US sanctions will weigh on Russia's economic growth but are unlikely to imminently deprive Moscow of its investment-grade rating, the head of Fitch Ratings Sovereigns group said on Tuesday. Concerns about more US sanctions against Russia have intensified in the past few months, even though risks of sanctions that could target new Russian government debt have been in place for around a year.
A year ago, Fitch said Russia's sovereign rating would be one notch higher than its current BBB- level were it not for the latest round of US sanctions. One year on, that is still the case. "We think that sanctions are going to remain a risk and are going to weigh on Russia' credit profile," Erich Arispe, sovereigns' and supranationals group director at Fitch, said in an interview in Moscow.
"Growth is likely to be the main victim of sanctions," Arispe said. "In spite of the improvements we've seen and efforts they (authorities) are making right now to improve the business operating climate, this sanctions uncertainty creates a challenge for people to come and say OK, let's invest in Russia."
After the recession of 2015-2016, Russia's economy remains in recovery mode. Economic growth is still sluggish, even though prices for oil, Russia's key export, have bounced back, while the central bank has cut rates to pre-crisis levels. Fitch expects Russia's economic growth to slow to 1.5 percent in 2019 from 2.0 percent this year, before picking up to 1.9 percent in 2020.
The rouble is likely to remain volatile and under pressure near current levels, finishing this year at 68 per dollar and averaging 67 in 2019 and 2020, Arispe said. Fitch has last affirmed Russia's sovereign credit rating at BBB- with a positive outlook in mid-August, at the time when the rouble was hitting more than two-year lows against the US dollar.
The next rating check-up is scheduled for February 2019 when Fitch, which has kept Russia's rating and the outlook unchanged since September 2017, will decide whether to proceed with a rating action or review the outlook. Currently, Russia has the same rating as Hungary, Romania, India and Oman. Ratings below BBB- considered to be off the investment grade.
"All options are always on the table, however, in Russia's case ... the sanctions impact could weigh on the economy and on Russia's outlook," Arispe said. When asked if Russia will still retain its investment grade even if new sanctions are applied, Arispe said that was Fitch's point of view at the moment.
"For now our baseline scenario is that we don't see an imposition of sanctions ... cutting the sovereign from making debt payments," Arispe said. "We also don't expect sanctions cutting the state-owned banks from the dollar markets." Justifying Russia's rating, Arispe pointed at structural reforms that the authorities have implemented since 2014 when the West applied first sanctions against Moscow to punish it for annexing Crimea and fuelling the Ukrainian crisis.
In the past few years, the central bank has managed to rein in inflation, while letting the rouble float freely. Meanwhile, the finance ministry has implemented a fiscal rule that insulates the economy from swings in oil prices and helps Russia to build up its reserves. "This policy framework put in place between 2014 and now is actually allowing Russia to manage crisis or external shocks better," Arispe said.
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