Fitch Revises Russia's Outlook to Negative; Affirms at 'BBB'

Fri Mar 21, 2014 12:03am EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Russian Federation - Rating Action Report here LONDON, March 20 (Fitch) Fitch Ratings has revised the Outlook on Russia's Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at 'BBB'. The issue ratings on Russia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB'. The Short-term rating has been affirmed at 'F3' and the Country Ceiling at 'BBB+'. Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on Russia was 25 July 2014, but Fitch believes that developments in Russia warrant such a deviation from the calendar and our rationale for this is laid out below. KEY RATING DRIVERS The rating actions reflect the following key rating drivers and their relative weights: High The revision of the Outlook to Negative reflects the potential impact of sanctions on Russia's economy and business environment. Growth slowed to 1.3% in 2013 and investment is contracting. Since US and EU banks and investors may well be reluctant to lend to Russia under the current circumstances, the economy may slow further and the private sector may require official support. Following the referendum in Crimea on 16 March, the US and EU applied sanctions (visa restrictions and the freezing of property and financial assets) to a list of Crimean, Russian and Ukrainian individuals that they determined were contributing to the ongoing situation in Ukraine. The direct impact of sanctions announced so far is minor, but the incorporation of Crimea into the Russian Federation will likely lead the EU and US to extend sanctions further in response. Furthermore, foreign investors may anticipate further official action and restrict Russian entities' access to external financing. Risk premiums have already risen and syndicated loans to a number of large corporates are reported to be on hold. In a worst-case scenario, the US may prevent foreign financial institutions from doing business with Russian banks and corporates. A hiatus in access to the external markets is manageable, provided it is not prolonged. The corporate sector must repay USD67bn in March-December 2014 and the banking sector USD36bn, according to Central Bank of Russia (CBR) data. If corporate financing needs cannot be met in the markets, the authorities could draw on ample FX reserves to provide FX liquidity, through the state-owned banks or from the reserve fund. Medium The current climate is negative for economic growth. Russia was already experiencing a slowdown, with growth falling to 1.3% in 2013 and investment declining. Fitch has revised down its growth forecast to less than 1% in 2014 and 2% in 2015. These projections still rely on a mild upturn in investment, which is now less likely. Indeed, recession is possible, given the impact of higher interest rates, a weaker rouble and geopolitical uncertainty. Economic spillovers from recent events include higher capital outflows and pressure on the rouble. The CBR raised its policy rate by 150bps to 7% on Monday 3 March, when it spent USD11bn to defend the currency and pledged to stabilise it in a more tightly controlled range. Since then, the rouble has steadied without the need for massive CBR intervention. A period of slower growth increases the risks of a departure from the fiscal policy framework in order to stimulate the economy, carrying medium-term risks that buffers are eroded or government debt rises from low levels. However, rouble depreciation is helping government finances by boosting the rouble value of oil revenues. Russia's ratings also reflect the following key rating drivers: Russia has a strong balance sheet at both the sovereign and country level. Gross external assets exceed debt by 15% of GDP. Central Bank international reserves are USD494bn, while corporate and banking sector external debt (excluding liabilities to foreign direct investors) is USD483bn, of which corporate FX-denominated debt is USD208bn (September 2013). Low government debt (11% of GDP) and sovereign net foreign assets of 23% of GDP support the rating, although the sovereign balance sheet has largely stopped strengthening. Russia ran a small federal budget deficit in 2013, and aims to keep it below 1% of GDP through 2016. Commodity dependence is high. Oil and gas account for 67% of goods exports and half of federal government revenue, exposing the balance of payments and public finances to external shocks. Governance is a relative weakness, manifested in the World Bank governance indicators. RATING SENSITIVITIES Future developments that could individually or collectively, result in negative rating action include: - An intensification of sanctions, resulting in further restrictions in access to financing for the private and/or public sectors or reduced export market access, large-scale capital flight and further impact on the real economy. - A weakening in the balance of payments leading to a substantial fall in reserves. - A further deterioration in growth prospects, with an impact on the financial system. - A steep and prolonged oil price fall that had a material impact on the economy and public finances. The Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a positive rating change. Future developments that could individually or collectively, result in a stabilisation of the Outlook include: - A reduction in tensions with the international community over Crimea, resulting in a reduced risk of wide-ranging sanctions being imposed. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: Fitch assumes that the government and monetary authorities avoid stimulus measures that would endanger macroeconomic stability or the sustainability of the public finances. Fitch assumes that Russian entities' access to foreign bank lending and capital markets is not constrained by wider financial sanctions. Fitch assumes that oil prices do not diverge significantly from the agency's base-case projection of USD105/barrel in 2014 and USD100/barrel in 2015. Fitch assumes that Russian-controlled forces do not attempt to gain control of further Ukrainian territory outside Crimea. Fitch assumes that Russia continues to enjoy broad social and political stability. Contact: Primary Analyst Charles Seville Director +44 20 3530 1048 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available at Applicable criteria, 'Sovereign Rating Criteria', dated 13 August 2012, and 'Country Ceilings', dated 9 August 2013, are available at Related research: 'Fitch Ratings Approach to CRA 3 for Sovereigns', dated 16 December 2013. 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