Russia’s ‘BBB’/Stable sovereign rating is resilient to newly-imposed US sanctions, Fitch Ratings says. The sanctions are consistent with our view that sanctions risk would remain high under the Biden administration, which is captured in Russia’s sovereign rating via a one-notch deduction from our Sovereign Rating Model (SRM) output.
The measures announced on 15 April include a prohibition on US financial institutions from participating in the primary market for rouble and non-rouble-denominated sovereign bonds, effective from 14 June, as well as sanctions on individuals and companies.
Limits on the participation of US entities in the primary market for non-rouble denominated issuance have been in place since August 2019. The US Treasury said the executive order outlining the measures signals the ability ‘to deploy strategic and economically impactful sanctions’ in response to activities such as cyber-attacks (for which Russia denies responsibility).
When we affirmed Russia’s sovereign rating on 5 February, we maintained our one-notch deduction to reflect geopolitical risks and the impact of existing, and potentially new, sanctions on sovereign financing flexibility and Russia’s economy. We also identified the imposition of additional sanctions ‘that undermine macroeconomic and financial stability, or impede debt service payments, as a negative rating sensitivity.’
We do not believe the measures of 15 April will have this effect. The extension of sanctions from non-rouble-denominated Russian sovereign debt (a possibility we noted at our February review) applies only to primary market activity, and so will not cause forced selling by US institutions.
Total non-resident holdings of Russian sovereign debt are around 20%, but participation by US and other foreign investors in the primary market is not large (it has averaged around 10% over the past 12 months according to the Ministry of Finance) and has fallen as Russia has tapped its domestic, local currency investor base for financing.
Moreover, Russia’s sustained external surplus, low fiscal deficit, low government debt (19.3% of GDP at end-2020), substantial fiscal assets and large foreign exchange reserves (USD580.5 billion at 9 April) support its capacity to withstand sanctions. The National Wealth Fund was equivalent to 12% of forecast 2021 GDP at end-March, with liquid assets of USD114.8 billion or 7.5% of 2021 GDP.
Russia is well-positioned in the event of any near-term market disruption. Above budget non-oil revenues accumulated in 2020 enabled the government to cut its 2021 gross issuance needs target to RUB2.8 trillion, of which RUB1.2 trillion has already been raised this year. Continued strength in non-oil revenues and a weaker rouble could further reduce financing needs, although the government may spend additional revenues, with legislative elections due later this year.
The Russian Treasury’s cash buffer is currently RUB6 trillion, and the government could abstain from primary market issuance for some time. The domestic market absorbed the pandemic-related increase in 2020 financing and Fitch considers demand from banks, and the growing non-bank financial sector, to be robust.
Sanctions can negatively affect investor sentiment and as such remain a test of Russia’s strengthened policy framework, which underpinned our one-notch upgrade of the sovereign rating to ‘BBB’ in August 2019. While the rouble recovered from its initial fall on Thursday’s announcement, greater market volatility could adversely affect growth prospects, for example if it caused the Central Bank of Russia to accelerate its policy rate tightening.
The executive order provides the authority for the US government to expand sovereign debt sanctions on Russia as appropriate, and Fitch still considers sanctions a key risk to Russia’s rating.
