S&P: Public Funding In Support Of Russian Financial Markets Would Harm Sovereign Credit Quality

/Standard & Poor's, London, 11.09.08/ - Comments attributed to the Finance Minister of The Russian Federation (foreign currency BBB+/Positive/A-2; local currency A-/Positive/A-2) earlier today contradict the sovereign's longstanding commitment to save and not spend its terms-of-trade gains. If, as Standard & Poor's Ratings Services suspects, these comments amount to verbal intervention in an attempt to stabilize market levels, then they have no implication for the 'BBB+' foreign currency sovereign rating on Russia. However, any use of public funds--including the National Wealth Fund, which was originally established to shore up Russia's inadequately capitalized pension system--to prop up asset values in financial markets would carry negative implications for Russia's sovereign rating. Russia's very substantial fiscal and monetary reserve buffers are a key ratings strength, and are more important then ever given the potential need to re- capitalize the weaker parts of the financial system. Recent moves by authorities to selectively launch investigations against private sector corporations, coupled with the conflict in the Caucasus, helped to trigger the loss of market confidence, leading to capital outflows of 1% of GDP in August 2008 (for further details see "Credit FAQ: Russia Sitting Comfortably On Its Liquidity Cushion, Despite Some Loose Threads," published Sept. 10, 2008, on RatingsDirect). Subsequent events highlight the possibility that Russian enforcement of shareholder and property rights is becoming increasingly unpredictable, lowering Russia's attractiveness as a destination for direct investment. Further evidence of a marked deterioration in the investment environment could destabilize financial inflows and fan capital outflows on a larger scale, a development which would lead Standard & Poor's to revise the outlook on the sovereign ratings to stable. For more information: Frank Gill, London, (44) 20-7176-7129; frank_gill@standardandpoors.com Moritz Kraemer, Frankfurt, (49) 69-33-99-9249; moritz_kraemer@standardandpoors.com SovereignLondon@standardandpoors.com [2008-09-12]