Given that Russian bonds have been strong performers since the start of 2015, Fitch looks to have made a savvy call by maintaining an investment grade rating, although lowered to BBB-, on the Russian sovereign when its peers cut their ratings to sub-investment grade in a wave of pessimism earlier in 2015. Both Standard and Poor’s and Moody’s slashed their ratings to ‘junk’ following the imposition of sanctions by Europe and the US on the back of the Crimean annexation and the Ukrainian impasse. Thus, it was interesting to see Standard and Poor’s finally upgrade the outlook on Russia to stable on 16 September, although retaining the BB+ long-term foreign currency rating.
Standard and Poor’s noted that external risks ‘have abated to a significant extent’ and the economy has adjusted to the lower oil price environment and sanctions. They forecast a ‘return to positive real GDP growth in 2017-2019 averaging 1.6%.’ A key factor behind the improved outlook is the improvement in private sector net capital outflows which ‘averaged US$57 billion annually over 2009-2013 and increased to US$152 billion in 2014. However, these outflows fell to US$58 billion in 2015, in line with the historical average and we expect capital outflows to fall further, averaging about US$40 billion in 2016. We also expect current account surpluses will average 3.8% of GDP in 2016-2019, covering the financial account deficit.’
Despite some remaining fiscal pressure Standard and Poor’s expect the government deficit will narrow over the 2016-1019 period (averaging 3.3% of GDP); the MOF is aiming to cut the budget deficit by 1% of GDP each year up to 2019. Moreover, the government should be able to maintain a comparatively low general government debt level (net of liquid assets) not in excess of 13% of GDP over 2016-2019.
Following this month’s Russian parliamentary election result (where the United Russia party increased its majority underlining strong support for President Vladimir Putin) Fitch noted that they will be closely monitoring the budget due to be released in October. For them the fiscal position is a key input given the lower oil price environment and the need for some further fiscal savings. They note ‘The risk to Russia's 'BBB-'/Negative sovereign rating has shifted from external finances towards public finances. Continued commitment to contain expenditure and implementation of a credible medium-term fiscal framework could result in positive rating action. Failure to recover from recession, coupled with significant deviation from stated macroeconomic and fiscal policy aims, would be negative.’
Interestingly, the Russian Federal Government is not directly named on the sanction list, rather selected state-owned companies are targeted instead. This has meant that the sovereign has still been able to access the market issuing USD1.75bn of Eurobonds in May 2016 which were deemed eligible for Euroclear in July. Moreover, this week Russia returned to the market with a further USD1.25bn offered to tap the May issue of 4.75% 2026 notes which was readily absorbed by the market in spite of the setback to the Syrian ceasefire: the book was six times covered and the issue was priced at a yield of 3.9%.
The implementation of the Minsk II agreement has been disappointingly slow but remains the key to resolving the Ukrainian debacle, and most likely the removal of sanctions on Russian entities. President Vladimir Putin recently noted ‘In my opinion, and here I agree fully with the Normandy Format participants, and also with the position of the United States, too, - there no alternative other than fulfilment of the Minsk agreements,’ and he goes on to state ‘We shall sincerely strive towards this, but we cannot do it on our own, this should be done together with us, the Normandy Format members, and the US, as only they have any realistic influence on the current authorities in Kiev." He concludes ‘without a political will of the Ukrainian leaders it would be impossible to achieve.’
Earlier in the month Francois Hollande commented while at the G20 summit: ‘In Ukraine, we must continue the Minsk process, address current bottlenecks, including the implementation of the special status, the security situation and the lack of trust between the parties. We agreed to organize in the coming weeks a summit between Germany, France, Russia and Ukraine.’