Moody's upgrades Russia's government ratings to Baa1 with a positive outlook

/IRBIS, July 17, 2008/ - Moody's Investors Service has upgraded Russia's government bond ratings and country ceiling for foreign currency deposits to Baa1 from Baa2, reflecting the ever-stronger government balance sheet and favorable debt metrics as well as the likelihood of policy continuity under the new President, Dmitry Medvedev. A positive outlook was assigned to all of these ratings, as well as the A2 country ceiling for foreign currency bonds. The A1 country ceilings for local- currency bonds and deposits were affirmed with a stable outlook. "During the past nine years, the Russian government and the central bank have accumulated a very large cushion of foreign currency assets at the same time as they have paid down the government's direct debt to relatively negligible levels," said Vice President Jonathan Schiffer, Moody's lead sovereign analyst for Russia. "Even if one includes the debt of quasi- sovereign corporations, the public debt is highly affordable." Furthermore, Schiffer predicts that President Medvedev will continue - if not improve upon - the macroeconomic policy framework of former President Putin, who now serves as prime minister. He expects that the two leaders will closely coordinate policy initiatives over the medium-term rating horizon. Accordingly, said Schiffer, Russian political risk has diminished with this smooth transition. Another factor in Moody's upgrade was the shift towards greater economic diversification, driven by surging domestic demand and investment outside of the hydrocarbons sector. This is particularly important for such a capital- intensive economy, which is likely to undergo substantial industrial restructuring in the coming years. In addition, Schiffer noted that the political momentum coming out of the March 2008 presidential election may bring an increased focus on needed structural reforms to stimulate the non-energy sectors of the economy. This has already been evidenced by the decision to increase fuel and power tariffs paid by large, energy-intensive industries. "Russia is likely to be able to sustain a strong economic performance over the medium term in spite of anticipated substantial reductions in both the current account and government budget surpluses due to output constraints," said Schiffer. "However, the expected narrowing of these surpluses will increasingly focus attention on policymakers' ability to implement a strategy that would improve the general business climate, lower inflation, and improve economic efficiency in both the public sector and, importantly, in the quasi- sovereign corporations." "With several key ratings placed on positive outlook," said Schiffer, "Moody's will continue to monitor closely the growth of private sector and enlarged public sector external debt, the incipient diversification of the economy, the stubbornly high rate of inflation, and the any further progress made in raising the investment ratio." In this vein, today Moody's Sovereign Risk Group will also be releasing a Special Comment concerning a refinement in its views on rating Russian government-related corporate borrowers. Moody's is modifying the agency's assumptions from 'near certainty' towards a view of 'strong confidence' - reflected in a range of slightly lower probabilities - in likely government support. Press releases regarding other affected issuers will follow separately. London Pierre Cailleteau Managing Director Sovereign Risk Group Moody's Investors Service JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 New York Kristin Lindow Senior Vice President Sovereign Risk Group Moody's Investors Service JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 New York Jonathan R. Schiffer VP - Senior Credit Officer Sovereign Risk Group Moody's Investors Service JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 [2008-07-17]