Robust public finances and strengthening external resilience drive the outlook change. Low growth potential, vulnerabilities to geopolitical risk and weak governance remain rating constraints. Scope Ratings GmbH has affirmed the Russian Federation’s long-term local-currency and foreign-currency issuer ratings at BBB- and revised the outlook to positive from stable. The sovereign’s ratings of BBB- for senior unsecured debt in local and foreign currency are also affirmed, with the outlook revised to positive. The short-term issuer ratings have been affirmed at S-2 in both local and foreign currency with a stable outlook.
As a result of external debt repayments and decreasing local and regional government debt, Russia’s gross public debt ratio declined to 14.0% of GDP as of 2018, from 16.4% in 2015. The IMF projects that the debt ratio will slightly increase to 16.9% of GDP by 2024, thus remaining below the government’s conservative debt threshold of 20%. However, government debt net of general government deposits including National Wealth Fund assets stood at below 1% of GDP at the end of 2018, one of the lowest such net debt ratios in Scope’s rated sovereign universe. Russia also benefits from very low public debt servicing costs at below 1% of GDP in 2019 and manageable foreign currency risks in public debt, reflected in low levels of maturing debt (amounting to just 5% of GDP through 2024) and a high share of sovereign obligations denominated in rubles (around 75% of total debt in 2018).
Russia’s fiscal policy focused on rebuilding fiscal buffers over past years has significantly improved budgetary performance. Higher than budgeted oil prices and robust tax revenue growth in 2018 resulted in a general government surplus of 2.8% of GDP, Russia’s first headline budgetary surplus since 2012.
Russia’s ratings are constrained by: i) Russia’s low growth potential, ii) weak governance, and iii) the economy’s high vulnerability to geopolitical risk, which has brought ramifications like restricted international market access for the Russian private sector.
In 2018, the economy posted the fastest growth since 2012, at 2.3%. However, Scope expects medium-term growth potential of only 1.5%. In Scope’s view, the weak potential growth is the result of: i) an overreliance on the oil and gas industries, which accounted together for 46% of federal budget revenues and more than 60% of goods exported in 2018, along with high regulated tariffs on natural monopolies, undermining competitiveness; ii) structural challenges posed by weak infrastructure in combination with notable regional economic disparities, constraining investments into value chains; and iii) supply-side bottlenecks due to challenging demographic trends in the form of a shrinking working-age population and a growing elderly population that weigh on productivity growth.
The ratings could be upgraded if: i) Russia maintains a prudent fiscal policy, leading public debt ratios on a steady downward trajectory; ii) growth potential improved as a result of structural reforms; iii) further improvements in reserve coverage ratios were realized; and/or iv) economic and/or financial sanctions were removed, reducing constraints on growth potential and market access of Russian entities.
Alternatively, the outlooks could be returned to stable or changed to negative if: i) Russia’s fiscal balance deteriorated significantly, reversing the decline in the public debt to GDP ratio; ii) the economic policy framework was materially weakened, undermining the country’s growth potential; iii) international reserves notably declined; and/or iv) geopolitical risks escalated and/or additional sanctions were put into place that would weigh significantly on Russia’s financial or macroeconomic stability.