YEREVAN, August 17. /ARKA/. Fitch Ratings has affirmed Russia’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB’ with Stable Outlooks, Reuters reports.
The Short-term foreign currency rating and the Country Ceiling have also been affirmed, at ‘F3’ and ‘BBB+’, respectively. The affirmation balances Russia’s strong sovereign balance sheet, net external creditor position and increasing exchange rate flexibility against its hesitant steps towards greater fiscal consolidation and structural reforms in the face of volatile oil prices and an uncertain global economic backdrop Russia retains a strong sovereign balance sheet relative to the ‘BBB’ category.
General government debt is low – 11% of GDP in 2011 – while the government holds USD112bn (7% of GDP) in sovereign wealth funds, which provide fiscal financing flexibility and a buffer against a sharp drop in oil prices. Externally, sovereign net foreign assets totalled USD467bn at end-2011 (25% of GDP), the highest in absolute terms in the ‘BBB’ category, bolstered by the fifth largest international reserves in the world.
Banks, a significant source of external stress in 2008-09, have also become net external creditors. Real GDP growth projections of 3.8% in 2012 and 3.5% in 2013 encapsulate Fitch’s view that Russia is materially less exposed to external shocks than it was in 2008-09, helped by a more flexible exchange rate that has moderated the budgetary impact of volatile oil prices while reducing net capital outflows. Nonetheless, Russia has not been immune to the eurozone debt crisis, which is playing itself out through volatile oil prices, falling asset prices, a weaker exchange rate and deteriorating investment sentiment.
Commodity dependence and the attendant exposure to fluctuations in oil prices remain Russia’s key rating weakness and one that shows no sign of diminishing.
Headline budget and current account surpluses mask structural non-oil deficits of 10%-12% of GDP in 2011, highlighting Russia’s vulnerability to commodity price shocks best exemplified by a high fiscal break-even oil price of around USD118/bbl.
While acknowledging that recent steps to reinstate a ‘fiscal rule’ represent a first step towards loosening the link between oil prices and expenditure, Fitch argues that these imply only a gradual reduction in the non-oil deficit to 8.5% of GDP by 2015, compared to a pre-crisis medium-term target of 4.5% (which the IMF estimates to be in line with intergenerational equity).
The agency also notes that it remains unclear how President Putin’s election pledges, independently estimated at a cumulative 6% of GDP over six years, will be accommodated within overall budget targets.
Compared to its BRIC counterparts, Fitch believes that Russia has fared relatively well throughout the current eurozone-led crisis. However, the prospect of Russia revisiting pre-crisis growth rates of 7% appear remote in the absence of major structural reforms, notwithstanding the country’s imminent accession to the WTO.
Russia compares poorly with rating peers on the World Bank’s governance indicators including political stability, rule of law, control of corruption and government effectiveness. These factors manifest themselves in a poor business climate, heightened event risk and persistent net capital outflows. In the absence of greater fiscal consolidation, Fitch says that a severe and sustained drop in oil prices would weaken public finances and the economy and could lead to a downgrade.
Conversely, further steps toward entrenching a ‘fiscal rule’ that delivered a more ambitious reduction in the non-oil deficit, coupled with a sustained reduction in inflation, could lead to an upgrade. Major reforms that improved the business climate, further strengthened the financial sector and made convincing inroads to poor governance, would also be rating positive.—0–
