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Russia tightens spending belt, Fitch downgrades

  Russia’s government said on Wednesday it would cut spending and shift support to banks from industries, while ratings agency Fitch highlighted the scale of the country’s economic crisis by cutting its credit status.

Government officials said banks could get up to $40 billion to recapitalize and lend some money to businesses, though companies would stop getting direct government bailouts because the state needs its foreign currency reserves to maintain broader economic stability.

Fitch’s move to cut Russian foreign and local currency ratings by one notch to ‘BBB’ -- two rankings above junk -- followed a similar move by Standard & Poor’s, which in December became the first agency to downgrade Russia in a decade.

Russian stocks and the ruble held steady after the downgrade, although the euro fell versus the dollar because of traders’ fears that outflows of dollars could force Russia’s central bank to sell euros to rebalance its reserves. The ruble is just a whisker away from a trading floor that the central bank has vowed to defend as the government of Premier Vladimir Putin faces the worst economic crisis in a decade. Industrial production is shrinking rapidly after years of growth and companies are laying off thousands of workers, raising the risk of social unrest.

Fitch said it was concerned by Russia’s weakening balance sheet due to capital outflows and the fall in reserves, still the world’s third largest, by $210 billion to $386.5 billion in just six months due to ruble support and weaker oil revenues. “Further falls in oil prices, low roll-over rates of external debt, ongoing capital outflows, heightened strains in the banking sector or increased political uncertainty could increase downward pressure on the ratings,” Fitch said, keeping Russia on negative outlook.

The statement came out as hundreds of investors attended one of Russia’s top investment conferences to listen to Igor Shuvalov, a key anti-crisis planner in Putin’s cabinet. “For us the most important thing today is macroeconomic stability and support of the banking sector,” Shuvalov, First Deputy Prime Minister, told the Troika Dialog Forum, according to delegates, who quoted him after his speech was closed to the press at the last minute. As if echoing some of Fitch’s concerns, Shuvalov said the state would suspend the release of $50 billion to help firms repay foreign debts after having spent only a fifth of the sum.

The government would focus on supporting the military complex as well as gas monopoly Gazprom, railway monopoly RZhD and power firms, and does not plan to create a bad asset bank because it could spur corruption, he said. “We do not plan to save all companies. If we ever sent such a signal it was a mistake,” he said. “Our business is not prepared to get involved in bankruptcies and winding up companies but this is the path we will have to go down.”

CONSERVING RESOURCES

The ruble has weakened some 35% versus the dollar in the past six months due to capital outflows and low oil prices. Russia has sought to put a floor under the depreciation, vowing to defend the rouble at 41 versus a euro-dollar basket. On Wednesday, it came within 5 kopecks of that mark, but investors shied away from a face-off with the regulator. “None shall pass,” said one dealer at a foreign bank of the regulator’s stance. “Of course they could just be posing but I think they mean business.”

Russia plans to adjust the budget for 2009 on an assumption of an oil price of $41 per barrel instead of the previous $95 and Shuvalov said the cuts would be announced on Thursday. He said gross domestic product (GDP) would fall or be at best flat in 2009 but spending cuts would help tame the deficit. “We may deliberately opt for a cut (in spending) to stabilize the situation and to conserve resources,” he said.

In London, Finance Minister Alexei Kudrin said the government could inject up to $40 billion in a second wave of support for the banking sector on condition some money would be released to help businesses prevent sharp job losses. “We’re facing some very difficult challenges. So certainly the forecast for Russia at the moment is worse now than at the end of 2008,” he told a news conference.

Underscoring the collapse in global demand for Russia’s commodity exports, the country’s transport minister said rail freight was down more than 30% on the year in January with no recovery in sight. Once-booming car sales have likely come in far below expectations in January and, adding to Russians’ troubles, inflation is still rising, with prices up 2.5% since the start of the year, fresh data showed on Wednesday.

Kudrin said ruble weakness meant inflation could overshoot the annual target of 13%, but denied any intention to return to capital controls to defend the currency. Russian firms and banks have to redeem up to $120 billion of foreign debt this year and the government has already spent $11 billion on refinancing help through state agent VEB.

VEB’s head Mikhail Dmitryiev told reporters indebted firms would have now to apply for help with commercial banks. Fitch’s rival S&P has Russia two notches into investment grade at BBB for foreign currency while Moody’s has it at Baa1 or three notches above junk. (Reuters)