Russia ratings remain positive as fiscal and external reserves grow

Standard & Poor's Ratings Services said it had affirmed its 'BBB+/A-' long-term and 'A-2' short-term sovereign credit ratings on The Russian Federation. The outlook on the ratings is positive. "The Federation is a net creditor in excess of 13% of GDP, up from 6% of GDP in 2006, compared with a median net debtor position of 26% of GDP for single 'A' credits," Standard & Poor's credit analyst Frank Gill said. "Authorities continue to save a large portion of the energy windfall, with the two fiscal reserve funds currently worth $175 billion or just over 10% of GDP, and steadily increasing. Hence government savings cover nearly twice the stock of government debt, both local and foreign."
External assets of the Federation are also both large and increasing. At $582 billion, reserve levels are the third highest in the world and are set to finish 2008 at just under $630 billion or 1.2x total gross external debt.
While high commodity prices are an all-important driver of Russian growth, there is ample evidence of strong performance and competitiveness of the non-commodity economy.
"The positive outlook on Russia's sovereign rating reflects our expectation of further improvements in the Federation's net creditor position thanks to high fiscal and current account surpluses," Mr. Gill said. "Should the government pursue prudent fiscal and monetary policies, the potential for an upgrade will increase."
For 2008 the fiscal and current account surpluses are likely to top 4% and 7% of GDP, exceeding our earlier expectations by 0.6% and 4.2% of GDP, respectively. Over the longer term, however, the current account surpluses will decline, increasing the importance of financial account inflows as a source of funding for investment activity. Recent moves by authorities to selectively launch investigations against private sector corporations, coupled with the conflict in the Caucasus, helped to trigger the loss of market confidence, leading to capital outflows of 1% of GDP in August 2008 (for further details see "Credit FAQ: Russia Sitting Comfortably On Its Liquidity Cushion, Despite Some Loose Threads," published today on RatingsDirect).
Subsequent events highlight the possibility that Russian enforcement of shareholder and property rights is becoming increasingly unpredictable, lowering Russia's attractiveness as a destination for direct investment. Further evidence of a marked deterioration in the investment environment could destabilize financial inflows and fan capital outflows on a larger scale, a development which would lead Standard & Poor's to revise the outlook on the sovereign ratings to stable.
"The positive outlook would also revert to stable if the authorities ended the policy of accumulating reserves in the special budgetary funds, or if proposed changes to political structures proved to be destabilizing," Mr. Gill said. "Our positive outlook on the sovereign rating incorporates our assumption that Russia's increasingly assertive foreign policy will not end with serious damage of its economic relations with the European Union."