Russia's exceptionally strong sovereign balance sheet underpins its rating, notably the buffer provided by foreign exchange reserves of USD531bn - the third largest in the world. This allows the policy authorities to provide the Russian corporate and banking sector with US dollar liquidity and financing without imperilling its own credit quality.
Russia is also facing a second negative external shock - the recent sharp fall in commodity prices - which combined with falling inflows of foreign capital, will lower economic growth and pressure the credit quality of Russian banks and companies. "Inconsistent macroeconomic policies could be Russia's Achilles Heel - if the authorities try to sustain economic growth with an easing of fiscal and especially monetary policies while at the same time trying to maintain the value of the rouble, they could end up encouraging and funding capital flight which would damage Russia's economic and sovereign credit fundamentals," added Mr Parker.
The Russian sovereign's strong solvency and liquidity position - with general government debt of just 8.5% of GDP (equivalent to around USD138bn), sovereign wealth funds (SWF) of USD190bn and Central Bank of Russia (CBR) foreign exchange reserves (FXR) of USD531bn (USD341bn excluding the SWF) - means that it is comparatively well-placed to withstand shocks from the global credit crunch. However, in contrast to the government, the Russian private sector has borrowed heavily from international capital markets in recent years to fund aggressive expansion at home and overseas. Combined with long-standing weaknesses in the banking sector, as well as investor concerns over relations with the rest of the world and corporate governance, Russian financial markets have proved especially vulnerable to the global financial crisis and the associated flight from risk.
Fitch estimates Russian banks and companies face medium- and long-term amortisation of around USD80bn next year and the CBR estimates that total foreign debt payments due in the final quarter of this year are some USD40bn. Refinancing this debt in international capital markets will prove challenging and Fitch anticipates that there will be a steady drawdown in the CBR's foreign exchange reserves as it continues to provide US dollar liquidity. Fitch currently projects that gross foreign exchange reserves will fall to around USD440bn by the end of 2009, compared to a peak of almost USD600bn in July 2008.
The government and CBR have implemented or announced substantive anti-crisis measures and Fitch expects the various support measures to succeed in stabilising the Russian banking system and financial markets, though the credit profile of the bank and corporate sector is likely to deteriorate given lower economic growth and reduced financing options. Fitch forecasts GDP growth to slow to around 4% in 2009 from 7.3% in 2008.
The drop in Brent oil prices to around USD70 per barrel (pb) from a peak of USD147pb in July constitutes a second balance of payments shock. Nevertheless, Fitch estimates the current account would balance at an oil price of around USD63pb (Urals) in 2009 and the budget at around USD65pb (the current Ural oil price is USD69bp). However, the volatility and recent fall in commodity and especially energy prices underscores the necessity of maintaining substantial foreign exchange reserves and fiscal reserve funds given the vulnerability of the balance of payments and budget to lower oil and gas prices.
Fitch notes that further marked declines in oil prices, large net capital outflows and support to the private sector combined with macroeconomic policy missteps, such as pursuing an overly-expansionary fiscal and monetary policy mix while intervening to support the exchange rate, would undermine Russia's sovereign credit fundamentals and prompt negative rating action.
