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Moody's Downgrades Russia, Outlook Negative
October 20, 2014 13:57

Moody's Investors Service has downgraded the government of Russia's debt rating by one notch to Baa2 from Baa1 in a move that could speed up capital flight in a country already suffering from liquidity and investment crunch.
Here are the key drivers, according to the rating agency, behind the downgrade:
·          Russia's increasingly subdued medium-term growth prospects, exacerbated by the prolongation of the Ukraine crisis, including through the impact of expanded international sanctions.
·          The gradual, but ongoing erosion of the country's foreign-exchange buffers due to capital flight, Russian borrowers' restricted international market access and low oil prices.
“Even prior to the crisis in Ukraine, the potential growth rate of the Russian economy was falling, constrained, according to the IMF, by economic rigidities such as infrastructure bottlenecks and shortfalls in labor skills and education,” reads the press release.
Moody's also puts focus on the high degree of dependence on the hydrocarbon sector, which has not materially decreased despite the government's diversification strategies, and demographic shifts. According to the corporate website, “much needed domestic and external investment was already being undermined by the challenges posed by the Russian business climate and by Russia's weak institutions.”
Moody's expects this trend to continue the longer that the conflict in Ukraine and sanctions against Russia persist. While Moody's does not currently expect the Russian economy to contract this year, the rating agency expects real growth to start to decline by around the end of the year and continue to do so at least until mid-2015.
“The second factor behind the downgrade in Russia's rating to Baa2 is the negative impact on the government's balance sheet of the gradual erosion of the country's foreign-exchange (FX) buffers, resulting from capital flight, Russian borrowers' restricted international market access and low oil prices,” said the statement.
The rating, however, could be improved if the Ukraine crisis is successfully resolved, or if Moody's confirm there are institutional or structural changes in place that could spur Russia's medium-term growth.
There are more factors that could see a downgrade of the rating since the outlook is now negative:
·          escalation of the Ukraine crisis, including harsher sanctions, or accelerated capital flight,
·          deterioration of domestic growth outlook,
·          the institutional framework becoming less predictable, potentially damaging creditors' interests.

And, finally, according to Moody's, GDP per capita in Russia stands at $24,298 (2013 data) and economic growth was recorded at 1.3% last year. 

Author: Mikhail Vesely

Tags: Russian economy     

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