Fitch Ratings-London-4 February 2009: Fitch Ratings has today downgraded the Russian Federation s Long-term foreign and local currency Issuer Default ratings (IDR) to ‘BBB from ‘BBB+ , the Short-term foreign currency IDR to ‘F3 from ‘F2 and the Country Ceiling to ‘BBB+ from ‘A- (A minus). The Outlooks on the Long-term ratings remain Negative.
“The downgrade reflects the negative impact on Russia from the fall in commodity prices and the dislocation to global capital markets that has left Russian banks and companies struggling to refinance external debt, and the difficulties Russia faces in managing the necessary macroeconomic policy adjustments,” says Edward Parker, Head of Emerging Europe in Fitch s Sovereigns team.
“The scale of capital outflows and the pace of decline in Russia s foreign exchange reserves have materially weakened the sovereign balance sheet,” says Mr Parker. Russia s foreign exchange reserves (FXR) have fallen by USD210bn, from their peak at end-July 2008 to USD386.5bn as at 23 January 2009, albeit around USD58bn of which was due to valuation effects.
Fitch is concerned about the depletion of FXR caused by gross private sector capital outflows, which were USD94bn in Q408. They might moderate now that banks and corporates have built up foreign currency (FX) assets, which could be used to repay maturing external debt. In addition, the announcement by the Central Bank of Russia (CBR) on 23 January that the period of rapid managed devaluation has reached an effective close could reduce the incentive to sell rouble and buy FX assets. However, capital outflows might continue if the authorities pursue inconsistent macroeconomic policies or if there is an ongoing lack of confidence in the country s financial outlook and institutions. Fitch notes that dollarisation in the banking system is rising and the rouble has fallen further since the CBR announcement to only just above the floor of its new band. Monetary and exchange rate policy remains a challenge for the CBR in terms of whether to continue using FXR to support the rouble (which would weaken the sovereign balance sheet), tighten domestic liquidity (which could adversely affect the banks) or revise its exchange rate policy (which would adversely affect its credibility).
Fitch is less concerned by the fall in FXR caused by external debt repayments, as this leaves the country s net external debt unchanged. It estimates the private sector made external debt net repayments of USD36bn in Q408, which corresponds to a roll-over rate of 55%. Nonetheless, with an estimated USD140bn of private sector external debt payments falling due in 2009, this will be a drain on FXR through the course of the year.
Russia s ratings remain supported by the sovereign s strong and liquid balance sheet. General government debt was less than 10% of GDP at end-2008, compared with the ‘BBB category median of 28%, while the sovereign wealth funds contained some USD225bn. Despite the substantial recent decline, Russia s FXR are still the third highest in the world and it is a net external creditor.
Nonetheless, risks to creditworthiness remain on the downside. Fitch forecasts GDP growth of 0% in 2009, compared to 8% in H108. The recession, anti-crisis measures and lower oil prices will cause the budget to swing into deficit this year. Further falls in oil prices, low roll-over rates of external debt, ongoing capital outflows, heightened strains in the banking sector or increased political uncertainty could increase downward pressure on the ratings.
