RISK ASSESSMENT

RUSSIA

RISK ASSESSMENT

Economic growth stabilised at a high level in the first half this year, up 8.0 per cent compared to up 8.1 per cent in 2007, driven by strong domestic demand and soaring oil prices. However, it is expected to slow through year end and in 2009. The slowdown is attributable to the inflationary upsurge (14°per°cent expected in 2008 and 12 per cent in 2009) affecting consumption and to the domestic and international credit crunch impeding investment, already low at 25 per cent of GDP. A lack of investment has moreover undermined the energy sector with production and exports consequently stagnating in volume terms. This trend reflects the economy's dependence on oil prices, which will be unlikely to rise through the end of 2009 with barrel prices of USD 105 and USD 75 expected respectively this year and next. The Russian economy is thus likely to shed a point of GDP growth this year and over a point in 2009. In this context, the Coface payment incident index could deteriorate with the business environment moreover still affected by major shortcomings.

In the financial sphere, the slowdown of gas and oil exports in volume terms associated with the decline of prices is expected to cause the current account surplus to shrink and Russia could even run a current account deficit in 2009. Since early July, furthermore, an estimated USD 40 billion in capital has left the country amid a crisis of confidence spurred by increased political risk, continued deficiencies in terms of governance, and greater aversion to risk since the announcement of the Lehman Brothers bankruptcy. The RTS index of the Moscow Stock Exchange is down 45 per cent since July 2008. The rouble, after appreciating for several years — up 7.0 per cent in 2007 and up 4.5 per cent though July this year — also weakened recently, down 9.0 per cent for the two-month period ending 30 September 2008. Currency risk has consequently heightened.

The banking system, which failed to undergo any far-reaching reforms after the 1998 crisis, has been weakened meanwhile by the shortage of liquidity associated with the tightening of refinancing conditions in the interbank market. A lack of transparent financial information continues to be a shortcoming of the Russian banking system. Systemic risk remains nonetheless very limited with bank intermediation not very developed.

In the political arena, relations with Georgia have deteriorated since early this year over the status of Abkhazia and South Ossetia. Despite recent accords Russo/Georgian relations will likely remain strained. Domestically, the coming into power of Dmitri Medvedev could mark a shift to more liberal positions and foster progress on political liberty and in combating corruption.