Russian Politics Leading to Shaky Ground? Fitch Says Yes

Though somewhat overshadowed by the flood of attention created by Standard & Poor's sweeping European downgrades, fellow "Big Three" agency Fitch Ratings changed its optimistic tune on one of the vaunted BRICs (Brazil, Russia, India and China) due to deepening political, rather than economic- or contagion-based, concerns.

Fitch revised the Russian Federation's long-term foreign and local currency Issuer Default Ratings (IDR) to stable from positive. While Russia was recently accepted into the World Trade Organization after a lengthy attempt at inclusion, political uncertainty is a growing concern. Though Prime Minister Vladimir Putin's likelihood to regain his post as president—some would allege he never really ceded power, only title—after elections in March is essentially a done deal, there is widespread evidence of unrest stemming from alleged deep corruption in Russian politics. The growing, and surprisingly brazen unrest, not seen so publicly since the fall of the Soviet Union, could spike the risk of investor capital flight, likely putting pressure on Russian bank reserves and the ruble.

"It is unclear how the country's leadership will respond to the unexpected wave of protests triggered by the elections to the Duma on 4 December and to the broader shift in the political landscape," Fitch analysts noted in a statement this week. "Voters handed the ruling United Russia party a much-reduced majority, and demonstrators protested against electoral fraud. More protests are expected in the run-up to the presidential election. In the long term, democratic development that leads to better governance could be positive for Russia's ratings, but in the short term, uncertainty has increased."

Financially, the Russian Federation performed very well in 2011, largely on above-expectations oil prices. However, Russian growth still remains dangerously tied almost solely to the oil/natural resources sector, as noted by an unexpected and sharp slowdown caused then by oil price changes. Additionally, faith in Russian businesses to honor their credit terms and in banks to become more transparent and trustworthy also has been slow to improve from near punchline status. Though each of the BRICs has seen challenges regarding their emerging economic strength, Russia continues to show signs that it may be in the most precarious position, not to mention perhaps the riskiest of the four with which to do business.

Brian Shappell, NACM staff writer