Ratings: Foreign Currency: BBB-/Stable/A-3 Local Currency: BBB/Stable/A-2 For further details see ratings list.
- 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.
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.
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.
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%.
|Russian Federation Selected Indicators|
|ECONOMIC INDICATORS (%)|
|Nominal GDP (bil. RUB)||68,164||73,134||79,200||83,387||85,918||92,082||96,873||101,239||106,079||111,138|
|Nominal GDP (bil. $)||2,193||2,297||2,064||1,368||1,281||1,578||1,642||1,660||1,705||1,750|
|GDP per capita (000s $)||15.5||16.0||14.4||9.4||8.7||10.8||11.2||11.3||11.6||11.9|
|Real GDP growth||3.7||1.8||0.7||(2.5)||(0.2)||1.5||1.8||1.7||1.7||1.7|
|Real GDP per capita growth||3.6||1.6||0.5||(4.3)||(0.3)||1.3||1.8||1.6||1.7||1.6|
|Real investment growth||5.0||1.3||(1.8)||(11.2)||0.8||3.6||3.2||2.8||2.8||2.8|
|Real exports growth||1.4||4.6||0.5||3.7||3.2||5.4||3.7||3.2||3.2||3.2|
|EXTERNAL INDICATORS (%)|
|Current account balance/GDP||3.2||1.5||2.8||5.0||2.0||2.6||2.8||1.8||1.8||1.5|
|Current account balance/CARs||10.9||5.1||9.2||15.6||6.7||8.6||9.0||5.9||5.9||5.1|
|Net portfolio equity inflow/GDP||0.0||(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 reserves||73.7||79.8||74.7||70.1||72.3||66.5||65.6||64.8||64.3||64.6|
|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/CARs||28.2||32.4||23.6||23.9||29.5||19.3||18.1||16.6||14.9||14.2|
|Usable reserves/CAPs (months)||8.0||7.5||7.0||7.7||9.0||8.7||8.7||9.0||8.9||8.7|
|Usable reserves (mil. $)||387,147||333,594||239,154||266,327||309,449||332,910||350,781||359,165||369,929||376,573|
|FISCAL INDICATORS (%, General government)|
|Change in net debt/GDP||(0.2)||1.1||(0.8)||3.8||4.3||1.7||2.2||1.9||1.8||1.7|
|MONETARY INDICATORS (%)|
|CPI growth (average)||5.1||6.7||7.8||15.5||7.0||3.7||3.1||4.0||4.0||4.0|
|GDP deflator growth||9.1||5.4||7.5||8.0||3.2||5.5||3.3||2.8||3.0||3.0|
|Exchange rate, year-end (RUB/$)||30.37||32.73||56.26||72.88||60.66||57.60||60.50||61.50||63.00||64.00|
|Banks' claims on resident non-gov't sector growth||19.5||17.4||22.8||8.0||(5.0)||3.5||7.0||7.0||7.0||7.0|
|Banks' claims on resident non-gov't sector/GDP||42.9||46.9||55.1||56.5||52.1||50.3||51.2||52.4||53.5||54.6|
|Foreign currency share of claims by banks on residents||12.9||13.5||19.4||23.8||17.8||16.0||16.2||16.3||16.5||16.7|
|Foreign currency share of residents' bank deposits||26.5||27.8||39.2||41.2||34.7||28.3||28.3||28.3||28.3||28.3|
|Real effective exchange rate growth||1.5||1.8||(8.4)||(17.4)||(1.1)||15.2||N/A||N/A||N/A||N/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
|Russian Federation Ratings Score Snapshot|
|Key rating factors|
|Fiscal assessment: flexibility and performance||4|
|Fiscal assessment: debt burden||1|
|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
- Criteria - Governments - Sovereigns: Sovereign Rating Methodology - December 18,2017
- General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments - May 18,2009
- General Criteria: Use Of CreditWatch And Outlooks - September 14,2009
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April 07,2017
- S&P Global Ratings Raises 2018 Brent And WTI Oil Price Assumptions - Januray 18, 2018
- Global Sovereign Rating Trends 2018 - January 10, 2018
- Central And Eastern Europe And CIS Sovereign Rating Trends 2018 - January 10, 2018
- Sovereign Ratings History - February 07, 2018
- Sovereign Risk Indicators - December 14, 2017. An interactive version is available at http://www.spratings.com/sri
- Global Sovereign Rating Outlook 2018: Brighter With Risk Of Turbulence - December 13, 2017
- Sanctions Increase Concentration Risks For Russian Corporates And Banks - December 04, 2017
- Banking Industry Country Risk Assessment: Russia - June 22, 2017
- Default, Transition, and Recovery: 2016 Annual Sovereign Default Study And Rating Transitions - April 03, 2017
- Sovereign Debt 2017: Global Borrowing To Drop By 4% To US$6.8 Trillion – February 23, 2017
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').
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;|
|Secondary Contact:||Ravi Bhatia, London (44) 20-7176-7113;|
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