• ACI Russia

08/17/1998 16:02:43 S&P cuts Russia's long-term foreign currency

NEW YORK, Aug 17 - Standard & Poor's today lowered its long-term foreign currency, issuer credit rating on the Russian Federation to triple-'C' from single-'B'-minus. Russia's short-term foreign currency, issuer credit rating remains at single-'C'. The outlook on the long-term rating still is negative. Standard & Poor's does not rate the Russian Federation's local currency-denominated obligations. The downgrade reflects the announcement by the Russian authorities of steps that, in the near term, should lead to a unilateral restructuring of the government's rouble debt and trigger defaults by private sector issuers on their external obligations. The key measures announced today include: -- A wider exchange rate band for the rouble of between six and 9.5 roubles per dollar, which should result in a sharp depreciation of the currency; -- Suspension of trading in the government debt market, pending proposals to restructure GKO and OFZ securities maturing before Dec. 31, 1999; -- A 90-day moratorium, effective August 17, on certain debt repayments due foreign creditors, which the authorities have indicated will apply to obligations of Russian banks and, possibly, corporates. OUTLOOK: NEGATIVE. Although some aspects of the government's new measures are unclear, their combined impact will lead to a lasting impairment of the credit standing of Russian public and private sector issuers in Standard & Poor's view. Debt service on the Federation's rated foreign currency obligations is not affected by the 90-day debt moratorium -- the next interest payment, on a US$1 billion eurobond due 2001, is scheduled for 27 November, with three other eurobond interest payments due in December. However, a forced restructuring of rouble debt would effectively be a default by the Federation and constrain new issuance of foreign currency-denominated debt going forward. The government's fiscal program for 1998-1999, and the IMF program supporting it, will necessarily have to be revised as a result. Even if fresh multilateral and bilateral official financing can be raised to back a tighter fiscal policy and make up the shortfall in commercial financing, domestic support for the government's reform program is likely to falter going forward. The economy is sliding into a deep recession, as the banking sector's problems worsen, the rouble declines, and falling foreign investment continues to sap confidence. Thus, however the current crisis is resolved, the Yeltsin government's political standing has been severely weakened, raising major questions about its ability to persevere with economic reforms in the run-up to Russia's next presidential election due in 2000, Standard & Poor's said.

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