The international rating agency Moody’s has confirmed the long-term ratings of Russia in foreign and national currencies at Baa3. Among the factors that influenced this decision, the agency names the stability of the Russian economy, a low level of public debt and exposure to political risks, including sanctions. At the same time, Moody’s also allowed Russia to be disconnected from international payment systems. The Ministry of Finance believes that the agency’s decision to preserve credit ratings indicates Russia’s readiness “for very difficult challenges.”
According to a press release from Moody’s, the outlook for the RF ratings is “stable”. The agency cites three factors in support of the rating affirmation decision:
- “Relative resilience” of the Russian economy to a pandemic and a jump in oil prices. Moody’s said that monetary easing and business support measures imposed by the authorities helped to weather the crisis in Russia, which strengthened the country’s ability to “adapt to shocks and not rely on those sectors most affected by the pandemic.” Thanks to this, the Russian economy “entered the crisis with improved macroeconomic stability,” analysts write. In their opinion, “exchange rate flexibility” helped the Russian Federation to preserve foreign exchange reserves, and “conservative fiscal rule” reduced economic instability from government spending on hydrocarbon revenues.
- Very low public debt and a reserve fund. This, according to Moody’s, will provide Russia with “some financial stability” for the next two years, when the country’s budget begins to gradually recover from the pandemic. Last year, the budget balance of Russia, according to experts, worsened, in particular, due to the fall in oil prices and the coronavirus. By the end of 2021, according to the agency’s forecast, the volume of public debt will peak at about 20% of GDP, which will be a fairly “moderate” level compared to developing countries that have similar credit ratings.
- “Russia’s susceptibility” to political risks and, in particular, to the constant risk of new sanctions. This is due, according to Moody’s, geopolitical tensions in relations with Ukraine, as well as accusations of Russia of interference in elections abroad, the use of chemical weapons and involvement in cyber attacks. Experts believe that the “continuing tension” between Russia and the United States with the European Union “leaves open the possibility of introducing new restrictions.” In particular, the agency allows Russia to be disconnected from international payment systems. The constant threat of new sanctions, analysts say, will continue to limit Russia’s investment prospects and, putting pressure on its “financial flexibility” and economic growth potential.
“The imposition of tougher than expected sanctions, which cause significant damage to the Russian economy or public finances and, therefore, limit the country’s ability to refinance its debt, creates a risk for the credit profile of the Russian Federation. Although Moody’s considers such steps unlikely, the possibility of limiting Russia’s access to international payment systems increases the uncertainty about the sanctions, influencing economic and political decisions, ”the press release said.
In the medium term, according to the agency, Russia’s GDP growth rates “will remain in the lower half of the 1.5-2% range.” Investment growth will also be low, which Moody’s calls “institutional constraints”: the agency writes that Russia is failing to observe the rule of law and “take control” of corruption. In addition, the pressure on business remains, and the “unpredictable nature” of Western sanctions restricts access to foreign capital, which hinders the authorities’ efforts to diversify Russian exports and government revenues. The coronavirus pandemic will increase government dominance in the economy, Moody’s predicts, as SMEs, which the agency calls “a key driver of private sector development,” have been disproportionately hit by the crisis. In addition, the agency also notes an unfavorable demographic factor, including “the continuing decline in the number of young people of working age,” which also impedes economic growth.
Russian Finance Minister Anton Siluanov said that the decision of Moody’s to preserve the long-term credit rating of Russia may indicate “the successful overcoming of the negative consequences of the coronavirus crisis by the Russian economy.” He noted that similar decisions on the credit rating of the Russian Federation were previously made by two more international agencies – Fitch and Standard & Poor’s (S&P). According to the minister, since the beginning of 2020, “only a few G20 states, including Russia, have been able to avoid downgrading their credit ratings and deteriorating forecasts for them.”
“In our opinion, time has shown that the Russian economy is ready for very difficult challenges. We hope that the most difficult stage is over, and the rates of economic growth will exceed both the government’s forecasts and the conservative expectations of experts from rating agencies, ”added Mr. Siluanov (quoted by Interfax).
We will remind, in April, the European Parliament proposed to disconnect Russia from the international payment system SWIFT (in case the escalation of the conflict in the south-east of Ukraine does not stop). The head of EU diplomacy, Josep Borrell, responded to this by saying that Brussels is not authorized to make such decisions. The Central Bank of the Russian Federation believes that there is no risk of disconnecting the country from SWIFT so far. But if this happens, Russia, according to the regulator, will be able to switch to an analogue – the Financial Messaging System.