S&P justified the current ratings of the Russian Federation on commodity prices and social inefficiency

The rating agency Standard & Poor's has published a full rating report on the Russian Federation, justifying the country's current rating at the BBB level and its "stable" forecast. S&P does not hide: the main “positive factor” supporting the high rating of the Russian Federation is “significant natural resources.” Expensive raw materials ensure a low level of quasi-public debt and a significant amount of budget reserves. At the same time, “most” of the national wealth is spent on financing exports, and GDP growth does not lead to an increase in life expectancy of the population—raw material wealth is not converted into social benefits.

The current assessment of the sovereign credit rating of the Russian Federation by Standard & Poor`s (S&P) is at the level of BBB for obligations in foreign currency and BBB+ for obligations in national currency. BBB is the last level of the investment rating, indicating that the country is “reasonably capable” of meeting its debt obligations on time and in full. But Group B ratings, unlike Group A, imply "greater sensitivity to the impact of adverse changes in commercial, financial and economic conditions."

According to S&P, the current BBB rating is the result of “prudent” fiscal policy “in past years” and the fact that the Russian Federation remains a net creditor—that is, the state’s assets exceed its liabilities. But agency analysts believe that by 2013, with an oil price of $85 per barrel, due to the increase in pre-election social spending, the Russian budget will turn into a net debtor. “Between 2010 and 2013, government net debt will rise by more than 6% of GDP to above 1% of GDP, which is a low debt burden by any measure,” the report says. But S&P notes that in 2010, with nominal general government spending growing at an annual rate of “only 8%,” the “non-oil” deficit was estimated at 13% of GDP, which is “far above the medium-term target of less than 5% of GDP.”

So far, the medium-term forecast for the rating of the Russian Federation (until 2013) remains “stable”. S&P does not hide that it is ensured by the main positive factor - “significant natural resources” - and the accompanying prudent fiscal policy, ensuring a “low, although increasing” level of quasi-fiscal debt and a “declining, but still significant” volume of budget reserves. The main factor on the other side of the scale is “the low level of accountability of political, legal and economic institutions.” It, in turn, is accompanied by commodity-based economic growth and “a significant amount of contingent liabilities, including liabilities associated with negative demographic trends.” In addition, according to S&P, it is the low level of accountability of institutions, and not the high share of the public sector in the economy (the Temasek state holding controls 24% of public companies in Singapore), that hinders the influx of foreign direct investment.

The authors of the report note that the medium-term indicators of economic growth in the Russian Federation “almost completely” depend on commodity prices, and long-term prospects “remain uncertain.” According to S&P estimates, in 2003-2010, “the majority of the national wealth of the Russian Federation,” created mainly from revenues from the oil and gas industry, went to finance real exports, “which doubled during this period.” At the same time, the increase in oil prices (from $16 per barrel in 1998) “was not used to improve the quality of the material base of infrastructure” (including roads, health services, defense capabilities or the education system). “Despite one-time injections of funds into these areas as part of national projects, sustainable funding aimed at achieving sustainable improvements in the quality of public services, from our point of view, was absent,” S&P notes. “Instead, a significant portion (albeit much less than 100%) additional revenues from oil sales were saved and accumulated in two reserve funds, totaling 8% of GDP (at the end of March 2011)."

Let us note that the presence of reserve funds largely allows for an additional positive contribution to the sovereign rating of the Russian Federation. But, according to S&P, unlike the countries of Asia, Latin America and North Africa (their ratings are also at the BBB level), the commodity-based “high GDP growth in Russia in 1978-2008 was not accompanied by an increase in life expectancy.” It is the high mortality rate in the Russian Federation (twice as much as in OECD countries) that determines the negative demographic dynamics. This, among other things, becomes an additional restriction on economic growth and imposes additional spending obligations on the budget - according to S&P estimates, in the amount of more than 12% of GDP in 2010-2050 (see chart).

Alexey Shapovalov

Oil does not protect against old age