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Credit watch – Moody's downgrades Russia to 'Baa3'


Moody's announced on Friday evening that it was downgrading Russia’s government bond rating to Baa3 from Baa2 and placing the rating on review for further downgrade.

The agency pointed to the sharp declines in the oil price and the rouble and the consequent deterioration in the country's already subdued growth prospects, along with erosion in official foreign exchange buffers and fiscal revenues, as the main factors behind the downgrade.

Following the rating action, Moody's has Russia's sovereign rating at the lowest investment grade (Baa3) and the new rating is now on review for further downgrade (On Watch - Possible Downgrade). To remind there is a difference between a negative rating outlook and 'On Watch - Possible Downgrade'. The latter is used to reflect developments which are relatively unexpected and which are supposed to be resolved more rapidly in terms of the forthcoming rating action. This means there is >50% chance of a downgrade. In practice it usually takes about 2-3 months before the rating agency completes the review and follows through with the rating action.

Moody's specified that Russia's ratings would be downgraded should the review conclude that lower oil prices and sanctions would likely lead to: i) a more pronounced erosion of the government's external buffer and/or ii) fiscal balance. In that event, the most likely outcome would be a one-notch downgrade, although more severe outcomes cannot be ruled out.

To remind, S&P also placed Russia's sovereign ratings (also currently at the lowest investment grade 'BBB-') on CreditWatch Negative in late December and indicated mid-January as the likely timeline for the conclusion of its reassessment and consequent rating action. Recent media reports suggested S&P might conclude their review by the end of January.

Vladimir Kolychev
VTB Capital analyst

ratings, Russia

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