Russia’s contingent liabilities are a manageable burden, says Moody’s

The Russian government has set aside the resources to support its economy and manage the strains associated with contingent liabilities, Moody's Investors Service said in a pair of new reports.
"As the global crisis has unfolded, large-scale funding of the banking system and sizeable debts of quasi-state corporations have made this a concern," said Moody's Senior Vice President Jonathan Schiffer, author of both reports, including Moody's annual sovereign report on Russia and a separate issuer comment on the contingent liability question. "But even in a worst-case scenario, the Russian Federation appears capable of handling these liabilities."
He said even if the government was forced to take on its books the whole stock of quasi-sovereign external debt at mid-2009 levels, its general government debt/GDP and general government debt/general government revenues ratios would rise, based on 2008 data, from 6% and 15%, respectively, to 18% and 61%, respectively. This compares to end-2009 median forecasts for all Baa-rated countries of 34% and 155%, respectively, and these latter ratios do not even include other countries' contingent liabilities.
In its annual report on Russia, Moody's said the country's Baa1 rating and stable outlook reflect the government's financial strength, including a light public sector debt servicing burden and ample foreign currency reserves. This is balanced by what Moody's considers moderate economic and low institutional strength.
"We consider the government's financial strength to be 'high' but with a caveat," said Schiffer. "Should commodity prices not rise significantly in the near term, foreign-currency reserves will diminish and international borrowing by the government will resume on a substantial scale."
Overall, he said, the country's economic resiliency reflects a moderate level of per capita income coupled with a very large-scale economy but one that is in need of diversification.
"The potential for Russia's economy to diversify away from commodity exports and towards a greater amount of high value-added manufacturing and service activity — given the right set of policies — has been seriously impaired by the impact of the global crisis, at least during the medium term," said Schiffer.
The global crisis has also reinforced the rating agency's assessment of Russia's low institutional strength, which is reflected in inefficient governance and weak rule of law.
"At the outset of the global crisis, Russia's macroeconomic policies were inconsistent, while the ever-present possibility of a loss of faith in the currency and banking system among the populace has been a constraining factor in policy formulation," said Schiffer.
At the same time, he said, Russia's low debt and ample foreign reserves still provide enough of a cushion that it is relatively unlikely that heightened political, economic, or financial shocks would lead Moody's to initiate a multi-notch credit rating downgrade.
"However, it is now clear that there will be less of an official foreign currency reserve cushion going forward," said Schiffer. "Just how much and how quickly the reserves decline remains to be seen, but the Russian Federation now has less room for error in formulating its fiscal and monetary policies."