S&P: Russia ratings outlook revised to Positive due to continuous growth in external buffers

/Standard & Poor's, London, March 11, 08/ - Standard & Poor's Ratings Services today said it had revised its long-term ratings outlook on The Russian Federation to positive from stable. At the same time, Standard & Poor's affirmed its 'BBB+/A-' long-term and 'A-2' short-term sovereign credit ratings, and its 'A-' transfer and convertibility assessment. "The outlook revision reflects our expectation of further growth of the country's already substantial fiscal and external reserves," Standard & Poor's credit analyst Frank Gill said. Although fiscal policy during 2007 was, as we expected, highly pro-cyclical, the general government surplus at 5.1% of GDP was well above target, leading to further increases in Russia's fiscal reserves. While early 2008 nominal expenditure growth continued to be extremely high, our expectation is that it will moderate during the remainder of 2008. This will allow the general government to run a cash surplus of at least 4% of GDP, which will be accumulated in the newly created Reserve Fund and National Well-Being Fund. The direct and spillover affect of high oil prices on domestic demand and fiscal performance has defined the post-2000 Russian economy, often to the disadvantage of the non-energy sector. That said, productivity performance in the manufacturing and private services sectors remains notably superior to nil productivity gains in the oil and gas industries. Negative side effects relating to the oil windfall and heavy capital inflows include a return to high inflation, which, in the absence of improved monetary and fiscal coordination, could become an increasing political liability for the new government. In addition, public institutions remain weak and unproductive, with basic services among the lowest value-added in Europe. The key near-term risk for the stability of Russia's banking system and ultimately the real economy is Russian banks' significant dependency on external markets for refinancing. Due to the closure of global debt markets, the process of financial system leveraging, which was in full swing up until the summer of 2007, has come to a virtual halt. As a consequence, the government's role as a source of emergency funding for financial institutions is likely to rise considerably over the next three years. In the medium term, the government may tap the newly created National Well-Being Fund (which was originally intended to co-finance private pensions) to recapitalize some distressed financial institutions. The enormity of Russia's general government liquid foreign assets is evident in that even after docking reserves by all $147 billion in gross banking system external liabilities, reserve coverage of current account payments would still be equivalent to nine months, or 3.0x the 'A' median. "The positive outlook on Russia reflects the potential for an upgrade on signs of policy continuity under the new government and better coordination of fiscal and monetary policy as part of a long-term commitment to sterilizing and saving terms-of-trade gains," Mr. Gill said. "The positive outlook would revert to stable, however, if the authorities ended the policy of accumulating reserves in the special budgetary funds, or if proposed changes to political structures proved to be destabilizing. Any unexpected shift toward targeting high fiscal deficits would also lead to the removal of the positive outlook on the long-term ratings." Primary Credit Analyst: Franklin Gill, London, (44) 20-7176-7129; frank_gill@standardandpoors.com Secondary Credit Analyst: Moritz Kraemer, Frankfurt, (49) 69-33-99-9249; moritz_kraemer@standardandpoors.com Additional Contact: Sovereign Ratings; SovereignLondon@standardandpoors.com [2008-03-11]