Fitch Ratings Upgrades Russia at BBB, Outlook Stable

Fitch Ratings has affirmed Russia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’ with a stable outlook, the international ratings agency said in a statement on Friday, TASS reported.

“Russia’s ‘BBB’ IDRs balance its credible and consistent policy framework, and robust public and external balance sheets, underpinned by a solid sovereign net foreign assets position and low government debt, with low growth prospects, high commodity dependence and weak governance indicators relative to peers,” Fitch said.

The Stable Outlook reflects Fitch’s view that Russia’s policy response to the unprecedented shock of the COVID-19 pandemic and extreme volatility in oil prices will contribute to anchor macroeconomic stability improvements and preserve the strength of the sovereign balance sheet.

“Moreover, a strong commitment to inflation targeting, exchange rate flexibility and a prudent fiscal strategy support Russia’s increased resilience to shocks and reduce the impact of oil price volatility on the economy,” the agency added.

Russia’s Finance Minister Anton Siluanov told reporters that the move demonstrates the sustainability of Russia’s macroeconomics.

“We view the decision by Fitch Ratings to affirm Russia’s long-term foreign-currency issuer default rating at BBB with stable outlook as a yet another evidence that the macroeconomic structure created in Russia remains stable even amid turbulent external situation,” Siluanov said.

“It is indicative that while reviewing credit ratings of CIS countries in 2020, Fitch in most cases made the decision to either downgrade the rating or the outlook,” he added.

According the minister, Russia’s economic decline in 2020 may be less profound and the economic recovery – more dynamic compared to other states.

“This year, Russia took unprecedented measures to support citizens and companies amid the novel coronavirus infection. At the time of economic decline, it was necessary to replace the fallen private consumption with state budgetary measures. The measures that were taken have demonstrated their efficiency,” Siluanov said.

“We managed to avoid the stress scenario at the labor market. As the restrictions are being lifted, consumer activity quickly rebounds in the most affected sectors. In general, the economic decline may turn out to be less profound than in other states, and the recovery – more dynamic,” he added.

According to the minister, Russian had to increase public borrowing to finance the anti-crisis measures and make up for the shortfalls in incomes. But in the course of economic recovery the budget will be gradually brought in compliance with the economy’s possibilities.

“We will return to the principles of the budgetary policy that ensure stability of the economic and financial environment in the country and encourage private investments by means of low interest rates. Starting from 2022, upper limits of incomes in the three-year budget will be set in compliance with the budget rules. It will make it possible to ensure the high level of investor trust to the macro-policy and accessibility of the financial resource for the off-budget sector,” Siluanov said.

Fitch economic forecast

Fitch forecasts Russia’s GDP to contract by 5.2% in 2020 due to the impact of the COVID-19 pandemic and containment measures on domestic demand and exports.

“Oil production cuts under the OPEC Plus agreement will likely shave around 1pp to 2020 growth. We expect growth to recover to 3.6% in 2021 and 2.5% in 2022 under our baseline scenario,” the agency said, adding that weaker global growth or a strong resurgence of coronavirus pose downside risks in the near term.

According to the agency, inflation will reach 3.1% in 2020 before rising to 3.8% by the end of 2022.

Fitch forecasts Russia’s federal government deficit to reach 5.1% of GDP in 2020, from a surplus of 1.8% in 2019, reflecting weaker oil prices and production cuts eroding oil revenues, weaker tax collection and the government anti-crisis budget measures estimated at 3% of GDP in 2020.

Sanction risks

Risks of sanctions remain high for Russia, especially as the U.S. electoral cycle is approaching.

“The U.S. sanctions’ push has been most recently directed at preventing the completion of the Nord Stream II gas pipeline, but sanction legislation remains in the U.S. Congress that could also target foreign investment in local currency sovereign debt, financial institutions believed to be involved in ‘election interference’, as well as Russia’s oil and gas sector,” Fitch said.

It added that the exact timing, form and actual execution of further sanctions legislation remained uncertain.

However, Fitch does not believe that U.S. sanctions that prevent the servicing of existing sovereign debt or prevent Russian banks from transacting in U.S. dollars are likely.