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Russia’s Growth Potential Remains Low

Emerging Market Views
·2 min read

Moody’s Investors Service this month announced Russia’s (Baa3 stable) credit profile as being supported by its “robust government balance sheet, large and relatively wealthy economy, and strong external position.” In a published report the agency also noted the main weaknesses as being its low potential growth given institutional constraints weighing on the business environment in the country. Russia’s vulnerability to geopolitical events continues to present a risk.

The agency’s stable outlook for Russia reflects expectations that its enhanced policy toolkit, improved buffers, and strong liquidity will help the government to manage the economic and fiscal impact of the coronavirus outbreak and relatively low oil prices.

Russia’s enhanced shock absorbers such as a flexible exchange rate, credible monetary policy with reduced inflation, and a fiscal rule that limits government spending-induced economic volatility, have improved its ability to manage crises.

“Following the sharp 2020 contraction, we forecast Russia’s real GDP growth will recover modestly to 2.3 percent in 2021 as oil prices remain subdued. The economic impact of the pandemic, together with the fiscal response, will push the budget to a large deficit, with a gradual fiscal consolidation forecast in the coming years. As a result, government debt will rise to just above 20% of GDP by year-end 2021, compared to 13.9 percent in 2019, although it is still modest relative to rating peers,” Evan Wohlmann, a vice president and senior credit officer at Moody’s Investors Service said.

Russia’s main credit challenges include its low potential growth, given institutional constraints that weigh on the business environment, and adverse demographic trends.

Weaknesses in the rule of law, control of corruption, and state dominance are key deterrents to private investment and “hinder diversification efforts” with Russia’s exports and government revenues, despite some improvement in recent years, still remaining substantially reliant on the oil and gas sector, the agency said.

Moody’s added: “Russia is also susceptible to political event risks related to geopolitical tensions and associated sanctions. The persistent risk of new and codification of existing sanctions weighs on investment prospects.”

In addition, the government’s dominance in the banking-system sector, and demonstrated willingness to support it, exposes Russia’s balance sheet to systemic crises.

The post Russia’s Growth Potential Remains Low appeared first on Emerging Market Views.