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Russia announces new economic plan

A day after a top ratings agency cut Russia's rating to junk level, the government in Moscow has announced a plan which will see the economy return to a budget surplus in 2017.

Standard & Poor's downgraded Russia's rating to BB-plus late yesterday, a non-investment grade, for the first time since 2004, citing a slide in the rouble and weakening revenue from oil exports. The agency said Russia's financial system is weakening, limiting room for manoeuvre for Russia's Central Bank.

Russia's economy has been hit hard by the double impact of weaker energy prices and Western sanctions over its role in Ukraine. It is expected to contract by 4% to 5% this year for the first time since President Vladimir Putin took the helm in 2000.

Capital outflows, which averaged 57 billion US dollars (£38 billion) annually during 2009 to 2013, soared to 152 billion US dollars (£101 billion) last year. Foreign currency reserves have dropped below 400 billion US dollars (£266 billion) for the first time since August 2009.

Finance Minister Anton Siluanov announced today that the government has adopted an anti-crisis plan that will freeze the level of spending. The plan also sees the budget returning to a surplus as soon as in 2017 and the government preparing structural reforms "so that we do not burn recklessly through Russia's sovereign reserves".

Mr Siluanov criticised S&P for being too pessimistic and added that the agency did not know about the government's upcoming plan when they made the decision.

The rouble was 1.2% lower against the dollar at 68.1 per dollar in early trading today while the Micex stock index was 0.3% higher. The rouble is now worth half as much as a year ago.

Moscow-based investment bank Sberbank CIB said in a note to investors that the long-term market reaction to the downgrade depends on if or when the other two major ratings agencies, Fitch and Moody's, cut Russia's grade to non-investment.

Sberbank said investors have already priced in the S&P move.

"Moreover, some investors have even postponed Eurobond purchases with the expectation that a rating downgrade would lead to lower prices, making them more attractive," the bank's Alexander Kudrin said in the note. "That said, if another agency follows S&P's lead, the negative reaction could be more pronounced."

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