(MENAFN- Gulf Times) The pillar of Russian creditworthiness is looking more rickety by the day to Moody's Investors Service.
"What once has been the country's strongest asset, which was the government's very strong financial position, is now under significant pressure," Kristin Lindow, senior vice president at the credit-ratings company, said Wednesday in an interview in Moscow. "It doesn't have a lot of debt, but it also is actively depleting its saving buffers, with very little prospect in the medium term of rebuilding them."
The country's public finances have been in the spotlight as the government debated fiscal adjustments for an economy clobbered by international sanctions and a sell-off in oil, which has paralysed investment and consumer demand. Next year's budget deficit is set to reach 2.4tn roubles ($39bn), or 3% of economic output, after Russia rolled back cuts to defence spending during a campaign in Syria, its first military foray outside the former Soviet Union in three decades.
The government is already running its widest deficit in five years in 2015 after the collapse in the price of oil, which together with natural gas contributes almost half of Russia's budget revenue. The economy of the world's largest energy exporter is at threat of the longest recession in two decades, with the rouble weakening 34% against the dollar in the past 12 months.
"Public finances are now changing the fastest and for the worse," Lindow said. The government "couldbe forced to do the fiscal consolidation that it's talking about, but that would further constrain growth, which is already very low."
To make up the bulk of next year's shortfall, the Finance Ministry plans to use 2.1tn roubles from one of Russia's two sovereign wealth funds, and may tap an additional 500bn roubles from it if needed. Russia may exhaust both of its funds in 16 months to two years if it continues to rely on the $144.2bn reserves without scaling back budget spending, Finance Minister Anton Siluanov has warned. Standard & Poor's and Moody's cut Russia below investment grade this year following a slump in oil prices and sanctions imposed over Ukraine. Fitch Ratings, the last major assessor that ranks the country above junk, is scheduled to review the sovereign's BBB- grade.
Moody's, which has cut Russia three times in the past 12 months after rating it at Baa1 for six years, says its concerns "have evolved" since the time of its last downgrade in February.
"Now what we have is a situation where the external position is a bit less of a worry and the public finance situation is much more of a credit concern, because it is not clear in the context of sanctions what the mix of government funding will be in 2017-2018," Lindow said. "Russia's two sovereign funds don't represent as strong a buffer as they used to. They are more vulnerable now to being depleted."
Russia has been overhauling its approach to crafting the budget next year to safeguard reserves. Actions by the government to protect the wealth funds mirror a move by the central bank to shift to a free-floating exchange rate ahead of schedule last November after spending about $88bn to prop up the rouble. With President Vladimir Putin saying the country won't "mindlessly burn" cash to defend its currency, the central bank conducted purchases of foreign currency to rebuild reserves between mid-May and late July before suspending them amid another tumble in the rouble.
Bank of Russia Governor Elvira Nabiullina said in an interview last week that international reserves will remain "approximately" unchanged through the start of next year, with the central bank monitoring rouble volatility as it waits to resume currency purchases. The stockpile was at $370.2bn as of October 2, down from last year's high of $510.5bn.
The current fiscal plan shows the budget won't be tightened "enough to eliminate the deficit,"Lindow said, adding that the cost of pensions is putting "clear pressure" on public finances. Limited room for borrowing is another challenge, according to Moody's. Russia plans to cut its 2016 limit on foreign borrowing to $3bn from the $7bn cap in recent years. Net domestic borrowing is projected at 500bn roubles.
As debate intensifies over Russia's budget outlook, speculation that a stabilising rouble will allow the central bank to resume interest-rate reductions has helped push yields on longer-maturity government bonds to the lowest since November. In the last two months, local government securities have handed investors a return of about 11% in dollar terms, the best among emerging markets tracked by Bloomberg.
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