Russia's Currency Ratings Rose

Fitch Ratings has today upgraded the Russian Federation's foreign currency and local currency Issuer Default ratings ("IDR") to 'BBB+' from 'BBB', CBonds.info reported.

The Outlooks on both ratings are Stable. At the same time, the agency upgraded the Short-term rating to 'F2' from 'F3' and the Country Ceiling to 'BBB+' from 'BBB'.

"Enduringly high commodity prices are strengthening Russia's macroeconomic and financial position at a remarkable pace, further reducing the likelihood of any future risk to sovereign debt service," says Edward Parker, Head of Emerging Europe sovereigns at Fitch. "Russia is projected to be a net public sector external creditor to the tune of over USD200 billion by the end of the year, providing a substantial buffer against potential negative shocks."

Fitch expects the general government to run a budget surplus of around 6.5% of GDP this year, allowing it to pre-pay USD22bn of debt to the Paris Club, reduce its debt-to-GDP ratio to just 11% of GDP by the end-2006 (compared with the 'BBB' median of 34%) and increase its stabilisation fund ("SF") to around USD89bn from USD43bn at end-2005. Although a significant loosening of fiscal policy is underway, the 2007 budget would still be forecast to balance at a Urals oil price of around USD39 per barrel, which does not look imprudent in the context of recent oil price trends and Russia's low debt ratio and SF.

Strong external finances also underpin Russia's ratings. Fitch expects the country to run another current account surplus of over 10% of GDP this year, boosting foreign exchange reserves to USD271bn (including the SF) by end-2006, from USD182bn at end-2005. Despite heavy private sector borrowing, Russia is expected to become a net external creditor this year, equivalent to 6% of current external receipts ("CXR"), compared with a debt-to-CXR ratio of 32% for the 'BBB' range median. The economy and living standards are booming. Fitch forecasts real GDP to grow by 6.7% in 2006 and Russia could become the 10th largest economy in the world, up from 22nd place in 1999.

However, Russia's ratings are constrained by a number of structural shortcomings and risks. Its dependence on natural resources exposes the economy to commodity price shocks and poses challenges to macroeconomic management, governance, competitiveness and diversification. The banking sector is growing rapidly on relatively weak foundations. Bureaucracy, corruption and uncertainty over the rule of law add up to a difficult business climate. The slow pace of structural reforms, increasing state control over the economy and relatively low investment-to-GDP ratio raise a question mark over long-term growth prospects.

The concentration of power and weakness of democratic institutions raise political uncertainty and event risk, in Fitch's view. President Putin's designated successor is highly likely to win the March 2008 presidential elections, but it cannot be assumed that the transition of power will go entirely smoothly. And although Fitch would expect broad political and economic policy continuity under the next president, that cannot be taken for granted.