Fitch Says BBB+ Rating Stable for Now

APTraders at MICEX before it was ordered Wednesday by the Federal Service for Financial Markets to halt trading.
Russia has huge capacity to support banking sector liquidity, Fitch ratings agency said Wednesday, but recent market developments have accentuated risks for the sovereign's credit status.

"The outlook on [Russia's] 'BBB+' rating is stable, but the events of recent days have tilted risks a bit more toward the downside," Edward Parker, head of emerging Europe sovereigns at Fitch, said by telephone from London.

"The stable outlook ... is signaling that we don't currently expect to change the rating in the near term. But clearly there are significant events taking place, and we are monitoring the situation," he added.

Confidence in Russian assets was knocked this summer by the falling oil price, wrangles over TNK-BP, a government attack on Mechel, the military conflict with Georgia and the subsequent souring of relations with the West.

The intensifying crisis in the U.S. financial sector has compounded risk aversion, and Moscow's bourses halted stocks trading Wednesday after losses on both the RTS and MICEX indexes.

"Russia has clearly been battered by a succession of bad news, which is taking its toll on financial markets -- global financial distress, the fall in oil price, the war in Georgia," Parker said.

"This has all led to a serious knock in investor confidence, and we have seen that play into the banking sector now, which is one of Russia's Achilles' heels."

Liquidity in the country's inter-banking system all but dried up despite injections of hundreds of billions of rubles from the Central Bank and the Finance Ministry.

Authorities have pledged to support the banking system, and new measures are expected in coming days.

"One of the great strengths of Russia as a sovereign creditor is that the government balance sheet is extremely strong. ... Russia has a huge external liquidity buffer to help it navigate through this extremely difficult time," Parker said. "[But] whilst it clearly has huge capacity to provide support to the banks, as we've seen this morning, that has an effect on the strength of the sovereign balance sheet."

Russia has around $570 billion in gold and foreign exchange reserves, including its National Welfare Fund.

Finance Minister Alexei Kudrin said Wednesday that the crisis was not deep enough to necessitate the use of the fund. Last week, he said the welfare and pension funds could in the future be used to support financial markets.

"As we've seen in the last couple of months, equities are a risky investment, and it is not a prudent place for the government to invest its fiscal reserves," Parker said.

Parker added that the liquidity crunch in Russian markets could have implications for the wider economy.

"It will be more difficult and expensive [for Russian companies] to access international markets ... which is likely to lead to a sharp fall in credit growth, which will put upward pressure on interest rates, and that will have a knock on effect on the Russian economy."