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Fitch: Russia’s Rating Outlook Under President Medvedev

February 29, 2008 | Сbonds

Fitch Ratings-London-29 February 2008: Fitch Ratings has today said that Dmitry Medvedev, who will almost certainly become Russia’s next president following elections on 2 March, faces a number of challenges if he is to strengthen Russia’s economy and creditworthiness. Fitch’s Long-term foreign and local currency Issuer Default ratings (IDR) for the Russian Federation are ‘BBB+’ with Stable Outlooks.

Mr Medvedev faces a tough job to emulate the domestic popularity and economic record of President Vladimir Putin. His legal and technocratic background and recent speeches advocating greater political and economic liberalism: an independent judiciary, the rule of law, tackling corruption, cutting bureaucracy and improving governance of state-owned companies are encouraging signals.

Russia’s economic and financial situation has staged a remarkable turnaround since Mr Putin became acting President at the beginning of 2000, underpinning Fitch upgrades of Russia’s sovereign rating to ‘BBB+’ from ‘CCC’. Real GDP growth on a five-year average rose to 7.3% at end-2007 (end-1999: negative 1%), government debt was 8% of GDP (99%), the stabilisation fund totalled USD157bn (nil), foreign exchange reserves were USD474bn (USD12bn) and GDP per capita rose to USD8,660 in 2007 from USD1,320 in 1999.

“A renewal of structural reforms that improve the business climate, diversification and growth prospects of the economy, as well as an easing in political uncertainty after the elections, could exert upward pressure on Russia’s rating,” says Edward Parker, Head of Emerging Europe sovereigns at Fitch. However, it may be difficult for Mr Medvedev to exert his will over powerful vested interests; and it is uncertain how smoothly his cohabitation with Mr Putin, who is expected to become prime minister, will work.

A further strengthening in Russia’s financial position could also exert upward pressure on its ratings. The general government budget ran a surplus of 7.6% of GDP in 2007, but pressures to cut taxes and increase spending are intensifying and Fitch expects a loosening of fiscal policy to reduce the surplus to around 3.5% of GDP this year. Russia recorded a current account surplus of 6.2% of GDP in 2007, but this could move into deficit by 2009 as imports boom, capacity constraints limit exports and energy prices ease. Russia’s public finances and balance of payments remain sensitive to commodity price shocks.

The Russian economy grew an impressive 8.1% in 2007 with fixed investment up 20.8%, buoyed by rapid bank credit growth to the private sector of 51%, net private sector capital inflows of USD82bn and strong public expenditure growth. Nevertheless, macroeconomic uncertainty has mounted over the past six months as inflation surged to 12.6% in January, amid signs of capacity constraints and overheating, exacerbated by fiscal expansion. Monetary conditions are also loose as the authorities provide liquidity support to the banking sector – which Fitch regards as a rating weakness. Notwithstanding Russia’s substantial foreign exchange reserves, another uncertainty is the impact of the global credit shock on capital inflows, particularly with the Russian private sector facing external amortisation of around USD80bn in 2008, as well as short-term external debts of around USD100bn.

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