Fitch leaves Russia's sovereign ratings at BBB-, outlook Negative

Fitch Ratings on Friday affirmed Russia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with a Negative Outlook.

Fitch Ratings on Friday affirmed Russia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with a Negative Outlook.

Fitch also affirmed the senior foreign currency and local currency unsecured debt ratings at 'BBB-'. The Country Ceiling was affirmed at 'BBB-' and the Short-term rating at 'F3'.

"Russia's 'BBB-' ratings balance a strong sovereign balance sheet and low sovereign financing needs against structural weaknesses (commodity dependence and governance risks), high growth volatility and geopolitical tensions," Fitch said in a press release.

Fitch expects that, due to a fall in oil prices, depreciation of the ruble and the imposition of sanctions by the U.S. and EU, Russia's economy will contract by 3.5% in 2015 after growing by only 0.6% in 2014. At the start of 2015, Russia's economy was expected to go down by 4% by the end of the year. Fitch expects Russia's real GDP to grow by 1% in 2016.

"Russia has recovered some competitiveness, but the medium-term growth outlook is the weakest of major emerging markets, at 1%-2%," it said.

Fitch said it still expected Russia's international reserves to decline in the second half of 2015, although by less than in its previous forecast.

The rating agency also mentions Russia's weak structural factors relative to peers, high commodity dependence, and relative weakness of governance.

Among risk factors that could trigger a negative rating action, Fitch mentions a renewed bout of exchange rate volatility, leading to broader financial sector instability; a return to low oil prices and/or continued recession in 2016; faster than forecast depletion of international reserves, reflecting larger than expected capital flight and/or accelerated dollarization domestically; and an intensification of sanctions or a geopolitical risk event.

Considering the negative outlook, Fitch said it does not currently anticipate developments with a high likelihood of leading to a positive rating change. However, it said "a reduction in tensions with the international community, resulting in an unwinding of sanctions and renewed access for Russian entities to international capital markets" could prompt it to revise its outlook to Stable.

Fitch said also it could make the same decision in the event of "a sustained recovery in the oil price, coupled with an easing of macroeconomic and financial stress."

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