BP plc (ADR) (BP): Ratings Firm Warns of Economic Slowdown in Russia

MOSCOW (AP) — Russia faces harsh times ahead for its economy unless the government improves the country’s poor investment climate and implements long-delayed privatizations and reforms, U.S ratings agency Standard & Poor’s has warned.

Russia has seen more than a decade of largely uninterrupted economic growth, thanks to its lucrative oil and gas industries, to become the world’s eighth largest economy. However, now that energy prices have stabilized, experts say Russia is unlikely to grow as quickly unless it aggressively reforms its economy.

S&P said in a report published Thursday that it expects Russia’s economic growth to slow to 3 percent this year — the lowest rate the country has seen since 1999 — and that “growth will remain constrained without structural reforms to support it.”

The ratings agency’s report adds to lengthening list of warnings for the Russian economy. The European Bank for Reconstruction and Development forecasts just 1.8 percent growth while the country’s own economic ministry predicts 2.4 percent growth.

Even the country’s Economic Development Minister, Andrei Belousov, has warned Russia risks a recession unless rapid steps are taken.

S&P is concerned that Russian authorities would not be ready for tough measures if the economic situation gets worse.

Kai Stukenbrock, a senior director at S&P, told reporters on Thursday that Russia needs to improve business climate and increase productivity if it wants to see robust development.

“In terms of what has actually been implemented in the past couple of years, there isn’t too much that points to a direction that the government would be willing to take difficult decisions to increase the long-term sustainability of public finances,” Stukenbrock said.

President Vladimir Putin won his third term in office in March 2012 promising a strong social agenda, lavish spending for public sector workers and the army. However, many economists, including former finance minister turned opposition politician Alexei Kudrin, consider the campaign promises unsustainable and dangerous for the budget’s balance.

Putin last week gave his government ministers a dressing-down for failing to deliver a stronger economic performance, saying that the country “needs high growth rates and investor activity right now.” Ministers were given a week to come up with their ideas of how to spur growth.

One area that Russia needs to develop is the accessibility of its industry to international competitors and investment. However global investors continually run into a hostile environment in Russia. Last year, for example, BP plc (ADR) (NYSE:BP)‘s Russian venture TNK-BP was taken over by state-owned oil conglomerate Rosneft. Since the deal, international minority investors holding some 3.5 percent in TNK-BP have been left in limbo with Rosneft showing no sign of buying up the remaining shares, and the investors unable to find other buyers for their stake.

Credit: BP plc (ADR) (NYSE:BP)