S&P joins peers in upgrading Russia's debt

Standard & Poor's on Monday raised its credit rating on Russia from "junk" to investment grade in a move that brings S&P into line with the other two leading ratings agencies.

It is a big step forward in the rehabilitation of Russia in the eyes of investors after it defaulted on its domestic debt in August 1998.

The upgrade prompted an immediate 8 basis point (hundredth of a percentage point) fall in the yield on the benchmark 2030 sovereign bond.

S&P still has serious concerns about the political risks involved in investing in Russia but the upgrade of the country's long-term foreign currency rating reflects its strong financial position, the agency said.

Russia's one-notch upgrade from double B plus to triple B minus with a stable outlook puts it on the lowest rung of the investment grade category. It widens the range of institutions that can invest in the country's sovereign and corporate debt and cuts the cost of borrowing.

"The upgrade reflects recent, crucial improvements in the government's debt level and external liquidity," said Helena Hessel, S&P analyst. "These improvements are so significant that they now outweigh the serious and growing political risk that continues to be a key ratings constraint on Russia."

Helped by a rising oil price, the Russian government became a net creditor at the end of last year, with a net external asset position of almost 11 per cent of current account receipts, compared with a net debtor position of more than 17 per cent a year earlier.

This was "an important rating consideration in the context of the continued political, institutional and structural weaknesses the country faces", said Ms Hessel. "At this point, the financial flexibility afforded by the government more than offsets these other challenges." The Russian government's break-up of Yukos, the oil company, and its pursuit of VimpelCom, a mobile phone company, for back taxes have dented investor confidence.

Tim Ash, emerging markets analyst at Bear Stearns, said the move was long overdue. "The Russian financing position is simply so strong as to outweigh concerns on the political/structural reform front," he said.

But some investors advised caution. John Cleary, chief investment officer at Standard Asset Management, part of Standard Bank, said: "My biggest worry is that now that Russia is included in the [benchmark emerging market debt] indices, there may be indiscriminate buying.

"There are good Russian companies issuing [international bonds] but there is a lot of dross, too. Corporate governance remains a worry in Russia. During the last Russian crisis, many companies that no one had heard of before were issuing debt."

Fitch Ratings raised Russia to investment grade in November after Moody's led the way in October 2003.

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