Country risk: Russia is on the long road back


Jeremy Weltman
Published on:

Experts are beginning to feel more confident about Russia’s prospects, and its credit ratings will ultimately reflect this.

Making a stand: Thanks to the steady oil-price recovery, the rouble is coming
out the shadows

Among the various changes to country risk scores in Euromoney’s survey, Russia’s improvement has seemingly gone under the radar.

After slipping to 44 points from a maximum 100 in the first half of 2016, Russia’s country risk score has climbed above 47 points this year, pushing the country back up three places in the global rankings to 70th out of 186 countries surveyed, which is less than three points from a tier-three rating.

Euromoney splits all 186 credits into five categories. Tier four is broadly equivalent to a B- to BB+ credit rating, and tier three justifies investment grade.

Currently Russia is rated a stable investment grade by Fitch, but Moody’s and S&P rate Russia Ba1/BB+, with S&P having altered its rating from stable to positive in March. That means it is poised to hand back the investment grade it took away at the beginning of 2015.


What has changed?

Clearly the rebound in the price of oil from below $30/barrel in early 2016 to $54/barrel in May has helped Russia avoid more disastrous consequences.

The steady oil-price recovery is supporting the rouble. This has put a stop to rising import price inflation.

The consumer price index increased by 4.1% year on year in April, and to within a whisker of the central bank’s 4% target rate, after it spiked at 17% in early 2015.

Consequently, the central bank feels more comfortable loosening monetary policy.

In April, the benchmark one-week repurchase (repo) rate was lowered by 50 basis points to 9.25%, continuing the gradual normalizing trend after it reached an all-time high of 17% at the end of 2014.

Meanwhile, GDP increased in real terms by 0.5% year on year in Q1 2017, strengthening from a 0.3% rise in Q4 2017, remaining weak, but moving in the right direction.

In the IMF’s latest assessment, GDP growth is predicted to reach 1.4% this year “supported by easier financial conditions and higher oil prices”.

The European Commission’s latest forecasts predict 1.2% GDP growth for 2017, rising to 1.4% in 2018, with the general government deficit narrowing from 3.7% of GDP last year to 3% in 2017, and 2.4% in 2018.

Gross debt remains low at less than 17% of GDP, and the current-account surplus is predicted to rise from 1.9% of GDP to 3.6% to 3.7% in 2017-18.

Experts respond favourably

All five of Russia’s economic risk indicators have been upgraded substantially compared with a year ago, contrasting with political and structural indicators, which are mostly either unchanged or improving marginally. Two – transparency and institutional risk – have worsened.

Russia’s capital access score is also notably higher.

Experts at Sberbank CIB Investment Research welcome the central bank’s move to lower interest rates, as it reduces the attractiveness of the carry trade, the major reason for the rouble’s current strength.

They see the rouble weakening during the second half of 2017, which should ease pressure on local producers who are presently losing out to cheaper imports.

Late May, Lilit Gevorgyan, senior economist and country risk analyst at IHS Markit commented on Azerbaijan’s spiralling risks.

On Russia, she believes growth will be lukewarm and partly improving due to a statistical base effect.

However, she also notes the rouble gaining strength, with inflation decelerating, which has brought some easing of the pressure on household disposable incomes.

“Credit is tight, but is far more affordable than in the past two years,” she says.

Other factors to consider include the slow recovery of Russia’s reserve fund and sovereign wealth fund, and the fact industrial production is expanding, which is down to the monetary policy and fiscal discipline exercised by the authorities.

“Interestingly, while Russia pursues often populist and nationalist objectives on the international stage, the management of the recent recession suggests a strong and positive influence of economic liberals,” adds Gevorgyan.

“They rebuffed calls for halting the extremely unpopular but necessary floating of the rouble, continued with inflation targeting rather than depleting already declining hard currency reserves to defend the rouble, and introduced significant reduction in budget spending.”

Russia still faces significant risks – its heavy dependence on oil and political factors determining investment.

However, with its risk score improving, the country would appear to be over the worst.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.