Moody's Puts Russia On Downgrade Review; Cites Event Risk, Investor Sentiment, And Weakening Economy

Tyler Durden's picture

Hot on the heels of what S&P said was not a "politically motivated" shift to rating watch, Moody's (who did not downgrade the USA and are not currently in a lawsuit over such terrible misrepresentations) has decided now is the time to put Russia on rating downgrade watch. The decision was triggered by 3 key factors: the weakening of Russia's economic strength, potential shifts in investor sentiment, and susceptibility to event risk. Full report below...

 

Moody's Investors Service has today placed Russia's Baa1 government bond rating on review for downgrade.

The decision was triggered by the following factors:

1.) The weakening of Russia's economic strength, as the conflict with the Ukraine and the related uncertainty over future policy actions further weigh on Russia's already impaired investment climate and medium-term economic outlook.

2.) The upward revision in Moody's assessment of Russia's susceptibility to event risk, owing to the heightened geo-political risk implied by the potential for the conflict in the Ukraine escalating further.

During its ratings review, Moody's will seek to obtain greater clarity on (1) the extent to which the current crisis will exacerbate the country's medium-term growth challenges; (2) the level of risk that the crisis escalates further; and (3) the consequent impact on Russia's economy, public finances and external position.

Should the review lead to a downgrade, the most likely outcome would be a one-notch adjustment. However, Moody's would consider a downgrade of more than one notch were the probability to rise of events occurring which could lead to more severe economic shocks. Moody's would consider confirming Russia's sovereign rating at its current Baa1 level if the current tensions were to dissipate and if a possible resolution of the crisis were to emerge with the potential to improve the country's growth outlook.

Russia's Prime-2 short-term debt rating is not affected by this review and remains unchanged.

RATINGS RATIONALE

RATIONALE BEHIND REVIEW FOR DOWNGRADE

-- FIRST DRIVER: WEAKENING OF RUSSIA'S ECONOMIC STRENGTH IN LIGHT OF AN IMPAIRED INVESTMENT CLIMATE

The first driver behind the decision to place Russia's sovereign rating on review for downgrade is the potential for the current crisis to further exacerbate the recent weakening of the country's economic strength and medium-term growth potential. Moody's already expects that the increased economic uncertainty triggered by the conflict with Ukraine will contribute to an economic GDP contraction of around -1.0% in 2014, against pre-crisis expectations of growth of around 2%.

Moody's expectation that Russia will slide into recession comes against the background of an ongoing deceleration in GDP growth since September 2011 that reached a low of 1.2% year-on-year in Q3 2013. Factors responsible for this deceleration -- namely, sluggish consumption growth, stagnating investment and a weak external environment -- will be further exacerbated by the elevated political and economic uncertainty.
 
The rating agency believes that the current crisis could significantly dampen investor sentiment for several years to come by adding to existing deterrents to investment posed by Russia's weak rule of law and high levels of corruption. This could further damage the country's economic outlook given its large investment needs. It could also further constrain its ability to diversify the economy away from overreliance on oil and gas. Overall, the crisis with Ukraine could therefore further weaken Russia's medium-term growth prospects, which had already been lowered by the Russian authorities in 2013.

-- SECOND DRIVER: RUSSIA'S INCREASED SUSCEPTIBILITY TO EVENT RISK AS A RESULT OF THE CONFLICT WITH UKRAINE

The second driver underlying the review for downgrade is Moody's concern regarding the country's rising susceptibility to political and financial event risk, primarily driven by the risk of further escalation of hostilities.

Moody's acknowledges Russia's large foreign-currency reserves and limited external debt repayments and the current strength of the government's balance sheet. However, wider economic sanctions and potential countermeasures by Russia could, were they to materialise, erode those financial buffers. That said, the agency notes that the exposure of the corporate and banking sectors to external refinancing risks this year appears to be manageable.

FOCUS OF THE REVIEW

During its ratings review, Moody's will seek to obtain greater clarity on (1) the extent to which the current crisis will exacerbate the country's medium-term growth challenges, (2) the level of risk that the crisis escalates still further; and (3) the resilience of Russia's economy, public finances and external position to such a scenario.

Related to the latter point, the rating agency notes that Russia's fiscal metrics compare favourably with countries in the same rating category. Russia's debt-to-GDP ratio remains very low (estimated at around 13% in 2013) and Moody's expects that its debt-servicing costs will remain lower than those of its peers in the same rating category.

In addition, Russia's oil funds (equivalent to around 9% of GDP) provide a cushion to a potential fall in oil prices and any associated shortfall of revenues or problems with market access. Russia also compares well to its rating peers in terms of external metrics. While the country's current account balance has declined, it remains in surplus. Russia's external vulnerability indicator, which measures a country's short-term and currently maturing long-term external obligations in relation to its foreign exchange reserves, compares favourably to rating peers.

WHAT COULD MOVE THE RATING DOWN/UP

Moody's would downgrade Russia's sovereign rating were it to conclude that the financial, diplomatic and political consequences of the crisis will materially undermine Russia's medium-term economic strength, whether by further discouraging foreign investor sentiment, undermining exports or weakening domestic consumption and investment still further. In that event, the most likely outcome would be a one-notch downgrade given the current state of the crisis. However, Moody's would consider a downgrade of more than one notch were the probability of more severe economic shocks to rise.

While an upgrade is unlikely over the medium term given the current review for downgrade, Moody's would confirm Russia's sovereign rating at its current Baa1 level were the crisis to stabilise, current tensions to dissipate and a possible resolution of the crisis with Ukraine to emerge, given that this could be conducive to improving the country's growth outlook and investor confidence.
 

  • GDP per capita (PPP basis, US$): 17,518 (2012 Actual) (also known as Per Capita Income)
  • Real GDP growth (% change): 1.3% (2013 Actual) (also known as GDP growth)
  • Inflation Rate (CPI, % change Dec/Dec): 6.5% (2013 Actual)
  • Gen. Gov. Financial Balance/ GDP: -1.3% (2013 Actual) (also known as Fiscal Balance)
  • Current Account Balance/GDP: 1.6%(2013 Actual) (also known as External Balance)
  • External debt/GDP: 35% (2013 Actual)
  • Level of economic development: Moderate level of economic resilience
  • Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

 
On 25 March 2014, a rating committee was called to discuss the rating of the Russia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have decreased. The issuer has become increasingly susceptible to event risks.

 

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Buckaroo Banzai's picture

<ring ring>

Hello, Moody's CEO speaking.

Hello, it's the Treasury Department. Downgrade the Russians!

Yes sir! How quickly?

Immediately!

For any particular reason?

You'll figure some out. Good bye.

knukles's picture

Was Valerie Jarrett's last official act (Telling Moody's to monkey-hammer Russia's ratings) before she went off to Hollywierd to enlist the Propaganda Matrix to include ObieDontCare in all their scripts, plot line...aka, sell the shit out of it.

And they think some folks can't connect dots, eh?

Freddie's picture

The US Military in Afghanistan is supplied through Russia and Pakistan.   The supply through Pakistan is very iffy but Russia is very reliable.  Russia should tell the USA to back off on this crap and on Syria or they can take their stuff through Pakistan.  Amerikan troops may have a Saigon helicopters on the roof evac once Russia closes the supply line.

Ifigenia's picture

no, from the sage of Omaha with his 10%

Soul Glow's picture

Update:  

Moody's Puts United States On Downgrade Review; Cites Event Risk, Investor Sentiment, And Weakening Economy
MontgomeryScott's picture

Moody's Corporation.

Yes, I suppose, it would take one to know one.

The guys over there are real whiz-bang leaders in business...

http://ir.moodys.com/documentdisplay.cfm?DocumentID=3500

I took the FIRST name listed, Basil L. Anderson, and looked at the three companies he's working with/for/around.

Becton Dickinson & Co.:

http://www.mideasttime.com/becton-dickinson-co-s-neutral-rating-reaffirm...

Hasbro:

http://www.marketwatch.com/story/fitch-affirms-hasbros-idr-at-bbb-outloo...

Staples:

http://www.foxbusiness.com/industries/2014/03/06/staples-to-shutter-225-...

These guys are rating whole nations...

SAY, how did they rate Bear Stearns all those years? was it a 'AAA'?

Yeah, I trust THEM! (sarc)

 

666's picture

How about downgrading the world's country with the highest debt and no way to pay it off: USSA.

Offthebeach's picture

The US gov might be/is junk but Exxon, not so much. Anyway, if US goes tapioca, moreso, the rest of the world's saints will more than make up for it with their paper. Put your trust in Yanan.....Rubles. ..the five Swiss Marks you can get a hold of...

Inside the US, the US fedgov is our problem. Outside the US, the dollar is their problem. For example, it must suck to be hated, fat, weak, diabetic Saudi Royal Crime, LLC, and a pile of Halliburton bills piling up and no of the 5 thousand Princes who knows how to turn a wrench.

the wet spot's picture

Serious question - after the 2007-2008 ratings bullshit, who gives a fuck what Moody rates anything?

disabledvet's picture

serious answer "this is why Japan attacked Pearl Harbor."

what wiggle room are we giving ourselves here? indeed...isn't the incentive for Putin to go "all in" because we have made this abou the Russian people?

I mean "targeted sanctions"? this is not Cuba..this is Russia.
"and there will be pain"?
why? Russians don't need a history lesson about "invading Crimea." Does the USA?

we seem to be using very blunt instruments for what is a very delicate AND EMOTIONAL issue.

that says to me "powderkeg."

Are we locked in to opposing sides already?
Sure feels like it here.
the "off ramp" talk sure has faded fast.

where is Reagan when you need him.

sudzee's picture

It could get pretty could in europe soon. Germany workers, already on strike for higher wages, may not have a job period.

NOZZLE's picture

Dear Mr. Moody,

Been anywhere on the planet besides Tokyo, the Hague, Londonistan, Paristan or DC?  You might be surprised to find a very vibrant economy in Russia.  People seem genrally happy, content, properly fed but not overstuffed with American fast food garbage. Their roads are not falling apart like anywhere in downtown Chitcago with exploding property taxes and pension liabilities and 57% of the population sucknig off the government tit.  

I'm not worried about Russians, if they had food shortgages they would eat less, if they had less rubles they would put off buying the next pair of air jordans, they are tough resourceful people who do not steal from their neighbors or allow their parents to starve in a nursing home.  America might have preppers but they are far outnumbered by lazy loooosers who riot at even the idea that their EBT card was not topped off.

So good luck with your rating downgrade, but just where were you in 2007?

Putin would rather saw his arm off than show a sign of weakness or conciliation.

Offthebeach's picture

Russians don't steal? Tell that to the Baltics, Poles...BP, Shell. .Brighton Beach.
Yeah, Rus are different. Shit nice pearlry white crap logs.

surf0766's picture

UNcle Warren taking care of hi little bubbles...

Ifigenia's picture

feel so good to have those scums in spotlight. Spitzer must be revenge.

NYPoke's picture

Of course, they would get arrested, if they put the U.S. on risk if downgrade...due to the risk of a credit event.

 

Russia should be getting upgraded.  They brought their cash home from overseas.  The signed deals with China & India.  They are money right now.

 

Moody's must have got a call on that new red phone, which was installed just last week.

TaperProof's picture

Economic warfare, Russia has cards to play too, this could get interesting.

disabledvet's picture

not really.

more like "predictable."

TaperProof's picture

Oh really, whats your prediction?  

MontgomeryScott's picture

Here's one for ya.

Both sides are whipped in to a propagandic frenzy by their information bureaus, which are controlled by the banks.

Both sides see the need to re-invest in military buildups, and the banks are there to 'help'.

Once again, the banks profit from unrest, and if it goes to the final stage, the banks will profit from war reparations (from the loser), and also from loaning 'money' to the winner (as both sides will once again be 'financially exhausted')

All wars are Banker's wars.

YES, it IS predictable, and an old and proven method, and quite well-proven. A solid track record...

css1971's picture

This is literally putting the worlds biggest oil and gas supplier on sale. Not only are they causing the stock market to dump but also the currency, making it even cheaper, and it was a very cheap market relative to the rest of the world to begin with.

Bearing in mind the risk of sanctions, corruption, outright confiscation and the general insanity shown on dashcams etc I'm BTFD.

nevket240's picture

The DogFuckers on Wall street can't even spell correctly. They were supposed to downgrade the USSA not the USSR. Slimey, Government controlled fuckwits.

regards

put_peter's picture

I want those Moody puts!

syntaxterror's picture

Downgrade? They just got a new sea port.

Byte Me's picture

In the Gaming industry - that is known as a Moodie.

Rodders75's picture

Ratings agency downgrades country. Buy country. Works like a dream.