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S&P Affirms Russia's Ratings, Outlook Stable

LONDON. Aug 31 (Interfax) - Standard & Poor's Ratings Services has affirmed its 'BBB/A-3' foreign currency and 'BBB+/A-2' local currency long- and short-term sovereign credit ratings on the Russian Federation (Russia), the agency said in a press release.

The outlook is stable.

At the same time, S&P affirmed the 'ruAAA' Russia national scale rating. The transfer and convertibility (T&C) assessment on Russia remains at 'BBB'.

"We affirmed the ratings because of the Russian government's slight net asset position, reflecting past fiscal surpluses and current moderate deficits, as well as the economy's overall net external creditor position," said Standard & Poor's credit analyst Kai Stukenbrock.

The ratings on Russia remain constrained by structural weaknesses in Russia's economy--in particular strong dependence on hydrocarbons and other commodities--and political uncertainty stemming from an ambiguous succession process for the presidency and weak checks and balances between institutions, S&P said.

S&P expects the presidential elections in March 2012 to be decided between President Dmitry Medvedev and Prime Minister Vladimir Putin, once they decide which of them will run for president.

S&P said the outcome of the election could potentially affect future economic and fiscal policy, including as to how decisively the government will consolidate public finances and push structural reforms--including pension reform-improve the business environment, and privatize government-owned companies.

Fiscal policy has been expansionary over the past three years, with increases in transfers, pensions, and wages. As a result, the government deficit excluding oil revenues remains about 8% of GDP above its precrisis level, leaving government finances vulnerable to a decline in oil prices. The government's net asset position still presents a buffer to cope with such shocks, but is gradually being eroded by recent deficits.

S&P therefore expects that the general government will become a net debtor from 2012, with net debt forecast at 4% of GDP by 2014, while S&P expects the gross debt burden to increase to a relatively low 11% of GDP.

The fiscal forecast remains clouded by political uncertainty. The government has so far committed to only modest consolidation efforts in future years.

However, public finances could benefit highly from accelerated reform and privatization efforts after the elections. On the other hand, should oil prices fall again from their current high levels, the resulting loss in revenues would quickly squeeze government finances.

S&P estimates Russia's GDP per capita at $12,650 in 2011, which is on par with or above that of most of its rated peers. However, Russia's economy is highly sensitive to oil prices, which is a rating weakness. In our view, economic growth will increasingly be constrained by Russia's negative demographics, a state-centered economic model that promotes regional monopolies and a lack of competition, inadequate infrastructure, and a business environment that deters both domestic and foreign investment.

The stable outlook reflects balanced risks to the ratings. Government debt levels are relatively low and the government enjoys a net creditor position as measured by narrow net external debt. These strengths are offset by the vulnerability of the budget and the economy to fluctuations in key export prices.

"Ratings upside could result from the government's implementation of policies that would broaden the economic base and improve growth performance, or if the government brought the fiscal position back to sustained surpluses," said Stukenbrock. "If the government fails to address its large non-oil deficit, and if that were accompanied by an extended slump in oil prices, it could eventually result in ratings downside."


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