Rising tension with the West could damage foreign investor sentiment towards Russia, ratings agency Fitch said on Tuesday, although it does not immediately threaten Russia's sovereign rating. But Fitch head of emerging European sovereigns Edward Parker told Reuters conditions for Russian corporate and quasi-sovereign borrowers may become more difficult in the aftermath of its invasion of Georgia.
He said the fallout of the conflict may also affect sentiment towards other Central European and ex-Soviet states but that the oil and gas-rich country's vast foreign reserves eased the risks to the Russian economy. Fitch rates Russia as "BBB+" with a stable outlook.
"In terms of the cost of the conflict, the impact on the economy is negligible," he told Reuters in a telephone interview. "We're not expecting to take a negative action with regards to Russia's rating. The main potential impact on Russia is through an impact on capital flows into the country... affecting foreign investment."
Russia recognised Georgia's breakaway regions of Abkhazia and South Ossetia as independent states on Tuesday, setting it on a collision course with the West. Russia's ambassador to Nato compared the situation to 1914 when World War One was about to break out.
Parker said Russian foreign exchange reserves saw a slight fall last week but that it was too soon to say if the trend would continue. "It's still very early days to assess the impact," he said. "Given that Russia has $580 billion in foreign exchange reserves, it has the ability to ride out weekly changes." "There are a significant number of corporates who are very dependent on international capital markets," he said. "There could be an impact on the Russian banking system as well."
Investor sentiment towards other regional economies was also being affected, he said. Ukraine is seen amongst the most exposed, with any fall in foreign direct investment potentially making it harder to cover their current account deficit.
Parker said there was already some impact on investor sentiment towards the Baltic states as well as Central European countries such as Poland, which has angered Russia by agreeing to house a US missile defence shield. "We don't see any immediate impact - it's more a potential impact if Russia decides to take more aggressive action in due course," Parker said. "But it is affecting investor sentiment."
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