S&P: Russia ratings outlook revised to stable from positive on response to liquidity crisis

/Standard & Poor's, London, 19.09.08/ - Standard & Poor's Ratings Services today said it had revised the outlook on its long-term sovereign credit ratings on The Russian Federation to stable from positive. At the same time, the 'BBB+' long-term foreign currency rating and the 'A-' long-term local currency rating were affirmed. The 'A-2' short-term ratings and the national scale rating of ruAAA' were also affirmed. "The outlook revision is based on growing uncertainty regarding Russia's economic policy response as the liquidity crisis in its financial markets has deepened," Standard & Poor's credit analyst Frank Gill said. "The situation is exacerbated by rising downside risk to Russia's terms of trade as the world economy flirts with recession." Partly due to ambivalent official policy towards shareholders' property rights, capital outflows have accelerated markedly during the month of September. Declining investor confidence has also motivated global banks to reduce lending lines to Russian entities. The virtual closure of the foreign-funded credit channel could eventually affect Russia's real economy, although much will depend on how long the credit drought continues. Russia's fiscal and external buffers remain formidable, but are likely to suffer over the next twelve months as banks are re-capitalized, and financial account net inflows decline or even reverse. Pressures on authorities to spend the energy windfalls accumulated in both reserve funds are also most probably going to intensify--increasing the risk that Russia's key credit strength, its external and fiscal buffers, will partially weaken. The Federation's timely decision to put direct budgetary funds into the banking system to ease reserve requirements and lower the refinancing rate should help to shore up confidence in the banking system. Nevertheless, the situation may require extensive follow-up capital injections to stabilize financial conditions depending on a host of factors, including the success of mechanisms to provide liquidity for Tier 2 and Tier 3 financial institutions. We estimate that the contingent fiscal liability of a reasonable worst case financial sector stress scenario could reach up to 20% of GDP. As credit growth falls away, so too could earnings performance in the private sector, introducing new uncertainties for corporate and financial sector debt servicing capacity. A deceleration in growth, if it were to materialize, could also drag on fiscal performance, with the budget now at risk of shifting into deficit in 2009 and 2010. More positively, were domestic demand growth to decline, so too would import absorption, most probably leading to an even higher-than-previously anticipated current account surplus result for 2009 and 2010. "We expect that authorities will take adequate measures to stabilize the financial system, and that external buffers will once again re-build commencing in 2009 and 2010, particularly on the back of high current account surpluses," Mr. Gill said. "The stable outlook also embeds our expectation that fiscal policies remain responsible and capital inflows will normalize next year, partly via an improvement in foreign investor confidence." Were external buffers to be built up again, and strong growth in the non- commodity sector to endure the current monetary shock, the likelihood of an upgrade would increase, as would material signs of a stronger commitment to foreign and domestic shareholders' property rights. On the other hand, if policy responses to a slowdown in the economy were to become more antagonistic towards foreign creditors, capital outflows would likely accelerate, undermining external liquidity and growth prospects. In such a scenario, banking system difficulties would worsen, significantly forcing up general government debt levels or an unanticipated run-down of financial assets, leading to downward pressure on the ratings. 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 [2008-09-19]