Are you sure?

Beware Russia’s shrinking c/a surplus-Moody’s

A gradually shrinking current account surplus coupled with the rising debt of state-controlled corporations pose challenges for Russia, Moody’s Investor Service Vice-President Jonathan Schiffer told Reuters.

Moody’s currently rates the Russian government’s foreign and local currency bonds at ‘Baa2’ while S&P and Fitch rate them at ‘BBB+’. Many analysts believe Russia, which runs hefty current account and budget surpluses, deserves a better rating. “We are aware of two interrelated phenomena that should be monitored -- the decline of the current account surplus and the debt of large quasi-sovereign firms,” Schiffer said in an interview on Tuesday.

Moody’s said this week the continuity in economic policy after President Vladimir Putin’s anointed successor, Dmitry Medvedev, won the election would increase the chances of a rating upgrade. “We are aware that Russia has been doing well for some time. We wanted to see how this variable of political uncertainty played out. Now we can see,” Schiffer said. “Dmitry Medvedev winning the election is a positive factor in assessing Russia’s credit rating,” he added.

Russia’s current account surplus fell in 2007 to $77 billion from a record $94 billion in 2006 due to rapidly rising imports, while net private capital inflows reached $82 billion as firms, mostly energy giants and banks, borrowed abroad. Gas export monopoly Gazprom currently runs a net debt of $24 billion, while state-controlled oil major Rosneft runs a net debt of $28 billion. Russia’s total external private sector debt amounts to $378 billion. “Debt payments are becoming a larger and larger negative on the current account,” Schiffer said.

New situation
The government said it will monitor the borrowings of state corporations as part of its anti-inflation package, but would not introduce any caps for the time being. “The quasi-state corporate debt and quasi-state banking debt: this is something we need to be alert to,” Schiffer said. Russian officials expect the current account surplus to disappear within the next two to three years, exposing Russia to more volatile capital flows, which will become the main source of foreign currency. “It is normal and makes sense for a country, which is trying to develop and spend, but it is a new situation for Russia,” Schiffer said, adding that, he expected the shrinking surplus have an impact on budget policy as well. Finance Minister Alexei Kudrin made a rare public call earlier this year for Moscow to change its hawkish foreign policy because the shrinking current account surplus was set to make the country more dependent on foreign investment.

Kudrin also said the shrinking surplus created a window of opportunity for Russia to float its currency and move to an inflation targeting regime to defeat double-digit inflation. “The ruble free float is certainly possible some time during Medvedev’s presidency,” said Schiffer. “When governments and central banks change their exchange rate regime, it is something that is usually prepared in detail, communicated comprehensively to market participants, and carried out carefully,” he added. (Reuters)