Russian political risk and the lack of an economic overhaul by President Vladimir Putin’s administration are holding back the country’s sovereign-credit rating, Standard & Poor’s (SPY:US) said.
Russia is rated BBB by S&P, the second-lowest investment grade, on a par with Brazil, Peru and Bulgaria. The economy’s medium-term growth potential of about 3.5 percent “could increase quite a bit” if Russia implemented structural changes to its economy and strengthened its political and legal framework, Kai Stukenbrock, a Frankfurt-based director at S&P’s sovereign-ratings group, told a seminar today in London.
Putin, 59, returned to the Kremlin last month for a third term as president, replacing his protégé Dmitry Medvedev, amid the biggest challenge to his authority after disputed parliamentary election in December triggered a wave of street protests. About 18,000 anti-Putin demonstrators gathered in central Moscow today, the capital’s police said in a statement.
“In Russia we have quite some concerns about the accountability of political, economic and legal institutions,” Stukenbrock said. “It’s the political risk and the weakness of political institutions that is holding the ratings down.”
S&P, which hasn’t changed its stance on Russia since downgrading it one step on Dec. 8, 2008, has a stable outlook on the rating. Gross domestic product, which shrank 7.9 percent in 2009, grew 4.9 percent from a year earlier in the first quarter.
Russia’s benchmark Micex stock index has lost 4.6 percent this year, while the ruble has declined 2.6 percent against the U.S. dollar, the 10th-worst performance among emerging-market currencies tracked by Bloomberg. Markets are closed today for a public holiday.
Putin said after taking office last month that his economic priorities included boosting labor productivity, adding 25 million “high-quality” jobs and lifting Russia to 50th from 120th in the World Bank’s Doing Business ranking by 2015.
Medvedev, who succeeded him as premier, said in April the government must continue working to diversify the economy away from industries reliant on natural resources and he wasn’t “entirely satisfied” with the results of efforts in this regard during his four years as president.
“There are still a lot of structural obstacles to growth including the very strong and very dominant role of the government in the economy,” Stukenbrock said. “Corruption is an issue, the business climate, the investment climate -- these are all issues. There is still not a decisive drive to tackle these.”
“Encouraging signs” include discussions on introducing a fiscal rule to cap government spending and central bank efforts to make the ruble more flexible, which provides the economy with “a buffer” when oil prices fall, Stukenbrock said. “This is an important positive factor in our view,” he said.
About $10 billion a month of capital left Russia from January to April, central bank data show. Overall outflows of $80.5 billion last year were the second-highest since the bank started keeping records in 1994.
“There could be a cautious trend toward liberalization, but I wouldn’t bet my money on it,” Stukenbrock said. “That could also shape our view of the political risks and maybe lead to a more favorable assessment on our side.”
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