S&P: Russia Outlook Revised to Negative from Stable as Bank Rescue Costs Rise

/Standard & Poor's, London, October 23, 08/ - Standard & Poor's Ratings Services today said it had revised its outlook on the long-term sovereign credit ratings on The Russian Federation to negative from stable. At the same time, the BBB+' long-term foreign currency and the 'A-' long-term local currency ratings were affirmed, as were the short-term ratings of 'A-2'. In addition, Russia's Transfer and Convertibility (T&C) assessment was lowered to 'BBB+' from 'A-'. "The outlook revision reflects the likelihood of a downgrade if costs to the Russian government of the bank rescue operations continue to increase, amid rising capital outflows as confidence in the financial system and the monetary regime declines," Standard & Poor's credit analyst Frank Gill said. "It is difficult at present to determine the ultimate impact on the public sector balance sheet of the banking system bail-out, not least due to the uncertain outlook on asset quality." In total, the Russian Federation has committed up to 15% of GDP in budgetary and reserve funds in order to maintain liquidity in the major state-owned retail banks, while partially guaranteeing interbank loans from these to smaller, less well-capitalized institutions. This figure includes subordinated lending, central bank repo injections, and a $50 billion central bank credit facility to Russia's national development bank, Vnesheconombank (VEB; foreign currency BBB+/Watch Neg/A-2), to provide an external refinancing source for Russian corporations and banks, and $5 billion of fresh capital for VEB to assist with the failures of several second and third tier banks. Further recapitalizations of stressed financial institutions are likely. In addition, the decision to adopt a higher- risk asset management strategy for the National Welfare Fund could potentially undermine the fund's original purpose, which was to recapitalize the pension system. We expect Russian corporate and financial sector default rates to increase as debtors' access to official funds will vary. Other uncertainties remain regarding what the economic policy response will be to weakening growth, and whether the ongoing concentration of the financial system in state hands is permanent or temporary. The government's fiscal and external assets remain comparatively high, projected at 4.6% and 15.6% of GDP respectively at year-end 2009. Political pressure to spend these buffers will intensify if, as we now expect, growth slows below 3% of GDP during 2009. "The negative outlook reflects the likelihood of a downgrade if financial system rescue operations and collateral damage to long-term growth prospects rise, driven in part by capital outflows and reduced confidence in the monetary regime," Mr. Gill said. "Russia's challenge could be greater depending on how quickly its terms of trade decline against a weakening external backdrop. The negative outlook also reflects the increasing possibility that the budget moves into deficit in 2009, which would reverse the previous steady decline in the government's debt burden." Primary Credit Analyst: Frank 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 [2008-10-24]