Fitch Voices Concern Over Inflation

Fitch confirmed Russia's investment grade rating Wednesday but said it was worried about economic overheating and inflation.

The State Statistics Service on Wednesday estimated that the consumer price index rose 8.7 percent in the first half of the year, compared with 5.7 percent in the same period of 2007 and 1 percent in the month of June. The government still targets 10.5 percent inflation.

"Russia's ratings are ... constrained by Fitch's concern over economic overheating and inflation in the context of a relatively weak banking system, which risks sowing the seeds of a painful macroeconomic and financial correction," Fitch said.

Annualized inflation rose to more than 15 percent in May, partly because of a spending spree ahead of State Duma elections in December and the presidential vote in March. The government blames soaring global food and energy prices for higher-than-expected inflation.

Fitch said Russia was now vulnerable to a "systemic banking stress." Fitch currently rates Russia BBB+ with a stable outlook. Standard & Poor's has a positive outlook for Russia, while Moody's has placed it under review for a possible upgrade. "The probability of a sovereign rating upgrade in the coming months from either S&P or Moody's remains high, as both have positive outlooks for Russia," said Mikhail Volkhonsky, analyst at Deutsche Bank. "Such an upgrade would likely be followed by upgrades of the leading Russian companies."