Election outcome signals continuity of Russia’s economic policy

Moody’s Investors Service said Russia‘s Baa2 ratings and stable outlook for the government’s local and foreign currency bonds are likely to be further validated by the victory of Vladimir Putin’s United Russia Party in Sunday’s parliamentary elections and by next spring’s presidential election.

In an annual report on Russia due for release early this week, Moody’s concluded that the economy is on a solid course, although it still faces longer-term challenges.

“In addition to the political stability established during the last eight years, the ratings reflect large external and budget surpluses, rapidly falling government debt, and massive strengthening of external liquidity for most of the same period,” said Moody’s Vice President Jonathan Schiffer, author of the forthcoming report. “This cushion should see the economy through any downturn in commodity prices.”

The government bond ratings and Moody’s assessment of a low risk of a general debt payment moratorium in the event of a government bond default serve as the basis for Russia‘s foreign currency country bond ceiling of A2.

“Since the early days of its independence from the former Soviet Union, political risk has weighed down Russia‘s credit rating,” said Schiffer.

“Although Mr. Putin is leaving office, his influence and approach, and a team of like-minded colleagues will continue to dominate Russia‘s political structures and manage its macroeconomy regardless of who is elected president next year.”

The incoming political leaders are likely to continue relatively prudent domestic priorities and policies in the medium term. In that case, the political situation will no longer detract from but will rather support the government ratings, although some tensions in foreign and domestic relations are likely to persist. Schiffer predicted that budget policies will hue to the current line and that expenditures from the Oil Stabilization Fund will continue to be limited and mainly focused towards debt reduction and pension payments.

“To date, the country has been affected only slightly by the current global liquidity crisis,” Schiffer said. “Moreover, the government has the means and the willingness to help the banking system if that was to become necessary.”

Schiffer also pointed out some medium- to longer-term economic challenges. He said that future macroeconomic performance “may not be quite so stellar as in recent years.”

With slowly growing export volumes plus rapidly rising imports and debt-service payments on private-sector external debt, Russia‘s current account surplus could shrink towards balance over the next two years.

Increased state expenditures — wages, pensions, and investments in large infrastructure projects — will also lower the large budget surpluses of recent years.

“The key factor for the Russian political economy over the medium term is whether state-led investment, either through the budget or via quasi-state corporations, can drive growth efficiently and provide the wherewithal, both directly and indirectly, to expand the nascent middle class,” said Schiffer.