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Moody’s Confirms Russia’s Rating and Notes Economic and Institutional Constraints

March 16, 2012

By Dr. Constantin Gurdgiev.

In its annual credit report on Russia, issued on February 29, Moody’s Investors Service confirmed Baa1 rating and stable outlook for Russian Government bonds, pointing that investment grade ratings for the country are supported by “high financial strength, but constrained …by the country’s moderate economic strength, its low institutional strength and its rising, albeit still low, susceptibility to event risk”.

Russia’s high score for financial strength is based on the large size of government assets “which could act as a buffer in the event of a fall in oil prices, exchange-rate depreciation and capital flight. Russia’s government also has solid fiscal reserves of USD61 billion, enabling it to potentially bridge unfavourable market conditions. Moreover, Russia’s general government debt remains very low, having recorded the lowest debt-to-GDP ratio in 2011 (around 10%) among all investment-grade sovereigns.”

Russia’s moderate economic strength performance is based on its GDP per capita in purchasing power parity terms (US$12,700) being “close to the median for A3-Baa2 rated countries in 2010”, and “the difficulties of diversifying the economy away from commodity exports, which represent over 80% of Russian exports”. “Looking ahead, the country’s dependence on oil and gas means that its economic growth is set to remain rather volatile… Russia also faces economic issues that are related to …an ageing and declining population.”

Per Moody’s, Russia faces increased political [elections], economic [vulnerability to oil prices fluctuations] and financial event risk [continued global financial crisis]. That said, per Moody’s “whereas the downside risks have increased, Russia’s exceptional fiscal shock absorption capacity mitigates the country’s susceptibility to risks that may come from political, economic or financial events.”

The main factor that constrains Russia’s rating is institutional strength, which Moody’s assesses to be relatively low, “reflecting the country’s weak governance, rule of law and transparency. The business uncertainties that relate to the impaired rule of law and the high level of corruption deter foreign investment into Russia, particularly from small- and medium-sized enterprises (SMEs).”

Looking ahead, Moody’s believes that “Russia’s medium- to long-term challenges will be (i) to develop economic bases with greater intrinsic stability, such as the manufacturing and services sectors; (ii) to attract enough investment capital to replace its aging infrastructure; and (iii) to provide incentives and carry out important structural reforms so as to address issues such as demographic developments or the efficiency in quasi-state corporations.”

Full Moody’s report can be found here.

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