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 Moody's confirms Russia's Ba1 sovereign rating; outlook negative

On April 22, Moody's Investors Service confirmed Russia's Ba1 government bond and issuer ratings, concluding the review for downgrade that was initiated on 4 March 2016, and assigned a negative rating outlook.

Censor.NET reports citing the Moody's website.

The key drivers for the decision to confirm Russia's rating at Ba1 are the following:

1. The economy has exhibited resilience to the renewed drop in oil prices early this year thanks to an effective blend of macro policy responses.

2. The fiscal adjustment underway appears sufficient to reduce the 2016-18 deficits to a level that can be financed in the domestic capital markets and through fiscal reserve drawdowns.

The negative outlook reflects the likely further erosion of the government's fiscal savings in the context of Moody's medium-term projections for oil prices. Moreover, a set of policies that would address the economy's low growth potential has been slow to emerge, while the election calendar over the next two years will likely interfere with the implementation of politically unpopular reforms that could achieve a more fundamental budget consolidation.

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Moody's would downgrade Russia's Ba1 rating were Russia's credit metrics to deteriorate meaningfully, reducing its room to maneuver in the event of another oil price or other shock. Indicators that might lead Moody's to anticipate such a deterioration would include the exhaustion of fiscal reserves or a material reduction in foreign currency reserves, sharply rising yields on government debt or deficits large enough to require monetization by the central bank. Further stress in the banking system would also contribute to downward pressure on Russia's ratings because the government needs a stable source of domestic financing in order to fund its budget deficits, especially in the context of ongoing international sanctions. Finally, deterioration in the domestic or regional political environment that resulted in disruptions to oil production or spurred renewed capital flight or an expansion of existing sanctions would also be credit negative.

Upward pressure on the rating would derive from the enunciation of a clear and credible economic policy agenda for the medium term, such as the enactment of reforms to sustainably address the underlying sources of economic and fiscal vulnerability and thereby boost the country's growth potential. Such measures might include reducing the economy's heavy dependence on the hydrocarbon sector for growth and public finance revenue, lowering the structural deficit of the pension system and improving the weak investment climate.

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