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Fitch downgrades Russia's currency ratings

Russia's Long-term foreign and local currency Issuer Default rating, IDR, was downgraded to 'BBB' from 'BBB+', the Fitch said Wednesday. The Short-term foreign currency IDR was downgraded to 'F3' from 'F2', while the Country Ceiling was downgraded to 'BBB+' from 'A minus'. The Outlook on long-term ratings remained 'Negative.'

Gross private sector capital outflows from Russia were $94 billion in the fourth quarter of 2008. This pulling down of foreign exchange reserves was a cause for concern, the Fitch pointed out. On the whole, Russia's foreign exchange reserves have tumbled $210 billion from July 2008. Foreign reserves stood at $386.5 billion in January 2009. Further, capital outflows could continue unabated if inconsistent macroeconomic policies were followed.

The period of managed devaluation was coming to an end, according to the Central Bank of Russia, while the Fitch said adding that dollarisation of the banking system was increasing." The scale of capital outflows and the pace of decline in Russia's foreign exchange reserves have materially weakened the sovereign balance sheet," said Edward Parker, Head of Emerging Europe in Fitch Sovereign's team.

The rouble had fallen to just above the floor level of the new band. Exchange rate and monetary policy was a challenge to the Russian central bank as continued support to the rouble would weaken the sovereign balance sheet and tighten domestic liquidity, while a revision in the exchange rate would affect the central bank's credibility. However Russia's sovereign wealth funds contain about $225 billion, while the country has the third biggest foreign exchange reserves in the world.

The private sector made net external debt payments of $36 billion in the fourth quarter of 2008, a rollover rate of 55%. Net external debt payments in 2009 were likely to be of the order of $140 billion. However, general government debt was less than 10% of GDP at the end of 2008. Russia's GDP was not expected to post any growth in the first half 2009, compared to the robust 8% growth witnessed in the first half of 2008. The budget was likely to move into deficit territory this year, due to the recession, the concomitant anti recessionary measures and plummeting oil prices.

"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," Parker said.

by RTT Staff Writer

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