Fitch Affirms Russia at 'BBB+'; Outlook Stable

/Fitch Ratings, London, July 2, 08, translated by Fitch Ratings/ - Fitch Ratings has today affirmed the Russian Federation's Long-term foreign and local currency Issuer Default ratings (IDR) at 'BBB+', with Stable Outlooks. At the same time, the agency affirmed the Short-term foreign currency IDR at F2' and the Country Ceiling at 'A-' (A minus). "High commodity prices are continuing to strengthen Russia's current macroeconomic and financial position, exerting upward pressure on its BBB+' sovereign ratings," says Edward Parker, Head of Emerging Europe sovereigns at Fitch. "Nevertheless, Russia's ratings are currently constrained by Fitch's concern over economic overheating and inflation, in the context of a relatively weak banking system, which risks sowing the seeds of a painful macroeconomic and financial correction." Russia's ratings are underpinned by its sound public finances. General government debt was just 8.6% of GDP at end-2007, compared with the BBB' range median of 28%. Fitch expects the general government to run a budget surplus of around 6.3% of GDP this year, buoyed by oil prices, helping it to accumulate around USD275bn (16% of GDP) in its sovereign wealth funds by early 2009. However, government spending rose by over 2pp of GDP in 2007, adding to demand pressures. Russia's external finances are a rating strength. Fitch forecasts a current account surplus of over 6% of GDP in 2008, though it expects this to disappear by 2010 as oil prices decline and imports continue to boom. Fitch estimates Russia was a net public sector external creditor to the tune of 99% of current external receipts at end-2007, compared with the 'BBB' range median of 21%. However, private sector external debt soared to USD413bn (32% of GDP) at end-2007, creating a substantial external financing requirement. Private net capital inflows have slowed sharply since the onset of the global credit crunch, though Russia's stockpile of foreign exchange reserves provides a sizeable liquidity buffer. The economy's strong growth track record since the early 2000s also supports the ratings. Fitch expects GDP growth of 7.7% in 2008, after 8.1% in 2007. GDP per capita at market exchange rates more than doubled between 2004 and 2007 to USD9,075, but remains well below the 'A' range median of USD16,660. Acceleration in investment augurs well for diversification and growth prospects, though fixed investment was a moderate 21% of GDP in 2007. However, there are signs of the economy overheating: domestic demand is outstripping productive capacity, wages and credit are rising rapidly and inflation has spiked to over 15%. Yet macroeconomic policy settings appear inadequate to cool the economy and reduce inflation to single digits: fiscal policy has loosened, real interest rates are markedly negative and the monetary and exchange rate policy framework is opaque. Fitch's Macro-Prudential Indicator for Russia is '3', signaling a "high vulnerability" to systemic banking stress. Russia's ratings are weighed down by structural factors, which heighten the country's vulnerability to shocks. It scores unambiguously badly on the World Bank Governance Indicators and Doing Business Survey, highlighting the weakness of institutions and the challenging business climate. Although high commodity prices have been a boon to Russia, the lack of diversification of fiscal and export receipts is a risk factor. President Medvedev's focus on strengthening the rule of law and institutions could herald a new burst of structural reforms. But vested interests are strong, previous initiatives have made only limited headway and the palliative of high oil prices could serve to put off unpopular decisions. Overall, political risks have diminished over the past 12 months as Russia has come through a potentially uncertain electoral period. However, the cohabitation of power between President Medvedev and Prime Minister Putin has yet to bed down and could create some friction and uncertainty. Contact: Edward Parker, London Tel.: +44 20 7417 6340 Andrew Colquhoun, London Tel.: +44 20 7417 4316 Media contact: Alla Izmailova, Moscow Tel.: + 7 495 956 9901/9903 alla.izmailova@fitchratings.com [2008-07-03]