TEXT-Fitch:Russia demonstrates exchange rate flexibility benefits


(The following statement was released by the rating agency)

Oct 11 - Greater exchange rate flexibility is giving Russia amore effective buffer against volatile oil prices and other external shocks,Fitch Ratings says. Russia's experience provides an example to other sovereignsin the CIS of the benefits of exchange rate flexibility. Nevertheless, rapidmoves towards fully floating currencies are not without risks.

Russia's move towards a more flexible exchange rate has lessened the direct linkbetween changes in oil prices and changes in Russia's budget oil revenue. Thisoffers some protection against sharp oil price falls because the rouble and oilprices have been highly correlated. Compared with 2008, Russia is materiallyless exposed to external shocks, although it remains vulnerable to a severe,sustained fall in oil prices.

Combined with monetary tightening (the Central Bank of Russia unexpectedlyraised its key interest rates on 13 September), it has also helped keepinflation in check and curb capital outflows. Further fiscal and structuralreforms would reduce vulnerability to oil prices and the consequent volatilityin growth and inflation relative to 'BBB' peers.

A track record of operating a flexible exchange rate policy while the centralbank keeps a lid on inflation could improve financial stability. This would beratings positive.

Ukraine has indicated that it will increase exchange rate flexibility in themedium-term, as recommended by the IMF. This could help keep inflation low,reduce dollarisation and the risk of financial instability, boost exports and -as in Russia - provide a cushion against external shocks. The National Bank ofUkraine has already allowed the exchange rate to weaken by 2% since January.

Pressure against the hryvnia, which has led the National Bank of Ukraine tointervene to support it, or a move to greater exchange rate flexibility, couldlead the currency to depreciate 10% by end-year. A full float would risk anovershoot, potentially pushing up inflation and borrowing costs, and increasingthe burden of external debt, to the detriment of the sovereign credit profile.The Outlook on Ukraine's 'B' long-term rating is Stable.

Our Positive Outlook on Kazakhstan's 'BBB' rating reflects the prospect offurther strengthening of the sovereign balance sheet, and a relatively stronggrowth outlook based on increased oil and mining output. Nevertheless, as wehave previously noted, the de facto peg of the Kazakh tenge to the dollar hasmeant that the country's monetary and exchange rate policy framework has not hada great track record in delivering macroeconomic and financial stability.Policymakers eye the Russian rouble closely and are unlikely to allow asignificant and lengthy deviation in the bilateral exchange rate.

The economic outlook for Russia, Ukraine and Kazakhstan, and their exposure tocommodity prices, was discussed by Charles Seville, director in Fitch'sSovereign ratings group, at the agency's Emerging Markets 2012 conference inLondon yesterday, one of a series of Emerging Market events being held in Europethis week and New York and Sao Paulo next week.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898satish.kb@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging: satish.kb.thomsonreuters.com@reuters.net))