S&P Affirms Russia’s Country Ratings, “Despite Political Turmoil over Yukos Affair “

November 5, 2003

Standard & Poor’s Ratings Services announced that it has affirmed its ‘BB’ long-term foreign and ‘BB+’ long-term local currency sovereign credit ratings on the Russian Federation, as well as its ‘B’ short-term foreign and local sovereign credit ratings on Russia. The outlook on the long-term ratings remains stable.

“The affirmation reflects Standard & Poor’s opinion that the ratings already incorporate the sort of risk event demonstrated by the Yukos affair,” said the bulletin. “The arrest of Mikhail Khodorkovsky (chief executive and major shareholder in OAO NK Yukos, Russia’s largest oil company, (rated BB/Watch Neg/–), and the freezing of some of Yukos shares substantiate Standard & Poor’s existing opinion that its sovereign ratings on Russia continue to be constrained by political uncertainty, rather than a new rating factor.”

S&P noted that it “has stated on several occasions during the 10 months since its last rating action (Dec. 5, 2002, when the foreign currency long-term ratings were raised one notch and the local currency ratings by two notches to their current levels) that the ratings on Russia continue to be constrained by” the following concerns:
— Lingering structural, economic, legal, institutional, and administrative problems; and
— Still-developing democratic culture and political institutions and a highly centralized decision-making process that could be subject to episodes of political stress.
This should not, however, significantly jeopardize either Russia’s social or economic stability or its reform program.”

The rating agency concluded that the “recent troublesome developments in Russia do not, in and of themselves, undermine the existing ratings or the stable outlook. Near-term risk in Russia is minimized, given the country’s very strong external liquidity position and the government’s significant short-term fiscal flexibility. However, the existing strong fiscal and external cushion could begin to disappear in the face of continued political setbacks. A change in market sentiment could start pushing Russia into a vicious cycle of capital outflows, declining investment, and the weakening of both economic performance and fiscal position.

“Nevertheless, given the size of Russia’s fiscal and international reserves, this negative scenario of serious outflow of confidence-sensitive resident and foreign capital–a scenario that Standard & Poor’s considers unlikely–will take time both to materialize and to start significantly jeopardizing Standard & Poor’s current ratings.”

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