Moody's Investors Service downgraded the debt rating of the Russian government by one notch from Baa1 to Baa2, while maintaining a Negative outlook on the rating and affirming the short-term rating of Prime-2 (P-2). Long-term country ceilings for local and Fx debt and deposits is downgraded from A2 to A3, and short-term country ceiling is downgraded from P-1 to P-2.
The key drivers of the rating downgrade are:
• Increasingly subdued medium-term growth prospects, facilitated by the prolonged Ukrainian crisis and the impact of expanded international sanctions. Already weak Russian economy is likely to suffer from the crisis in longer-term, through the negative effect on the investment climate. The trend of slowing domestic demand, undermined confidence and investment are expected to continue the longer that the Ukrainian crisis persists. GDP contraction is not expected for 2014 overall, but real growth is expected to decline towards the end of 2014 at least until mid-2015.
• Ongoing gradual erosion of the Fx buffers due to capital flight, restricted international access of Russian borrowers and low oil prices. Even despite the trade and CA accounts strengthening due to in part to 20% exchange rate decline this year, the CA account only financed about 60% of the USD 85bn capital outflow in Jan-Sep. The isolation of Russian issuers from the international capital markets that started in Q2 has increased demand for Fx liquidity domestically and contributed to USD 60bn slump in central bank's Fx reserves. Government's Fx reserves and finances, although substantial and extremely strong, will be strained by the need to provide public and private sector with liquidity, Moody's believes.
Moody's sees limited upward pressure on the rating in the coming 12-18 months, reflected in the Negative outlook. The rating could come under downwards pressure, should the Ukrainian crisis escalate further, particularly if resulting in tougher sanctions, accelerated capital flight, and prolonged isolation from international capital markets. Given the lack of progress on economic diversification and reform, prolonged period of low commodity prices would also be rating-negative.
In July, Fitch Ratings affirmed Russia's long-term foreign and national currency Issuers Default Rating (IDR) at BBB, outlook on the rating Negative. Short-term foreign currency IDR was affirmed at F3, while the country ceiling was lowered from BBB+ to BBB, the same level as the actual IDR. In September Bloomber cited senior director of Fitch Ratings Paul Rawkins as saying that Russia could slide into recession already in H2/14 on the background of sanctions limiting external financing and eroding the Fx reserves.
Most recently Standard & Poor's expected the impact of the sanctions between West and Russia will exert pressure on economic growth in the rest of 2014, while the growth already came to a halt in the first half of the year. The agency sees two main channels through which the sanctions are affecting the economy. The first is the restricted access to capital markets and limited cost of financing, together with business uncertainty, curbing the private investment. The second channel is higher inflation and reduced consumer purchasing power, due to Russia's ban on food imports and renewed RUB weakness.
Last week Russia's EconMin Alexei Ulyukaev told the press that there are "expectations and rumours" of the international rating agencies downgrading Russia's sovereign rating. Ulyukaev believes that such action would be an indication of either strong bias or incompetence on behalf of the agencies. EconMin stressed that Russia's ability to service external debt of only 33% of GDP and the state debt of 11% of GDP is solid.
(c) 2014 Emerging Markets Direct Media Holdings LLC Provided by SyndiGate Media Inc. (Syndigate.info).