As sanctions and falling oil prices force the rouble’s slide, country risk experts are questioning the ability of privately owned and/or state-backed banks and corporates to obtain credit and repay their debts amid capital flight and an economy in decline.
Russia’s country risk score has fallen precipitously this year, in tandem with Ukraine.
An 8.3 point correction since 2013, to 46.2 points out of a maximum 100 available, has sent the sovereign careering 17 places down ECR’s global rankings to 71st out of 189 countries worldwide.
That marks a lower score compared with 2008, indeed the lowest since Russia defaulted in 1998, with the sovereign slipping into the fourth of ECR’s five tiered groups commensurate with a B- to BB+ credit rating, signalling its triple-B credit ratings are overdue a downgrade.
Russia’s plight is understandable. Oil prices have come off their peak since June, falling more than $30 per barrel to $81, as of Thursday.
With sanctions causing an estimated $130 billion of capital outflow this year, according to the central bank, the rouble has plunged to $46/$, depreciating by 42% since the end of 2013 and forcing an abandonment of its target corridor in favour of a (virtual) free-float absorbing the shock and preventing forex decline.
Amid the ensuing threat of stagflation – with an economy now on its knees and import prices pushing inflation higher to around double the official 4% target – Russian banks and corporations unable to raise finance on the international markets, but facing a dollar liquidity crunch and potential default, are scrambling to pay down their maturing foreign currency loans.
Russia’s FX reserves totalled $429 billion as of end-October, down from $524 billion the year before. The true total is a little lower due to adjustments for the reduced valuation of gold reserves and changes in official agency reserves.
Yet Danske Bank analysts contributing to Euromoney Country Risk’s survey believe the $50 billion FX repo facility is “reasonable enough to cover the most urgent needs of Russian corporations regarding their external debt repayments” through to 2016.
Some banks, after all, have surplus liquidity that can be redistributed to those in need, and the central bank’s forex stockpile is sufficient to imbue some confidence in averting a crisis.
Yet, in line with the views of other experts, Danske Bank is bearish on the rouble, noting the challenging geopolitical environment, and anticipating “no major improvements in Russian macro” with inflation accelerating and fixed investments shrinking.
Kaan Nazli, senior economist at Neuberger Berman, has lately adopted a more cautious assessment of GDP growth, inflation, fiscal policy, FX reserves and the banking sector.
He is not alone. All of Russia’s risk factors have been marked down this year – bar corruption, which already had a low score – and several are undergoing further downward score shifts during the fourth quarter.
Downgrades to bank stability, the economic outlook and currency stability have invariably fallen the most this year, but there are political dimensions to the crisis, too, with doubts over repatriation/repayment, the strengths of Russia’s institutions and its transparency all affecting the risk outlook.
The authorities might resort to more monetary and/or fiscal policy measures, including further rises in the policy interest rate – which jumped to 9.5% at the end of October – coinciding perhaps with public spending cuts to avoid a repeat of the default and subsequent economic collapse that occurred in 1998.
Yet it must also be noted that a decline in oil prices does not translate into a one-for-one decline in Russian external balances, and the Russian economy is capable of a quick and sharp correction in import demand, as previous experience indicates.
Neuberger Berman’s Nazli expects a turnaround next year “due to the currency devaluation effect, and as private-sector debts are paid down with refinancing options limited by the sanctions”.
Constantin Gurdgiev, adjunct professor at Trinity College Dublin, does not believe a sovereign or even selective (large-scale) private-sector defaults are likely in the short term in spite of some talk of difficulties.
“Such an event is not in the interest of the Russian authorities and can be prevented by using the existent foreign-exchange reserves cushion,” he says.
However, if oil prices remain low for a prolonged period and, simultaneously, Russian companies’ and banks’ access to foreign funding is severely curtailed, “we are likely to see a significant uplift in sovereign and banks’ credit risk”, he adds.
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