Fitch Ratings–London–18 November 2004: Fitch Ratings, the international
rating agency, has today upgraded the Russian Federation’s Long-term
foreign and local currency ratings to ‘BBB-’ (BBB minus) from ‘BB+’. The
Short-term rating is also upgraded to ‘F3’ from ‘B’, the Country Ceiling
to ‘BBB-’ (BBB minus) from ‘BB+’ and ratings for the MinFin 5 and 8
bonds to ‘BB+’ from ‘BB’. Following the rating action the Outlook is
Stable.
“Fitch’s upgrade of Russia’s sovereign rating to investment grade is
testimony to its remarkable improvement in creditworthiness over recent
years. An exceptional macroeconomic performance, helped by high oil
prices and broadly prudent fiscal policy, is continuing to lead to
marked declines in its public and external debt ratios, a massive
accumulation of foreign exchange reserves and a build-up in its oil
stabilisation fund. This has greatly increased the Russian government’s
capacity to service its debts, even in the event of a significant
downside shock,” says Edward Parker, Director in the Fitch Sovereigns
Group.
The agency said the rating continues to reflect the balance between
Russia’s improving macroeconomic position and its structural weaknesses.
Fitch said macroeconomic and financial indicators of Russia’s
creditworthiness are comparable with a low investment grade rating.
Higher oil prices have further enhanced Russia’s financial position,
with official foreign exchange reserves jumping by USD24 billion since
the beginning of September to USD113bn, making Russia a net public
external creditor. The agency expects that a budget surplus of 3.5% of
GDP, real rouble appreciation and GDP growth of 7% this year will lead
to a decline in general government debt to just 25% of GDP at end-2004,
below the ‘BBB’ range median of 40%. Despite some loosening of fiscal
policy next year, enduring high oil prices (which Fitch projects at
USD35pb for Urals in 05) should allow Russia to accumulate around
RUB550bn (USD19bn) in its stabilisation fund at end-2004 and RUB850bn by
end-2005. Funds in excess of the RUB500bn ceiling could be used for debt
buybacks, which would further support the rating. The repayment of debt
and build up in the stabilisation fund should provide a substantial
cushion to help Russia cope with even a severe and prolonged drop in oil
prices. Russia’s external position is also strengthening, with large
current account surpluses, rising foreign exchange reserves and
declining external debt ratios. Fitch expects net external debt to drop
to 28% of current external receipts at end-2004, comparing favourably
with the ‘BBB’ range median of 44%.
The risk of major instability in the banking sector has diminished since
the summer. Deposits are increasing and confidence appears to have
returned. The Central Bank of Russia is pushing ahead with planned
reforms, reviewing and announcing banks for membership of the deposit
insurance system, though it will also need to significantly strengthen
the regulatory and supervisory regime. The sector will remain a source
of significant vulnerability over the medium term in the absence of a
concerted reform effort. The Yukos affair has yet to be resolved and
there may be further twists and turns. In Fitch’s view, the episode is a
clear negative development that raises concerns about the robustness of
property rights and the commitment to further market-orientated reforms.
However, worries that it signalled the start of a more general campaign
of property redistribution have not been realised nor has its escalation
this year precipitated an acceleration of gross capital flight, which
after jumping in the third quarter of last year, appears to have
stabilised at around USD6bn a quarter. The rating remains constrained by
a number of structural weaknesses including a dependence on commodity
prices and a difficult business climate which raise concerns over
medium-term prospects for sustaining strong investment and economic
growth.
Fitch will host a teleconference to outline the rationale behind the
upgrade at 1:00pm London time on Friday 19 November – full details for
the teleconference will follow shortly.
Contact:
Edward parker, London, Tel: +44 (0) 20 7417 6340; Roger Scher, New York,
Tel: +1 212 908 0240; Natasha Page, Moscow, Tel: +7 095 956 9901
Lucinda Highley
Marketing Associate
European Capital Markets
Tel: 020 7862 4042
Fax: 020 7417 6315
Eldon House
2 Eldon Street
London
EC2M 7UA
Tel: Ratings Information - 0044 (0)207 417 6300