Despite slowing demand in Europe, the outlook for the fundamental business conditions in the Russian chemicals sector in the next 12-18 months is stable, says Moody\'s in a Special Comment report published today.

\"While we expect demand from Europe to slow due to ongoing economic uncertainty, demand in Asia -- particularly China and India -- and Latin America remains robust,\" says Julia Pribytkova, a Vice President -- Senior Analyst in Moody\'s Corporate Finance Group and author of the report. \"We would revise downwards our outlook for the Russian chemicals sector if Chinese economic growth were to slow to less than 5%,\" adds Ms Pribytkova.

Moody\'s expects that demand for fertiliser will remain strong, supported by emerging markets and a growing domestic market. Again, the rating agency anticipates some slowing of demand from Europe, but believes domestic demand will increase. Risks are posed by cheap feedstocks in North America, increasing production of nitrogen-based fertilisers in the Middle East, where input costs are even lower than in Russia, and a ramp-up in Chinese domestic production. However, Russia remains competitive on cost.

In addition, Russian chemicals producers will benefit from planned increases in polymer production. Russian domestic demand currently outstrips supply, with Russia importing mostly high-value-added chemical products. Moody\'s believes demand will be supported by strong growth in the Russian retail and construction sectors, which the rating agency expects will continue to grow in the next 12-18 months.

Ongoing investment will benefit the sector, but has delayed deleveraging. With the exception of NKNK, which completed its large-scale capital expenditure programme in 2010, players in the sector, such as Acron and Sibur, won\'t begin to see a contribution from new projects for another 18-24 months, when Moody\'s would expect them to deleverage and generate free cash flow.