New York, December 03, 2015 -- Moody's Investors Service ("Moody's") has today changed the outlook on Russia's Ba1 government bond rating to stable from negative. At the same time, Moody's has affirmed Russia's government bond rating at Ba1/Not Prime (NP).

The key drivers for the decision to change the rating outlook to stable from negative are the following:

1. The stabilization of Russia's external finances, resulting from a macroeconomic adjustment that has helped to mitigate the effect of the fall in oil prices on official FX reserves.

2. The diminished likelihood of the Russian economy or finances facing a further intense shock in the next 12-18 months, such as from additional international sanctions given some easing of the conflict in eastern Ukraine.

Moody's says the decision to affirm Russia's current Ba1 rating acknowledges the government's very high fiscal strength tempered by the erosion of its savings buffers due to persistently low oil prices. Moreover, the country's structurally weak growth potential remains an important rating constraint. Overreliance on the oil and gas industry makes the economy vulnerable to shocks to that sector, and to its highly cyclical nature. While this dependence is not new, the likelihood that oil prices will stay low for several more years significantly constrains the government's room for budgetary maneuver.

Russia's country ceilings remain unchanged at Ba1/NP (foreign currency bonds), Ba2/NP (foreign currency bank deposits) and Baa3 (long-term local currency debt and deposits).

RATIONALE FOR THE STABLE OUTLOOK

First driver: continued stabilization in the country's external position

The first driver for changing the rating outlook to stable from negative is Moody's expectation that Russia's external financial position will remain relatively robust despite ongoing pressures on public and external finances exerted by weak oil and gas prices. The negative effect of low oil prices, in addition to the sanctions-related impact of the Ukraine conflict, on Russia's foreign exchange reserves this year has not been as severe as Moody's initially expected due to a combination of macro policy adjustments that helped mitigate the shocks.

The resilience of official foreign exchange reserves was partly due to the introduction of the floating exchange rate in November 2014, and the steep depreciation of the ruble exchange rate which that permitted. FX reserves have dropped by USD20 billion to about USD308 billion between the end of 2014 and October 31, 2015, a much smaller decline than the losses Moody's had anticipated and a significant contrast to the USD129 billion drop in reserves that occurred in 2014.

Although the government is drawing down its accumulated savings in its Reserve Fund in order to finance the budget deficit this year, in an amount expected to reach RUB 2.6 trillion (USD40 billion), the withdrawals from its deposits at the central bank have been made almost entirely in rubles. So, while the government's savings are being depleted, the official foreign exchange reserves have been left largely intact.

As regards Russia's external liabilities, Moody's notes that a steep fall in imports as a consequence of constrained household finances and a plunge in investment spending meant that the current account surplus largely covered external debt repayments made by the government, banks and corporate issuers in the first nine months of 2015. As a consequence, gross external debt declined by USD77 billion in the period (and more than USD200 billion since external debt peaked in June 2014), further reducing refinancing risks facing Russian corporates and banks.

Second driver: diminished likelihood of a further shock, e.g. from tighter international sanctions

The second driver for changing the rating outlook to stable is that the likelihood of a further economic or financial shock has diminished relative to earlier in the year. In particular, the relative stability in eastern Ukraine suggests a lower likelihood of sanctions being tightened as a consequence of that conflict in the near future. Tensions in the region have lessened significantly and, as per the Minsk II agreement, local elections are scheduled to take place in the contested regions early in 2016 after being held elsewhere in Ukraine in October (and in November in Mariupol, the port city close to the contested eastern regions). At the same time, we do not expect existing sanctions to be loosened or removed until such time that the parties involved in the conflict demonstrate their willingness to abide by the terms of Minsk II for a sustained period of time, especially with Crimea's status remaining a potentially insoluble impediment to any final resolution of the impasse between Ukraine and Russia.

RATIONALE FOR THE AFFIRMATION OF RUSSIA'S Ba1 GOVERNMENT BOND RATING

Moody's assessment of Russia's creditworthiness balances very strong although weakening government finances against low growth potential, weak institutional strength and still elevated geopolitical risks. Russia has a low level of general government gross debt, which Moody's estimates at 19% of GDP as of year end 2015, combined with the presence of substantial accumulated financial assets. However, the government balance sheet is weakening as the authorities are using significant amounts of fiscal reserves to finance wider government budget deficits and, to a lesser extent, to support local companies and banks. The government projects that the Reserve Fund and the eligible portion of the National Welfare Fund will be fully depleted by the end of 2017.

The uncertainty surrounding the economic situation, including the oil price, led the government to drop formal medium-term budget planning temporarily. The authorities intend to introduce a revised fiscal rule before formulating the next three-year budget framework, which if approved would base revenue forecasts on lower average oil prices and provide for rebuilding fiscal reserves should oil prices subsequently recover.

The affirmation of Russia's Ba1 government bond rating also reflects the country's increasingly limited growth potential, a key rating constraint. Overreliance on the oil and gas industry makes the economy vulnerable to shocks to that sector, and to its highly cyclical nature, which creates significant economic distortions regardless of whether prices are elevated or low. While this dependence is not new, the likelihood that oil prices will stay low for several more years during a period in which we expect to see the government's financial assets largely depleted, significantly constrains the room for budgetary maneuver.

Moreover, the dominant oil and gas sector has limited room to expand capacity due to the lack of sufficient investment over a number of years. The international sanctions make investment capital more scarce, so that companies must rely on their own funds or in some cases, assistance from the government. The sanctions also prevent Russian companies from obtaining advanced technology to explore for oil offshore and other areas that are more difficult to reach, which will be needed if the anticipated decline in oil output is to be reversed.

Against this backdrop, we expect Russia's growth will remain modest even when the economy starts to recover. The economy's potential growth rate is estimated at only 1%-1.5%, constrained by declining oil output capacity, underinvestment, fiscal consolidation and highly indebted households. The one-off boost from net exports in 2015 is not expected to recur, since it was driven by a sharp contraction in imports, so further support from this source is unlikely. Finally, the availability of investment capital and technology transfer will be limited as long as sanctions remain in place.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider a positive outlook on Russia's government bond rating should the government's fiscal consolidation and structural reform plans be advanced, enhancing growth and limiting the risk of further depletion of its financial assets. The rating agency said other positive rating developments would come from a further diminution of Russia's exposure to financial or economic shocks, such as might be expected were there to be further progress on resolving the Ukraine conflict such that international sanctions were loosened or removed.

Moody's says that Russia's government bond ratings would come under negative pressure should volatile macroeconomic and financial market conditions return or if progress on fiscal consolidation and structural reforms does not take place. In addition, the rating agency says it might downgrade the rating if the military conflict in Ukraine were to escalate and result in the introduction of additional sanctions, which would undermine Russia's economic strength. Finally, actions that create greater uncertainty around the government's capacity or willingness to continue to service its debt would most likely put negative pressure on the rating.

GDP per capita (PPP basis, US$): 24,449 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.6% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 11.4% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -1.2% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 3.1% (2014 Actual) (also known as External Balance)

External debt/GDP: 32.2% (2014 Actual)

Level of economic development: Moderate level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 30 November 2015, a rating committee was called to discuss the rating of the Russia, Government of. The main points raised during the discussion were: The issuer has become less susceptible to event risks and the country's external finances are expected to continue to stabilize. The likelihood of tougher international sanctions diminished.

Outlook Actions:

..Issuer: Russia, Government of

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Russia, Government of

.... Issuer Rating (Foreign Currency), Affirmed Ba1

.... Issuer Rating (Local Currency), Affirmed Ba1

....Short-Term Issuer Rating (Local Currency), Affirmed NP

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Ba1

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Ba1

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kristin Lindow

Senior Vice President

Sovereign Risk Group

Moody's Investors Service, Inc.

250 Greenwich Street

New York, NY 10007

U.S.A.

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653



Yves Lemay

MD-Banking & Sovereign

Sovereign Risk Group

JOURNALISTS: 44 20 7772 5456

SUBSCRIBERS: 44 20 7772 5454



Releasing Office:

Moody's Investors Service, Inc.

250 Greenwich Street

New York, NY 10007

U.S.A.

JOURNALISTS: 212-553-0376

SUBSCRIBERS: 212-553-1653



Moody's changes outlook on Russia's Ba1 government bond rating to stable from negative; affirms rating