Last Wednesday, Moody?s one of the top three credit rating agencies, upgraded Russia?s bond rating to investment grade. This came only five years after the financial crisis and the country?s default in 1998. Financial markets were caught by surprise and reacted immediately. Within hours the Russian RTS index, which had been falling steadily since the start of the day's trading, jumped more than 5 percent from its low, reaching a new high. In the bond market, the risk premium on the government's benchmark long-term debt, the 2030 Eurobond, contracted by 40 basis points to 265 basis points over U.S. Treasury bonds.
The upgrade is likely to have a very positive influence on Russian markets. It is a vote of confidence in the county?s new gained stability and economic well-being. With the new rating, many huge investment and pension funds, which are limited by charter to channel their money only in investment-grade debts, have now the opportunity to invest in Russia. Therefore, it can be expected that the boom and inflow of foreign money is likely to continue.
Since 1998 the Russian political and financial situation has been continuously increasing. The economy has been growing for 5 years, supported by high oil and gas prices from which it earns most of its foreign-currency income. In the last three years, Russia used budget surpluses to repay debts, which amount today only to 30 percent of the national income. As a comparison, the Japanese debts are 150 percent of the national income. Due to the windfall profits from high oil prices, the Russian Central Bank was able to increase its foreign currency reserves. In 1992 these reserves were only $60 million. Today they have approximately risen to $60 billion. Moreover, the Russian government was increasingly successful to tighten the control of the regions which should also lead to more financial austerity. But one of the most important reasons for Moody?s to increase the rating was the creation of a stability fund which should help serving debts if the oil prices would significantly fall.
Foreign companies, led by oil and gas majors have already been rushing to Russia to acquire assets there. BP spent $7.7 billion in order to acquire Tyumen Oil, a consortium, led by Royal Dutch/Shell will invest around $10 billion in the development of the Sakhalin gas reserves and Exxon Mobil is considering buying a stake in the newly merged YukosSibneft for up to $25 billion. But Russia has also been successful to attract more investments outside the oil and gas sector and the new rating will only enhance this trend.
The new rating is also a success for Vladimir Putin who pursues a politic which supports economic growth and brings stability to the country. However, the recent conflict between Yukos head Mikhail Khodorkovsky and a fraction in the Kremlin showed that the long-praised stability might not be that persistent. But Moody?s thinks that such political struggles inside and outside the presidential administration will not threaten the broad direction of pro-market reforms.
However, for Moody?s main rivals, Standard & Poor?s and Fitch, this upgrade is premature. It is very unlikely that they will check their rating before the parliament and presidential elections will be over next spring. Also the international monetary fund is not convinced that the fundamentals justify an investment grade rating. The fund would like to see a longer track record and the proof that periods of low oil prices can be handled properly. Not only oil prices but also the inadequate financial system can possess a risk for the economic development.
Other skeptics acknowledge that the chance that Russia will default again is very small but they criticize the timing of the upgrade. The current budget, influenced by the pre-election period, is fare less conservative than the one in previous years. Also the speed of economic reforms has been slowed down by the coming elections. Important but unpopular steps like the liberalization of the gas market and institutional reforms were delayed.
It seems also a risk to assume that the coming elections will not change anything and that Russia will continue going down the path of reforms and remain stable. It can also not be ruled out that big politics were involved in the decision. The upgrade might be somehow connected to the recent Putin-Bush summit.
Author: Nana Bendukize
