Fitch affirms Russia at `BBB-`, outlook negative

Fitch Ratings has affirmed Russia`s Long-term foreign and local currency Issuer Default Ratings (IDRs) at `BBB-` with a Negative Outlook, Fitch Ratings said in its press release.
The issue ratings on Russia`s senior unsecured foreign- and local-currency bonds are also affirmed at `BBB-`. The Country Ceiling is affirmed at `BBB-` and the Short-term foreign-currency IDR at `F3,` according to Fitch.
The `BBB-` ratings balance Russia`s strong external and sovereign balance sheets and low sovereign financing needs against structural weaknesses, such as commodity dependence and governance risks, low growth potential and geopolitical tensions.
External risks have abated over the last 12 months. Fears about a sharp draw down in reserves to cover capital outflows and sizeable debt maturities have eased. A sharp external rebalancing, (imports fell 35% in 2015), helped by a steep depreciation of the real exchange rate, saw the current account surplus (5% of GDP or $70 billion) cover a capital account deficit.
For 2016, Fitch forecasts that the current account surplus will remain sufficient to cover expected capital outflows of $40 billion, helping to preserve foreign exchange reserves above 12 months of current external payments, which is above the `BBB` median of 5.6 months. Lower oil prices or a pick-up in demand for foreign currency represent the main risks to the reserves outlook.
Risks to public finances have increased, reflecting a renewed decline in oil revenue, delays in announcing a revised 2016 budget, the lack of a medium-term fiscal framework, as well as likely challenges in executing fiscal reforms given the electoral calendar. Uncertainty about deficit financing, once the Reserve Fund has been depleted in 2017, also presents risks. Discussions on a new budget rule are only expected after the September parliamentary elections.
Fitch expects that the federal fiscal deficit will widen to 3.9% of GDP in 2016 (2.4% in 2015), above the government`s 3% target based on a lower oil price assumption ($35/barrel versus $40/barrel) as well as risk that the approaching elections may lead to higher-than-planned indexation of pensions or public sector wages. Without a medium-term fiscal framework and greater clarity on fiscal reforms, particularly revenue measures and social reforms, it is unclear how the authorities will meet their target of balancing the budget by 2020.
Fitch expects inflation to remain above the Central Bank of Russia`s (CBR) target of 4% by end-2017 and the `BBB` median of 3.3% over the medium term, as structural rigidities and likely above-target wage indexation contain downward pressure on prices. Moderating inflation, which eased to 7.3% in March, from 16.9% in April 2015, is unlikely to persuade the CBR to ease monetary policy in 2016. Rather, the CBR aims to ensure a stable interest rate path by seeking to moderate stubbornly high inflation expectations and ensuring increased liquidity from the drawdown of the Reserve Fund does not translate into inflation.

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