Russia’s strengthened public accounts and resilience to external shocks are an opportunity for the government to address economic challenges, but weak governance and geopolitical risk remain obstacles to improving the country’s growth potential. Scope Ratings GmbH says low general government debt, sizeable state cash deposits, better cost control and more efficient tax collection all provide greater room for fiscal manoeuvre, raising the capacity of the Russian government to tolerate somewhat higher debt in coming years. Fiscal buffers safeguard the government’s debt repayment capacity under conditions of intensifying US sanctions.
Russia’s gross public debt ratio fell to 14.0% of GDP in 2018 from 16.4% in 2015. While set to rise to 16.9% of GDP by 2024, according to the IMF, it will remain below the government’s conservative 20% of GDP debt ceiling. Government debt net of deposits including National Wealth Fund assets stood at below 1% of GDP at the end of 2018, among the lowest net-debt ratios for a major economy. The Russian government has focused fiscal policy on rebuilding financial buffers that, with the help of higher-than-budgeted oil prices and growth in tax revenues, resulted in a general government surplus of 2.8% of GDP in 2018.
On 1 August, deeper US sanctions were signed into law opposing the extension of financial or technical assistance to Russia from international financial institutions and prohibiting US banks from participating in the primary market for non-ruble-denominated Russian sovereign debt and lending non-ruble denominated funds to the Russian government. While Scope views risks regarding new restrictions on Russia’s sovereign debt issuances to be credit-negative as these add to the cost of financing, they are at least partly offset by the country’s greater capacity to resist external shocks. This is due to a high share of sovereign obligations denominated in rubles (around 75% of total debt in 2018) and overall low levels of maturing debt (amounting to just 5% of GDP through 2024) that could be met via ruble-denominated borrowing and government cash deposits.
Inward FDI to Russia over 2014-2018 averaged 1.3% of GDP, the lowest levels for 20 years when reinvestment is factored in. Russians’ reluctance to invest at home is visible in the dominant oligarchic business model based on commodity exports rather than on developing supply chains or downstream value-added activities, alongside the preference for extracting company profits in cash. Russian corporates’ dividend yields at 7.9% are 4.6% higher than the MSCI Emerging Markets Index average and among the highest for the corporate sector of a large emerging-market economy.
Russia also suffers from a weak application of the rule of law and control of corruption, notably in relation to contract enforcement and respect for property rights, according to the International Property Rights Index. This weighs on business confidence and ties into chronic underinvestment.