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. Last Updated: 07/27/2016

S&P Says Russia Still Too Hooked On Oil

The economy of Russia, the world's second-biggest oil producer, has become more dependent on oil and metals in the past year, Helena Hessel, Standard & Poor's director for sovereign ratings, said Tuesday.

Sales abroad of oil, gas and metals generate about 75 percent of Russia's export revenue, up from 60 percent a year ago as prices rose and companies ramped up output, she said. "In terms of its share of export revenue, Russia is more dependent than ever on oil and metals," Hessel said in Moscow.

Russia will raise taxes on oil and gas exporters next year as it seeks to reduce dependence on natural resources. Export duties on gas will be raised to 30 percent from 5 percent and mineral extraction taxes on oil and gas will be increased.

S&P last month said it may reduce Russia's rating or change the outlook if prosecutors' probes into shareholders of Yukos led to capital flight or hurt the economy.

"The Yukos affair is important as part of the stability and predictability of Russian politics," Hessel said. "I don't think anyone really understands why this decision was made and it's worrisome."

The economy will expand about 6.7 percent in 2003, the fifth-straight year of growth, as Brent crude oil prices have averaged $28.43 per barrel this year, 14 percent higher than in 2002. Russia, the world's largest miner of nickel and fifth-largest miner of gold, has benefited as nickel rose to a 14-year high and gold traded near an eight-year high.

"The main question for us is how sustainable this growth is," Hessel said. "We don't see diversification of the economy."

Growth may slow if oil and metal prices decline, hurting the ability of the country to meet its obligations, Hessel said.

"Oil-price strength masks a multitude of sins within the Russian economy which will eventually come back to haunt it," said Callum Henderson, a strategist at Banc of America Securities Ltd. in London. "Productivity gains are entirely focused on energy, while the rest of Russian industrial capacity remains extremely unproductive."

S&P's representatives will be meeting with Russian officials this month as they prepare to assess whether to change the country's sovereign debt rating or the outlook, Hessel said. S&P ranks Russia two levels lower than investment grade.

The country this month held parliamentary elections. S&P decided to hold off assessing the ratings until after the election, Hessel said. Moody's Investors Service in October gave Russia an investment-grade credit rating for the first time.

"We are trying to assess the impact of parliamentary elections," she said. "Given the political environment is one of the main factors, we waited for this."

United Russia, the party endorsed by President Vladimir Putin, won the elections, helping tighten his grip on power and making it likely he will remain in office for another four years. United Russia will be the first to win a majority in the Duma, or lower house of parliament, since the Soviet Union fell in 1991.

"The issue is how the executive and parliament will work together," Hessel said. "At this point, the results indicate it will be relatively smooth. The government has such an overwhelming majority."