Updated August 7, 2008 Rating agency Standard & Poor`s leveled one group down the country risks of Russia's banking system. S&P reacted to support the Bank of Russia had rendered to

the system within financial crisis.

On the other hand, the agency still considers that if recession happens, approximately the half of the Russian banking assets can become troublesome.

As reported the international rating agency Standard & Poor`s, in terms of banking system country risks assessment (BICRA) it shifted Russia from group 8 to group 7. As a result, Russia is the one group with Turkey, Latvia, Romania and Salvador. In the former group, where Russia had been since June, 2007, its neighbors were Kazakhstan and Argentina.

On August, 5 the agency confirmed its assessment concerning Ukraine, and it was placed into the group 10.

The BICRA assessment indicates strong and weak sides of the country banking system as compared to banking systems of other states.

Using the BICRA classification, the agency divides banking systems into 10 groups from the viewpoint of their exposure to the country and branch risks, where the strongest belong to group 1, and the weakest – to group 10.

Also, Standard & Poor`s changed its assessment of the Russian government policy and position in terms of its tendency to provide private banks with support, and shifted it from the group of the countries that "are not binding to provide support", to the group of the countries that "are ready to provide support". According to deputy director of ratings group for financial institutes of the Paris Standard & Poor`s representative office Ekaterina Trofimova, these decisions take account of an effective liquidity management in the Russian banking sector from the Central Bank part in terms of turbulence on the world financial markets since mid-2007.

"What Bank of Russia had undertaken in autumn last year, was above all our core expectations", as Mr. Trofimova marked.

Alfa Bank top-economist Natalia Orlova considers that the rating reassessment is reasonable.

She reminded that one of the first measures the Central Bank had taken last autumn to maintain liquidity in the banking sector was contributions reduction to obligatory provision fund for three months: from 4,5 to 3,5% on external loans and from 4 to 3% – on ruble and retail deposits.

Also, the Central Bank made changes in the refunding instruments list (extended a Lombard list) and started giving direct loans to banks (in particular, URSA Bank and VTB Bank took advantage of it). In spring of the current year the Ministry of Finance started to hold auctions to provide banks with budgetary funds.

However, in Standard & Poor`s suppose that Russia's banking sector is still characterized by "weak institution system and aggressive lending growth that is mainly financed due to external borrowings". Therefore, the agency hasn't changed its level assessment of hypothetical gross problematic assets (GPA) that can arise in terms of realization of reasonable (but not catastrophic) economic recession scenario. As per this assessment, the GPA level (banks do not have guarantees of these assets return) in Russia's banking system totals 35-50%, and it belongs to this level since June, 2007, and earlier it was within 50-75% limits.

"High and rapid lending growth that has been continuing within several years increases the banking sector vulnerability towards the long deceleration or full stop of the economy growth in Russia", as underlines Mrs.

Trofimova. Recently, analysts of UniCredit Aton Company doubted the prospects

of the banking system growth.

They declared about assessment of the overall Russian banking sector towards lowering.