October 26, 2017 / 2:23 PM / 5 months ago

Russia's economic recovery not enough for higher rating: Moody's

MOSCOW (Reuters) - Economic recovery in Russia is not strong enough to convince Moody’s rating agency to upgrade its sovereign credit rating as the country still lacks sufficient structural reform, a senior vice president at Moody’s Investor Service said on Thursday.

A Russian national flag flies over the Central Bank headquarters in Moscow, Russia, May 17, 2016. REUTERS/Sergei Karpukhin/Files

Moody’s downgraded Russia’s rating to below investment grade in early 2015 as Russia’s economy slipped into recession amid a rapid drop in oil prices and Western sanctions imposed on Moscow over its role in the Ukrainian crisis.

Moody’s confirmed the Ba1 rating two years later, in February this year, when it also revised its rating outlook to stable from negative.

In an interview with Reuters, Kristin Lindow said Moody’s rating outlook has a time horizon of 12-18 months before the agency may consider the next rating action.

In Russia’s case it is likely to be closer to 18 months, said Lindow, who is in charge of the country’s sovereign ratings.

“We’re looking for those structural reforms that have been delayed by the political cycle over the last several years to begin to be implemented in order to move upward with the rating.”

Moody’s improved the outlook to stable as Russia was proceeding with structural reforms. The central bank convinced the market the rouble will remain a free-floating currency, while the finance ministry this year started buying dollars for its reserves when prices for oil, Russia’s key exports, stay above $40 per barrel.

Lindow said the latest economic crisis in Russia “was not wasted” in the sense that it helped Russia to undertake reforms that might not have taken in good times.

“The mix of policies, monetary, fiscal, the exchange rate policy, reduce the dependence on high oil prices, reduce the volatility of that income and therefore diminish the inherent volatility of the economy,” Lindow said.

But without further reforms, such as a reduction of state ownership in the economy and higher retirement age, the Russian economy is seen growing by only around 1.5 percent a year over the next several years, Lindow said.

Moody’s economic forecasts are worse than expectations voiced by the Russian authorities. The Russian central bank said last month it revised gross domestic product growth for 2017 to up to 2.2 percent, up from 1-1.5 percent expected in early 2017.

Lindow said a stronger GDP growth this year could be a one-off.

“Growth of 2 percent plus is not expected to be sustained. The economy may pay for higher growth this year with lower growth next year.”

Even if the Russian economy is getting more stable and grows further, it would not be enough to meaningfully reduce poverty and curtail income differentials among households, Lindow said.

Reporting by Andrey Ostroukh; editing by Richard Balmforth

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