Russian Federation Outlook Revised to Positive; Ratings Affirmed

Standard & Poor's today revised its outlook on the Russian Federation to positive from stable. At the same time, all the ratings on Russia were affirmed, including the single-'B'-plus/single-'B' sovereign credit ratings.

The outlook revision reflects recent strong reform dynamics, which have created a genuine potential for improving the economy's structure and reducing its vulnerability to oil price fluctuations.

The ratings are supported by:

• Reform momentum, which began in May 2001, and continued through the rest of last year and into 2002. This has strengthened the country's economic structure and bolstered economic prospects and policy flexibility. Although the oil sector was an important trigger for current growth, the economy's strong performance in 2000-2001 would not have been possible without important underlying institutional and structural changes.
  
  
• The growing commitment and ability of Russian policymakers to service all debt in the next few years, on the back of a reduced debt burden, ample resources, and increased availability of financing from multilateral, official, and commercial creditors.

The ratings on Russia remain constrained by:

• Significant structural weaknesses. The political will and ability to implement banking, corporate governance, judicial, and a host of other microeconomic reforms are critical to creating a stable environment for sustainable growth.
  
  
• Continued, though decreasing, vulnerability to oil price fluctuations. Although the economy has started to develop nonenergy sources of growth, it remains highly dependent upon oil and gas exports (22% of GDP and more than 50% of exports).
  
  
• Weak political institutions. The current high level of political and governmental stability is anchored around one man, President Vladimir Putin. It is difficult to gauge how the political situation would evolve if there were to be a leadership change. Stable political institutions are still lacking, and much already legislated reform could still be undone.

OUTLOOK: POSITIVE. The outlook is underpinned by recent strong reform dynamics. Further progress now hinges on continued macroeconomic prudence and effective implementation.

A sensible budget was tabled for 2002, which includes important contingency plans. A Reserve Fund established last year affords additional flexibility. Recent active debt management policy is also encouraging.

Continued efficient reform implementation is key. There is some concern that "reform fatigue" may set in, especially in the run-up to the parliamentary and presidential elections scheduled for December 2003 and April 2004, respectively. For the time being, however, Standard & Poor's expects further reform to be formulated and legislated, as well as some progress on implementation this year - which should strengthen creditworthiness.