Russians go to the polls to elect a new leader in March 2008, opening the way for significant uncertainties that could weaken
Russia's creditworthiness and undermine current strong growth. So far, this much is fairly certain in the carefully shaped electoral season: President Vladimir Putin will choose his own successor, and this endorsement should ensure a victory for the official candidate. Furthermore, Mr. Putin's chosen successor will have the support of the parliament that will be elected this coming December.
With the elections, Russia's spectacular, although unbalanced, growth may come under pressure from a number of directions (see
The Russian Federation's full analysis, published Jan. 11, 2007, on RatingsDirect, the real-time, Web-based source for Standard & Poor's Ratings Services credit ratings, research, and risk analysis). The new wealth has trickled down very unequally, and this may spark populist sentiment for policy changes from a highly centralized leadership. Additional potential risks include any deterioration of the Putin administration's long-running war in Chechnya, an unexpected political crisis or an unlikely big drop in oil and gas prices. Over the long term, growth is threatened by Russia's (foreign currency BBB+/Stable/A-2, local currency A-/Stable/A-2) rapidly declining population, as low fertility is aggravated by very high mortality rates for males in their prime age. By 2020 Russia's population is forecast to drop by around 7% from 2005 levels.
For the moment, however, many Russians consumers are enjoying the economic growth spurt, while an emerging credit culture is fueling rapid expansion of the securitization sector, especially of car and mortgage loans (see "
As Russian Securitization Expands, Our Ratings Process Gets Refined," published Jan. 17, 2007, on RatingsDirect).
Russia's Path To Prosperity
The current growth prospects for Russia are bright, buoyed by strong credit growth and elevated energy and other commodity prices.
The Russian stock market has risen almost 3,000% in the past eight years, with stocks on the Moscow bourse up by 71% in 2006. The banking sector is growing rapidly (see "
Renewed Rating Impetus As Major Kazakh, Russian, And Ukrainian Banks Greet The New Year," published Dec. 21, 2006, on RatingsDirect), and the real estate market is surging.
According to a new set of sovereign risk forecasts from Standard & Poor's, Russia will continue its star performance of recent years, becoming in 2007 one of the 10 largest economies (as measured by GDP), moving up from 18 as recently as 2000 (see "
Sovereign Risk Indicators: 2007 Outliers," published Jan. 18, 2007, on RatingsDirect).
The economy is expected to grow by about 6% this year. By 2008, Russia's per capita income will have overtaken those of
South Africa,
Malaysia, and
Mexico. Among peers, only fellow energy exporter
Kazakhstan experienced a similarly sustained spurt.
The government has improved its balance sheet and is now a net creditor. After working out an agreement with the U.S., Russia is expected to become a member of the World Trade Organization this year.
Corporate governance in Russia is generally becoming more transparent, and more information is being disclosed, thanks to increasing pressure from international investors (see "
Russia’s Slow March Toward Global Corporate Governance Standards," published Jan. 17, 2007, on RatingsDirect).
Astute fiscal management after the elections could further boost Russia's creditworthiness.
Risks To Policy Continuity
The elections could trigger policy slippages that would deter investments and dilute the economic basis of sustained growth.
The Kremlin has centralized power during Mr. Putin's second term, and a change in leadership comes with above-average political imponderables and risks to policy continuity. Significant policy shifts would undermine the foundations of Russia's recent economic successes, and could lead to downward pressure on the sovereign ratings.
While Russian billionaires and oligarchs make international headlines, perilously wide income inequalities will provide a powerful sounding board for populist policy recipes. The new president may find it harder to resist pressures to increase government spending to "buy" power and popularity, thereby stoking inflationary pressure and destabilizing the economic environment.
Russia's oil and gas assets are increasingly concentrated in state hands, and its energy endowment often serves as a political, social and foreign policy tool. Government pressure has been applied on international energy majors to cede more control to Russian state-sponsored companies.
The business environment is poor compared with those of Russia's peers. Governmental, legal, and economic institutions and accountability remain very weak. Progress in the fight against money laundering halted when Andrei Kozlov, the central bank deputy chairman in charge, was gunned down in September 2006. Frequent contract killings have raised fears of growing lawlessness.
Russia's national investment ratio is among the lowest in the peer group. This may well undermine productive capacity in the future, all the more so as a disproportionate share of investment is dedicated to the booming real estate market. Investment remains relatively low, at around 20% of GDP, and capital formation in the manufacturing sector has been sluggish.
Country risk remains high, not just for foreign investors but also for Russian companies. This is highlighted by an article, "
Russian Steelmakers’ Growth Ambitions Put M&A On The Front Burner," published Jan. 15, 2007, on RatingsDirect." Although international diversification of assets is gradually increasing following overseas acquisitions, the Russia-based operations of four major steel companies are their key cash generators. Exposure to Russian country risks, therefore, remains significant but not always detrimental to improving credit quality.
Analytic services provided by Standard & Poor's Ratings Services (Ratings Services) are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. The credit ratings and observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of the information contained herein should not rely on any credit rating or other opinion contained herein in making any investment decision. Ratings are based on information received by Ratings Services. Other divisions of Standard & Poor's may have information that is not available to Ratings Services. Standard & Poor's has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process.
Ratings Services receives compensation for its ratings. Such compensation is normally paid either by the issuers of such securities or third parties participating in marketing the securities. While Standard & Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
