Fitch, the ratings agency, has upgraded Russia's long-term foreign and local currency ratings to 'BBB' from 'BBB-' but warns that structural weaknesses in the economy and the likelihood of political turbulence leading up to the next Presidential election in 2007 both remain causes for concern. The outlook on all long-term ratings was reaffirmed as 'stable.'
Sharon Raj, director in Fitch's Sovereign Group and lead analyst for Russia, explained that the overriding factor in the decision was ongoing improvement in the government's fiscal balance and external debt numbers.
The agency maintains that the growth of the government's 'stablisation fund', described as a 'war chest' to over $25 billion in assets provides an important buffer should oil revenues decline in the medium term. Soaring oil revenues have enabled Russia to pay off all IMF debts, and Paris Club creditors expect to be fully paid by August 20.
The government is operating a strong fiscal surpuls of 6% of GDP this year, though inflation remains the highest of all the investment grade credits. Fitch accepts, however, that economic reform and business investment, the prerequistes for sustainable domestic-led growth, continue to lag.
Growth in the next few years is expected to be one or two points below the current trend of 7% of GDP per annum.