Scope Ratings GmbH, a leading European agency, has release its research report on Russia’s credit outlook, noting that oil revenues, prudent budgetary and monetary policies focused on rebuilding Russia’s financial buffers have cushioned the impact of sanctions at the cost of exacerbating the economy’s deep structural weaknesses over the long term.
In its 2019 outlook, Scope highlighted intensified sanctions on Russia as one of the key rating-relevant risks, next to pronounced oil price volatility along protectionist measures in world trade, as well as the threat of escalating geopolitical tensions. However, it highlighted that Russia’s BBB- (Stable) ratings have been well supported by a recovering economy, robust public finances and a strengthened macroeconomic policy framework.
“Our Stable Outlook on Russia balances the country’s external resilience, increased exchange rate flexibility and low public finance risks against rising geopolitical risks and structural constraints on growth,” Scope’s lead analyst on Russia, Jakob Suwalski, says.
In this new report, Scope highlights four factors that will determine the trajectory of Russia’s ratings going forward:
- Rising geopolitical risks: US legislators have reintroduced a sanctions bill in recent months, titled the ‘Defending American Security from Kremlin Aggression Act of 2019’. The proposed bill, if passed, would broaden and deepen the sanctions regime, potentially leading to significant intervention in existing commercial relationships and energy projects. The proposals include measures on Russian liquefied natural gas, state energy projects abroad, as well as on new Russian sovereign debt issuance.
“The proposed new sanctions indicate that geopolitical confrontation between the US and Russian governments will last a long time and be likely increasingly characterized by unilateral sanctions focused on Europe’s dependence on Russian energy imports,” Suwalski says.
While Scope views risks regarding restrictions on Russian sovereign debt issuances to be credit-negative as those would add to the cost of financing, Scope considers Russia’s enhanced resilience to external shocks to be a counter-weight, cushioning the impact of sanctions. The agency does not expect that restrictions on new sovereign debt, if included in any final, adopted version of the bill, would weigh significantly on Russia’s debt service ability, given low financing needs that could be easily met by local financing and government cash deposits.
- Robust external economic risk-profile: Russia’s high foreign-exchange-reserve adequacy, low external financing needs, and net external-creditor position underpin the ability of the economy to support stability in environments of intensified external shocks.
“The medium-term impact of sanctions on Russia’s external economic risk profile will likely be contained as long as oil revenues remain robust,” Levon Kameryan, analyst at Scope, believes. “Despite our expectations of moderating oil prices going forward, Russia’s oil revenues will remain large enough to cover debt amortization through 2019.”
- Low public finance risks: Effective budgetary policy focused on rebuilding fiscal buffers over the past years has materially improved the country’s capacity to withstand potentially deepened sanctions and has provided some fiscal room for countercyclical manoeuvre. Higher than budgeted oil prices and improvements in tax collections in 2018 resulted in a federal fiscal surplus of 2.7% of GDP, which was Russia’s first surplus since 2012.
- Sanctions drag on structurally-weak economic growth: Russia’s growth prospects remain structurally constrained and subdued even though short-term risks from low oil prices have decreased helped by the policy response. According to the Russian statistics agency, in 2018, the economy posted the fastest growth since 2012, at 2.3%. The IMF, in its latest World Economic Outlook, forecasted growth of just 1.6% and 1.7% for 2019 and 2020. The medium-term growth outlook, however, remains modest, with estimates of potential growth at just 1.5%.
“Weak potential growth is the result of a number of factors that aren’t easy to address overnight,” Kameryan notes.
Scope points to adverse demographics, an overreliance on the commodities and energy sector, structural challenges posed by weak infrastructure, poor business and investment environments, as well as weak governance.
“Russia needs comprehensive economic and institutional reforms,” Kameryan adds.