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Russia's Economy Rebounds on Pricey Crude

Friday, 22 January 2010 03:40 PM

Russia's oil-dependent economy is getting back on track after its biggest downturn in a decade as higher crude prices and new inflows of capital have shored up the country's banks, government finances and stock markets.

Fitch Ratings on Friday became the second ratings agency to raise its outlook on Russia's creditworthiness, following Standard and Poor's.

The agency said the upgrade from negative to stable reflects a greater confidence in Russia's economic and financial stability, as the broader domestic economy picks up and more money from abroad comes into the country, reversing the outflows that alarmed markets during the crisis.

Investors have flocked back to the Russian market, considering it undervalued at the start of 2009 after it lost 74 percent during 2008. The market was the second-best performing in 2009 next to The ruble-denominated MICEX benchmark has more than doubled since January 2009, moving from under 600 points to close at 1,410.38 on Friday though it remains well below its peak.

A year ago, Russia was flirting with financial and currency collapse. The ruble was routinely losing 2 percent a day against the U.S. dollar, while the government was spending billions of dollars from its reserves — earned from oil profits during better years — every week to shore up the currency. Investors feared that Russia would burn through its rainy-day fund and watch the ruble plunge sharply.

But the Central Bank was able to manage a gradual decline of the ruble's exchange rate and avoid a sharp drop like the one during a 1998 collapse that saw the country default on its debts. With oil prices recovering, the ruble has now regained about 10 percent in value against the dollar since late January 2009.

"The market then was seized by fears that the Central Bank would fail to stabilize the ruble and spend all of its reserves," said Yulia Tsyplyayeva, chief economist at Merill Lynch in Moscow.

"We are talking about completely different things now."

Oil has been key. The price of crude rose from a 2008 low of $45 to $83 a barrel this month.

Russia posted a net private capital inflow of $11.6 billion in the fourth quarter of 2009 against outflows of $33.4 billion in the third quarter. The Central Bank has forecast some $42 billion to flow into the country this year.

Although the gross domestic product is expected to have contracted by 8.5 percent in 2009, the economy has been growing for two consecutive quarters and is expected to grow by at least 3 percent this year. The European Bank for Reconstruction and Development on Friday upgraded its forecast to 3.9 percent from 3.1 percent.

A year ago, the market was worried about non-performing loans, and although their share in banks' loan portfolios remains high — at 20 percent across the sector — the country seems in better shape to cope with that problem now.

Fitch said in its Friday report that "downside risks to the banking sector have lessened somewhat due to the stabilization of the economy and banks' increasing loss absorption capacity".

"Even if NPLs are high, (the government has) resources at hand to re-capitalize the banking system," Tsyplyayeva said.

Russia's government has reported that the federal budget deficit was 5.9 percent of GDP in 2009 compared with a projected 7.7 percent. Six months ago, most analysts predicted the deficit would be as much as 10 percent.

Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow, said this demonstrates that the government not only received extra revenues but also managed to cap expenses.

The downturn has shown how vulnerable Russia is to any movement in oil prices — the true backbone of its economy. President Dmitry Medvedev has repeatedly emphasized the need to shake off the dependence on oil and diversify the economy, but little has been done.

Lissovolik, however, said the government should be given time, as its priority during the first year of the crisis was to mitigate the impact of the recession.

"Now that the crisis is easing, one could expect that the task to modernize the economy will start to get implemented," he said.

Russia announced last year that it would have to borrow abroad — for the first time in a decade — to cover its budget deficit. Although the budget will need less money than originally thought, the government is still set to tap debt markets later this year.

Finance Minister Alexei Kudrin lauded Fitch's move on Friday, saying this will help Russia borrow more cheaply on global markets.

Lissovolik of Deutsche Bank said Russia is likely to borrow less than previously thought but still needs to do so, at least in order to set a benchmark for future borrowings.

"To some extent it will also make it easier for Russian companies to borrow abroad," he said.

Tsyplyayeva agreed that borrowing would be wise, since this would allow the government to keep its $60 billion rainy-day fund in reserve in case oil prices drop. As less money is being pumped into real economies around the world, Moscow-based economists fear that Russia's recovery might be bruised as any slowdown in the global recovery will hurt oil prices.

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Russia's oil-dependent economy is getting back on track after its biggest downturn in a decade as higher crude prices and new inflows of capital have shored up the country's banks, government finances and stock markets.Fitch Ratings on Friday became the second ratings...
Friday, 22 January 2010 03:40 PM
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