Moody’s warns of structural risks for oil exporters amid Russia ratings downgrade

Moody’s Investors Service has downgraded Russia’s long-term issuer (local- and foreign-currency) and senior unsecured (local- and foreign-currency) debt ratings to Ca from B3 with a negative outlook, the agency said in a statement.

The downgrade of Russia’s ratings comes amid a violent phase of its invasion of Ukraine, and was triggered by Moody’s expectation that capital controls by the Central Bank of Russia (CBR) will restrict cross border payments – including for debt service on government bonds.

Last week, Moody's downgraded Ukraine’s foreign and domestic currency long-term issuer ratings and foreign currency senior unsecured debt ratings to Caa2 from B3, with a provision for further downgrade.

The downgrades will weigh further on the respective economies despite higher oil prices, Moody's said, since the credit profiles are constrained by structural vulnerabilities and carbon transition risks.

“Higher oil prices will benefit hydrocarbon-exporting sovereigns, lifting government revenues and exports and, in turn, allowing the sovereigns to repair balance sheets and rebuild buffers eroded during 2020,” the agency said.

“However, for most of the oil and gas exporters, credit profiles will remain constrained by their very high vulnerability to future declines in oil demand and prices, including when current geopolitical risks recede, and by the longer-term economic and financial risks stemming from the strengthening global commitment to transition toward lower-carbon energy sources,” Moody’s said in a statement.

Global oil prices started rising as part of the post-pandemic recovery and supply constraints even before the Ukraine crisis.

On Monday, Brent crude soared above $139 a barrel, its highest level since 2008, hours after the US House began exploring a bill that would ban the import of Russian oil and energy products

But Moody’s said its medium-term oil price range, which is their estimate of the prices required to support reinvestment by the industry that needs to continuously replace extracted reserves to maintain a steady level of production, remains $50-$70/barrel.

“While we expect oil prices to remain volatile and to swing outside this medium-term range, barring persistence of the geopolitical risk premium, we assume oil prices will decline to an average of around $68/barrel in 2023 and then ease further to the middle of our range in subsequent years,” it said.