Russian Federation Long-Term FC Rating Raised To Investment Grade BBB-'; Outlook Stable

/Standard & Poor's, New York, January 31, 05 / - Standard & Poor's Ratings Services said today it raised its long-term foreign currency sovereign credit rating on The Russian Federation (Russia) to 'BBB-' from 'BB+'. Standard & Poor's also raised its short-term foreign currency sovereign credit rating on Russia to 'A-3' from 'B', its long-term local currency sovereign credit rating to 'BBB' from 'BBB-', and its Russia National Scale rating to 'ruAAA' from ruAA+'. At the same time, Standard & Poor's affirmed its 'A-3' short-term local currency sovereign credit rating. The outlook is stable. Russia is the eleventh sovereign currently rated by Standard & Poor's that has made the transition to investment grade from speculative grade. "The upgrade reflects recent, crucial improvements in the government's debt level and external liquidity," said Standard & Poor's credit analyst Helena Hessel. "These improvements are so significant that they now outweigh the serious and growing political risk that continues to be a key ratings constraint on Russia." The general government became a net creditor by the end of 2004, with a net external asset position of almost 11% of current account receipts (CARs), compared with a net debtor position of more than 17% at year-end 2003. "The fact that Russian government became a net external creditor by the end of 2004 is an important rating consideration in the context of the continued political, institutional, and structural weaknesses the country faces," stressed Ms. Hessel. "At this point, the financial flexibility afforded by the government more than offsets these other challenges." The government's recently reached net external creditor position is expected to become stronger in the next couple of years, with the general government's asset position rising to more than 22% of CARs by end-2005 and to 35% at end-2007. Total debt servicing of the general government external debt will amount to $13.6 billion in 2005 and less than $12 billion in 2006 and 2007. This compares well both with $18.8 billion assets accumulated in the Stabilization Fund at end-2004-which are likely to increase in the next three years-and the high level of international reserves ($118 billion at year-end 2004) held by the Central Bank of Russia. With continued high oil prices, Russia's fiscal position should remain strong, while external liquidity should strengthen further, balancing the private sector's fast-growing external debt burden. "Political uncertainty in Russia heightened last year while the reform process lowed, limiting political and policy predictability," said Ms. Hessel. Little effective reform was accomplished in 2004: attempts to reform the judiciary and public administration have been ineffective, the restructuring of the electricity sector has stalled, and the reform of OAO Gazprom (BB- /Watch Dev/-) has been delayed. "The stable outlook on Russia balances uncertain prospects for a medium- term reduction of political risk with the government's strong financial position and the economy's robust liquidity level and good growth prospects of 4%- 5% per year on average in the medium term," said Ms. Hessel. Russia's creditworthiness would benefit from improvements in the current political environment and renewed reform momentum. Conversely, a further significant worsening of the domestic political scene, together with unsustainable economic policy decisions, would dent investor confidence and lead to rising private sector capital flight. This would weaken Russia's potential economic growth and its strong liquidity position, which could negatively affect sovereign creditworthiness over time. "Nevertheless, the potential for deterioration in the government's capacity to service its debt is limited in the medium term by its reserves and accumulated funds, which will allow it to cope with even a sharp potential decline in oil prices as far as $20 per barrel, as well as with political and economic policy uncertainties in the near term," concluded Ms. Hessel. For detailed information apply: Helena Hessel, New York (1) 212-438-7349, helena_hessel@standardandpoors.com Konrad Reuss, London (44) 20-7176-7102, konrad_reuss@standardandpoors.com Ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. It can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Alternatively, call one of the following Standard & Poor's numbers: London Ratings Desk (44) 20- 7176-7400; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1- 4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5916; or Moscow (7) 095-783-4017. Members of the media may also contact the European Press Office via e-mail on: media_europe@standardandpoors.com. GROUP E-MAIL ADDRESS SovereignLondon@standardandpoors.com [2005-01-31]