Russia has limited room for tapping one of its sovereign wealth funds before jeopardizing its investment-grade debt rating that’s already squeezed by lower oil prices and sanctions, according to Standard & Poor’s.
“If money is spent to support the economy, to support specific companies -- that would lead to a decline of those fiscal buffers beyond what we currently expect,” S&P analyst Christian Esters said in an interview in Moscow yesterday. The rainy-day funds “are strong mitigating factors for the stresses Russia has been experiencing.’”
Russia is unsealing the $82 billion National Wellbeing Fund (RUWFUSD) as lower oil prices pinch budget revenue and the stranglehold of sanctions over the conflict in Ukraine limits access to credit. The stockpile, originally created to cover long-term outlays for social spending such as supporting the pension system, is down more than 13 percent from its peak three years ago.
While using about 20 percent of the fund, or $16 billion in
dollar terms, to help companies “alone would probably not breach a threshold for us,” a downgrade is possible if such a decrease is compounded by additional sanctions and a prolonged decline in oil prices, according to Esters. State-controlled companies from oil producer OAO Rosneft (ROSN) to OAO Russian Railways are asking for tens of billions of dollars in assistance from the fund.
Rating Affirmed
S&P last month kept Russia’s sovereign rating at BBB-, its lowest investment grade, and maintained its negative outlook on the debt. The rating company will next review Russia’s grade in April or earlier, Esters said.The country’s grade is supported by the government’s “modest net debtor position,” the credit evaluator said in its last review. Russia’s external debt was 35 percent of gross domestic product in June, according to the central bank.
The economy will grow 0.3 percent this year and 0.6 percent in 2015, with oil prices averaging $90 a barrel, according to S&P’s base case, Esters said. GDP grew 0.7 percent in the third quarter from a year earlier, the slowest pace since a 2009 recession.
Russia’s international reserves have been in the spotlight after the central bank used about $90 billion of its gold and foreign-currency holdings to defend the ruble this year before shifting to a free-floating exchange rate months ahead of schedule. Russia’s currency has depreciated 30 percent this year against the dollar, the worst performance after Ukraine’s hryvnia among more than 170 global currencies tracked by Bloomberg.
‘Off-Budget Support’
The government’s two sovereign wealth funds are counted as part of total reserves. S&P said last month that the government will “increasingly use these funds to increase its off-budget support to the economy.”Russia’s “usable” currency reserves will shrink to about four months of imports by 2017, down from eight months this year, as a result of “liquidity support” provided by the central bank to the economy, according to S&P. Usable reserves are defined as total holdings adjusted for investments made by the central bank on behalf of the government.
As Russian borrowers struggle to access foreign capital markets amid U.S. and European sanctions over Ukraine, the government approved channeling more than 400 billion rubles ($8.6 billion) from the Wellbeing Fund to companies including Russian Railways, fixed-line operator OAO Rostelecom and Avtodor, the state road-building agency.
The Economy Ministry has also given its preliminary approval for allocating another 300 billion rubles from the fund.
Rosneft, VTB
Other requests are pending. Rosneft has asked for money to finance its investment program after its bid for more than 2 trillion rubles was turned down. Companies ranging from gas producer OAO Novatek (NVTK) to VTB Group, Russia’s second-biggest bank, are also seeking hundreds of billions of rubles.S&P estimates Russia’s government net debt position, or the difference between gross debt and sovereign funds, at 4 percent of economic output this year, according to Esters. The measure is set to grow to 8 percent in 2016, a “very low” level by international standards, he said.
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