S&P upgrade gives Putin pre-election boost, but central bank frets about oil

The Russian economy  received a welcome if qualified vote of confidence  last Friday when  S&P  Global raised the country’s foreign currency long-term and short-term sovereign credit ratings up from  BB+/B ‘junk’ level to ‘BBB-/A-3,  in a move that is expected to bolster capital inflows into its financial markets just weeks before  next month’s presidential elections.
S&P now expects Russia’s GDP to grow at 1.8% this year and to continue to recover over the course of 2019, despite its assumption that Western sanctions imposed after the annexation of Crimea and the conflict in eastern Ukraine will remain in place for at least the next two years.The agency went on  to praise Russia’s policy response to lower commodity prices and international sanctions, highlighting its strong net external asset position, low government debt and the central bank’s monetary policy.
The Kremlin will be hoping that the upgrade will be taken by the financial markets as a nod of approval  in the direction of its efforts to put the oil-dependent country back on the path of economic growth. The Finance Minister Anton Siluanov, who in 2014 had dismissed Russia’s rating downgrades at the height of the Ukrainian crisis as being “politically motivated”, said on Saturday that S&P’s decision was anticipated and logical. “The assignment of the investment (grade) rating will certainly increase investors’ interest in Russia, not only in investing in state assets but also in private business,” he told reporters on Saturday.
But it was not all good news for President Putin as he prepares for the elections which everybody assumes he will win easily in any case. In the same  report, S&P lowered Russia’s rating outlook to stable from positive, but said it expects “broad policy continuity and macroeconomic stability” after the election. “In the longer term, the limited track record and uncertainty surrounding the succession of power could undermine predictability of policy priorities,” it said. “Sanctions will continue to limit Russia’s trend growth and economic diversification efforts due to high investor uncertainty and constraints on technology transfer.” It also warned that it might be prompted to downgrade Russia again “should geopolitical events result in foreign governments introducing materially tighter sanctions.”
An even more  sobering assessment of the country’s  prospects  came earlier this month from an altogether more surprising source – the Central Bank of Russia (CBR) – that  warned that Russia’s economy may take a big hit in 2018 thanks to the cuts in crude production following Moscow’s decision to extend its agreement with OPEC to restrict oil supplies for another year in a bid to reduce stockpiles and shore up prices.  “We are assuming that the deal with OPEC … along with weaker demand for natural gas from abroad will temporary curb growth in (Russian oil and gas) production, which may have a negative impact on economic growth in general,” it pronounced in a statement released on February 16.

Source: reuters