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Moody's changes outlook to stable from positive on Russia's key ratings
New York, December 12, 2008 -- Moody's Investors Service has changed the outlook to stable from positive on Russia's foreign currency country ceilings and the Russian Federation's Baa1 local and foreign currency government bond ratings. The decision reflects the heightened pressure that has been exerted upon the country's external liquidity position as the global credit crisis has deepened and, more importantly, it reflects the equivocal policy response that such pressures have triggered.
"In such circumstances, the probability that Moody's would raise the sovereign credit ratings in the next 12-18 months, the time horizon associated with a rating outlook, has diminished considerably," said Moody's Vice President Jonathan Schiffer. "Nonetheless, the stable outlook reflects Russia's still-favorable credit metrics relative to other countries rated in the Baa range."
In its last rating action on Russia on October 23, 2008, Moody's had affirmed its positive rating outlook on the government's Baa1 ratings and the foreign currency country ceilings. That decision was based on the expectation that the country's large foreign currency reserve cushion and the limited size of public debt would allow the government to successfully support those systemically important banks and corporates whose access to liquidity had been adversely affected by the global credit crunch. Moody's expected that the announced support programs -- which were both proactive and substantial -- would still leave the Russian government in a comparatively favorable financial position relative to other countries at the same rating level once the worst of the global financial dislocations is over.
"However, since that time, the effort to address the admittedly complex policy challenge of letting the exchange rate reach more sustainable levels without amplifying banking and financial stability concerns has been ineffective and extremely costly for official reserves," said Schiffer. "Moreover, the government's room for maneuver has lately been constrained by the populace's lack of confidence in both the currency and the banking system as well as its fast-declining oil and commodities exports. This lack of trust was signaled by a meaningful decline in banking system deposits that has since receded."
Schiffer said that the inconsistent policy approach taken to date included keeping interest rates low while trying to defend the rouble exchange rate. Although the central bank raised rates recently, suggesting a generally more coherent monetary and exchange rate policy framework, nominal interest rates are still below current inflation and therefore unlikely to stem the deposit drain.
The analyst said, however, that even after calculating the consequences of the government's "anti-crisis package" and currency defense, the Russian Federation's foreign currency reserves and debt ratios should remain in good shape. Furthermore, even if one were to contemplate circumstances whereby the government took direct responsibility for paying the liabilities of the quasi-sovereign corporations and state-owned banks coming due through 2009, its balance sheet would continue to remain well-positioned relative to its Baa1 peers.
Moody's will continue to monitor developments in Russia to assess the efficacy of the government's economic policy goals in achieving stable financial markets, restoring confidence and liquidity in the banking system, and smoothing the transition to a more appropriate exchange rate. In particular, Moody's will be analyzing the ability of the authorities to remedy those policy conditions that have led to capital flight and sizeable losses of foreign exchange reserves.
"In addition to more effective management of monetary policy, the central bank's key challenges at this point are to improve interbank liquidity, forcing the state banks to use official capital injections to increase the flow of credit to the private sector," said Schiffer. "Longer term, structural reforms aimed at shifting the institutional foundation for growth more towards the non-energy sectors of the economy will be an important priority. Established consensus within the political leadership suggests that the necessary policies will be pursued to achieve this objective."
The ratings that now have a stable outlook include the Baa1 local and foreign currency government bond ratings, the Baa1 country ceiling for foreign currency bank deposits, and the A2 foreign currency country bond ceiling. The A1 local currency country ceilings for bonds and deposits were not affected by this rating action.