Russia Within a Step of Investment Grade
Moscow Times
Wednesday, May, 14, 2003
By Catherine Belton, Staff Writer

International ratings agency Fitch upgraded its assessment of Russia's credit worthiness by two notches Tuesday, putting it just one step shy of the landmark status of investment grade major global funds need to buy Russian government bonds.

"The upgrade reflects a very strong performance in the Russian economy," said Edward Parker, Fitch's primary sovereign analyst for Russia.

The BB+ rating leapfrogs upgrades in December by rival agencies Moody's and Standard & Poor's, both of which put Russia two notches under investment grade. Parker cited continued economic expansion, the reduction of the nation's overall debt burden and strong growth in foreign exchange and gold reserves as reasons for the move. "We see the risks to Russia's debt servicing as very low," he said.

Most market analysts say the much-hallowed investment grade will come within a year -- a move that would mark a remarkable turnaround from 1998, when buying Russian debt was considered a sucker's bet in the wake of the spectacular default that August.

But Parker said Fitch's stable outlook meant that he does not expect the agency to boost Russia to investment grade for at least another 18 months.

"It would not be correct to interpret the upgrade as a significant movement towards investment grade," he said. "For that to happen we would need to see more evidence that Russia was moving forward on structural reforms."

Nonetheless, Finance Minister Alexei Kudrin applauded the move, calling it a sign that Russia is now a much safer place to put money than it was just a few years ago.

"We are close to the understanding that Russia is a safe place for investment. Investors have already appreciated it," Kudrin said, Prime-Tass reported.

Parker said the BB+ rating puts Russia on a par with Egypt, El Salvador, Kazakhstan, Panama and the Philippines, and just below Mexico, Croatia and Thailand.

Russia's 2030 dollar eurobond jumped 75 basis points Tuesday to trade at 94.375 percent of face value.

Fitch noted in a statement that structural weaknesses in the economy left Russia with medium-term credit risks generated by the fact that Russia is still largely dependent on commodity price swings, making it impossible to consider economic growth as sustainable yet.

"[Sustainability] would depend on greater progress on structural reforms in order to increase the efficiency, flexibility, dynamism and investment rate of the economy," the statement said. "Until then, Russia will remain vulnerable to commodity price shocks and uncertainty will persist over its ability to generate the future income that is necessary to replace decaying infrastructure, meet social expectations and service its debts."

In the short term, however, the agency said it expected Central Bank reserves to climb by $18 billion to $66 billion this year and the government's financial reserve fund to climb to more than $8 billion. That cushion, combined with strong financing options in the eurobond market, greater domestic borrowing and privatization revenues, means Russia's debt servicing would be safe from falling oil prices for the next several years at least, it said.

"Oil prices would need to fall below $15 per barrel for a number of years, without an adequate policy response, before debt service came under serious pressure," the agency said.

Market watchers say that despite not officially being investment grade, the market has already priced Russia as if it is. "Russia is already trading 20 basis points above investment grade Mexico," said James Fenkner, head of research at Troika Dialog.

He said a massive rally in Russian debt over recent weeks that has pushed yields on Russia's 30-year eurobond down to 7.2 percent had been partly fueled by the fact that Russia is set to redeem up to $6 billion worth of international debt in May and June alone. That would free up more funds for reinvestment in other debt instruments, he said.

Fitch's upgrade could help push down yields even more and further ease the cost of borrowing for Russian companies, analysts said.

"This sends a very strong signal that Russia risk has dropped. It makes it easier for Russian corporates to issue internationally," said Roland Nash, head of research at Renaissance Capital.

Gazprom, Sistema and Alrosa have issued major eurobonds this year, all of which were heavily oversubscribed, and Wimm-Bill-Dann is expected to come to the market with a $100 million to $250 million issue by the end of spring.

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