Standard & Poor’s Ratings Services said today it affirmed its ‘BB+’ long-term foreign and ‘BBB-‘ long-term local currency sovereign credit ratings on The Russian Federation (Russia). At the same time, Standard & Poor’s affirmed its ‘B’ short-term foreign and ‘A-3’ short-term local currency sovereign credit ratings and ‘ruAA+’ Russia National Scale rating on Russia. The outlook is stable.
“The ratings are supported by continued improvement in external liquidity and government debt levels,” says Standard & Poor’s credit analyst Helena Hessel. “With high oil prices, Russia’s fiscal and external balance sheets are likely to strengthen further.”
Although stronger public sector fiscal and external positions are not a substitute for badly needed economic, legal, and administrative reforms, they leave the government better positioned to address significant challenges and vulnerabilities, including those recently emanating from the private banking sector and from the investigation into oil company Yukos (CC/Watch Neg/–).
Standard & Poor’s says that deposit runs at some private sector banks should not trigger a broader banking crisis. Hessel explains that the central bank of Russia acted promptly to inject liquidity into the system by cutting reserve requirements to 3.5% from 7.0%. Most of the deposits are expected to remain in the system, with the public sector banks gaining market share from the private sector banks.
“From a sovereign credit standing perspective, the Russian banking sector is small and does not represent a significant contingent fiscal liability to the government, although these problems do illustrate the difficulty in having the system undergo a needed consolidation when deposit guarantee rules are not in place,” says Hessel.
According to Standard & Poor’s, the Russian economy is expected to grow at almost 7% in 2004, reflecting robust energy and metal exports that have triggered increased production in other industries and in construction. At the same time, the government’s prudent fiscal policy has engendered investor confidence, which, in turn, has helped growth. Nevertheless, the ratings on Russia continue to be constrained by the economy’s dependence on the natural resource sector.
Hessel adds that Russia’s many structural and political weaknesses might be mitigated over time by the adoption of the government’s reform agenda, but only if reform is efficiently implemented.
“There is a rising risk that this reform will slow despite public proclamations, as it meets resistance from entrenched political and industrial interests and from the general public, as the social costs of the reform become felt,” notes Hessel. “The stable outlook reflects our expectation that the reform process will not be derailed. Downward pressure from the banking system turmoil or from the Yukos investigation is balanced by country’s strong external liquidity position and the government’s fiscal flexibility, while upward pressure would arise if our concerns about the pace of reform prove too cautious.”