPs (months)8.07.57.07.79.08.78.79.08.98.7
Usable reserves (mil. $)387,147333,594239,154266,327309,449332,910350,781359,165369,929376,573
FISCAL INDICATORS (%, General government)
Balance/GDP0.4(1.2)(2.3)(3.4)(4.5)(1.5)(2.5)(2.2)(2.0)(1.9)
Change in net debt/GDP(0.2)1.1(0.8)3.84.31.72.21.91.81.7
Primary balance/GDP0.9(0.6)(1.7)(2.5)(3.6)(0.7)(1.8)(1.4)(1.1)(0.9)
Revenue/GDP34.433.433.832.332.033.133.333.433.433.4
Expenditures/GDP34.034.636.135.736.534.635.835.635.435.3
Interest /revenues1.61.82.02.72.82.42.22.42.72.8
Debt/GDP10.311.013.615.115.214.816.318.219.220.1
Debt/Revenue30.032.940.146.947.644.849.054.557.560.2
Net debt/GDP(1.4)(0.1)(0.9)2.97.18.410.211.712.914.1
Liquid assets/GDP11.711.114.512.28.16.46.16.56.36.0
MONETARY INDICATORS (%)
CPI growth (average)5.16.77.815.57.03.73.14.04.04.0
GDP deflator growth9.15.47.58.03.25.53.32.83.03.0
Exchange rate, year-end (RUB/$)30.3732.7356.2672.8860.6657.6060.5061.5063.0064.00
Banks' claims on resident non-gov't sector growth19.517.422.88.0(5.0)3.57.07.07.07.0
Banks' claims on resident non-gov't sector/GDP42.946.955.156.552.150.351.252.453.554.6
Foreign currency share of claims by banks on residents12.913.519.423.817.816.016.216.316.516.7
Foreign currency share of residents' bank deposits26.527.839.241.234.728.328.328.328.328.3
Real effective exchange rate growth1.51.8(8.4)(17.4)(1.1)15.2N/AN/AN/AN/A
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. RUB--Russian ruble. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. 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

Russian Federation Ratings Score Snapshot
Key rating factors 
Institutional assessment5
Economic assessment5
External assessment1
Fiscal assessment: flexibility and performance4
Fiscal assessment: debt burden1
Monetary assessment3
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 Dec18, 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.

Related Criteria And Research


Related Criteria

Related Research

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision.

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts.

The committee agreed that monetary factors had improved. All other key rating 
factors were unchanged.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research').

Ratings List

                                         Rating                               
                                         To                 From              
Russia
 Sovereign Credit Rating                                                      
  Foreign Currency                       BBB-/Stable/A-3    BB+/Positive/B    
  Local Currency                         BBB/Stable/A-2     BBB-/Positive/A-3 
 Transfer & Convertibility Assessment    BBB                BBB-              
 Senior Unsecured                                                             
  Foreign Currency                       BBB-               BB+               
  Local Currency                         BBB                BBB-              

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action
can be found on S&P Global Ratings' public website at www.standardandpoors.com
. Use the Ratings search box located in the left column. Alternatively, call 
one of the following S&P Global Ratings numbers: Client Support Europe (44) 
20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; 
Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 
783-4009.


Primary Credit Analyst:Karen Vartapetov, Frankfurt (49) 69-33-999-225;
karen.vartapetov@spglobal.com
Secondary Contact:Ravi Bhatia, London (44) 20-7176-7113;
ravi.bhatia@spglobal.com
Additional Contact:SovereignEurope;
SovereignEurope@spglobal.com

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