S&P will revise the “junk” rating of Russia

On Friday, September 16, rating Agency Standard & Poor’s (S&P) may revise the long-term credit rating of Russia, which is now at “junk” level. S&P representative confirmed that the decision is scheduled for September 16. The Agency will maintain a rating on the same level, put 10 economists surveyed . Three of them believe that the most that you can count on is the revision of the Outlook to stable from negative.

S&P in January 2015, downgraded Russia to BB+, below investment grade with a negative Outlook. The previous rating was BBB-. Explaining its decision, S&P reported that monetary policy of Russia becomes less flexible, economic growth prospects weaken. In addition, the Agency took into account the risk that external and fiscal constraints will increase with the external pressure and increase state support of the economy. “We believe that the Central Bank is forced to make increasingly difficult decisions regarding monetary policy, at the same time attempting to support sustainable GDP growth,” said analysts at S&P.

Moody’s confirmed the rating with a negative Outlook in April, in July, Fitch — “BBB-” from “negative” Outlook. Fitch announced that it will consider the negative rating of Russia no later than March 2017. The Finance Ministry did not respond to a request .

Failed institutions and sanctions

S&P affirmed the “junk rating” of Russia with a negative Outlook twice in 2015 — in April and October and once this year in March. In recent comments the rating Agency said that S&P expects the GDP contraction of 1.4% and moderate growth of the economy next year. But S&P has observed that limited access to external financing could renew pressure on Russia’s foreign currency reserves, which can also undermine economic activity in the corporate and banking sectors. Among the negative factors influencing the Russian rating system, also called the weakness of political institutions. On the economy under pressure from the decline in the purchasing power. In addition, S&P took into account the continuing against Russia sanctions.

This time, most likely, the Agency will take a break and wait for additional statistical evidence of performance for the first three or four quarters, as well as changes in the country’s budget in 2016, and the next few years, says Alexander Polyutov of PSB.

Main negative factors affecting the rating are still there: the preservation of Western sanctions, the weak growth prospects of the economy, low oil prices and the lack of significant institutional reforms, lists managing Director of BCS Ultima Vitaly Bagmanov. Chief economist at ING in Russia and CIS Dmitry Polevoy adds to the negative factors and the uncertainty of fiscal policy. “The most important unresolved issue is the balance the Federal budget, which is due to the fall in oil prices loses income — the result is a significant size of the deficit without budget cuts and additional revenues may significantly exceed the approved amount. In this case, there is a risk of exhaustion of the Reserve Fund that reduces the financial flexibility of the government in subsequent years, in the case of low oil prices, and carries risks for the ruble,” — adds Polutov.

Analyst of the market of bonds of Raiffeisenbank Denis Poryvai recalls that, according to the Central Bank, the positive balance of the current account balance in January—August amounted to $14.8 billion (three times less compared to the same period last year). Debt burden of the state and the amount of reserves on these factors based S&P in rating review also did not show any significant changes.

The main analyst of Bank “GLOBEKS” Viktor Veselov noted that the main reason to leave the rating unchanged, which can be referenced by the Agency, could be a political risk. Senior Vice President, Moody’s Kristin Lindow Thursday, September 15, commenting on the last rating actions your Agency against Russia said that the credit profile of Russia, in addition to the recession, hit and high sensitivity of the country to geopolitical risks. “Secondary cause of the recession was the introduction of the international sanctions the US, EU, Japan and others in response to the Russian annexation of the Ukrainian Crimean Peninsula”, — quotes it Reuters.

S&P will continue to argue that although Russia has successfully passed the crisis, remain external risks related to the dynamics of oil prices and higher interest rates in the United States. The emphasis is likely to shift from critical statements about the external factors and monetary policy to criticisms of fiscal policy, does not exclude the chief economist at Citi in Russia, Ukraine and Kazakhstan, Ivan Tchakarov.

Positive factors

Chief economist of Credit Suisse in Russia Alexey Pogorelov and senior analyst of Bank “URALSIB” Olga Sterol does not exclude the possibility that S&P may revise the Outlook to stable from negative. One of the arguments may be General stabilization of macroeconomic indicators, says Pogorelov. “The last time in March was confirmed by the rating, S&P predicted the decline of the Russian economy this year at 1.4%. Now this forecast seems rather pessimistic,” adds the Sterols. According to the forecast “Uralsiba”, GDP this year will drop by 0.3%. According to the new calculations of economic development, the economic decline will make up 0.5—0.7%, declared on 8 September the Director of the consolidated Department of macroeconomic forecasting of Ministry of economic development Kirill Tremasov.

Next year expect the General macroeconomic recovery, the economy could grow by 1-1,5% when the price of oil from $40 to $50, and inflation will continue to decline due to the rigid policy of the Central Bank, says chief economist at Renaissance Capital in Russia Oleg Kuzmin. If the Russian economy stabiliziruemost and go to smooth growth, then S&P will be able to improve the Outlook for Russia’s rating, but only next year, does not exclude Vladimir Kharchenko from IFD “Kapital”.

Vitaly Bagmanov of BCS Ultima expects saving and rating and forecast at the current level. In the number of positive factors that S&P will pay attention when making the decision to change its Outlook to neutral or positive, he calls maintaining a low level of debt relative to reserves and GDP and a possible reduction in rates by the Central Bank. The Board of Directors of the Central Bank decides on the rate, which now stands at 10.5 percent, at the meeting on 16 September. 19 out of 22 analysts polled expect it will be reduced to 10%.

Also among positive factors — reduction in capital outflows (according to the Bank, for eight months, he fell five times, to $9.9 billion); in addition, since the last revision of the rating in Russia has increased the price of oil, points out Denis Poryvai. According to the Finance Ministry, the average price of Urals crude oil from 15 August to 14 September was almost $45,5 per barrel against the March $a 36.53.

The Sterol adds that when deciding S&P will look at the size of the Federal budget deficit. “Despite its significant growth, the Finance Ministry hopes to keep it at the level of 3.2% of GDP in the current year, which for Russia, of course, high, but in comparison with other countries, this value is acceptable,” she says.

The market indifferent

The majority of surveyed analysts believe that the improving Outlook on the rating will not affect the market or the impact will be minimal. It is worth considering that Russia is trading like a country with an investment rating and at least a stable Outlook, says Kuzmin. The Outlook revision does not affect the foreign exchange market, as well as on the debt market, said Alexei Pogorelov. “Both are traded without regard to the rating Agency. Only increase of a rating may have an effect on the value of Russian assets, while the short term,” he says. “Judging by the impressive performance of Russian Eurobonds, the market is not very concerned about the preservation of “junk rating”. As they say — investors vote with their money, even taking into account the fact that part of demand for foreign currency debt comes from local players,” — adds Dmitry Polevoy.

Russia has placed this year’s ten-year Eurobonds for $1.75 billion, and despite the fact that the first placement was with a certain premium to the secondary market because of problems with settlements in Euroclear, with time, the issue was admitted to the settlement system of Euroclear and the prize was neutralized, adds Olga Sterol.

Vitaly Bagmanov does not expect significant growth of the ruble in case of improvement of the forecast: “the market is already came the hot money hedge funds, which fueled demand for the Russian currency. Basically now have a visible impact on oil prices and the verbal intervention of the Central Bank. The yield on the public debt will decrease, but the euphoria will not in debt are unable to invest customers of Western investment banks, in addition, the current premiums that give paper Russia, is quite modest compared to other countries in the rating of the same rating.