Russia Could Weather Even Venezuela-Type Sanctions, Moody's Says

Updated on
  • Moody’s says Russia’s domestic market enough to cover deficit
  • Nation on course for upgrade out of junk in next 18 months

Moody’s Investors Service isn’t too concerned about a classified U.S. Treasury report about sanctions that’s been hanging over Russian bond markets.

The ratings agency said that it would consider raising Russia to investment grade even if the nation is burdened with the kind of penalties that have curbed Venezuela’s ability to finance its debts. Moody’s put Russia on positive outlook last week, setting it on course for a possible raise out of junk in the next 12-18 months.

“Government financing needs are so low now that it can essentially rely on the domestic market to finance the deficit,” Moody’s analyst Kristin Lindow said in a phone interview from London. “When it needs to refinance external foreign-currency borrowing we expect there will be sufficient demand from investors in countries other than the U.S.”

Investors are scrambling for information about potential U.S. plans to extend restrictions on Russia’s billionaires and sovereign debt after reports assessing the impact of the measure were classified earlier this week. Treasury Secretary Steven Mnuchin said the reports will be followed by fresh sanctions on Russia as punishment for its alleged meddling in the 2016 election.

Penalties imposed by the U.S. on Venezuela in August have made it difficult for the country to raise money from international investors, and effectively prohibit refinancing or restructuring existing debt, because they block U.S.-regulated institutions from buying new bonds. The U.S. has not said it is mulling similar restrictions on Russia.

Cut to Junk

Moody’s and S&P Global Ratings cut Russia’s credit rating to junk in 2015 after international sanctions over the country’s annexation of Crimea and a slump in oil prices sent the economy into a two-year recession. Three years on, growth is returning, inflation has been tamed and a recent jump in oil prices is boosting budget revenue.

“The government is in a good shape, the entire economy is in a good shape, the foreign-exchange reserves are large enough to cover maturing long-term debt in the coming several quarters,” Lindow said.

The Moody’s analyst said she was “surprised” that the U.S. Treasury didn’t give more details about possible sanctions when it published a list of Russian billionaires and top Russian officials late on Monday. I expected to see some “explanation of the meaning of being on the list,” she said.

Other Risks

A drop in Brent crude below $40 a barrel could pose a risk to Russia’s ratings trajectory because it would hurt the government’s ability to rebuild its fiscal reserves, Lindow said. Moody’s expects the commodity to trade between $40 a barrel and $60 a barrel in the next two years.

“There is always a possibility we could change the outlook back to stable if we felt the circumstances warranted that,” Lindow said. “That could come because some sanctions that we couldn’t imagine are imposed that cause a lot of market disruption. We don’t think that is very likely.”

— With assistance by Alexander Nicholson

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