Russia Credit Swaps Surpassing Turkey Keep Kudrin Waiting for Debt Upgrade
Russian Finance Minister Alexei Kudrin says the world’s largest energy exporter deserves a higher credit rating. The biggest jump in bond insurance costs since 2008 shows investors disagree.
Credit-default swaps protecting against Russia reneging on its debt climbed 52 basis points last quarter, the most since the final three months of 2008, and traded at 194 yesterday, according to CMA DataVision prices. Five-year contracts on Russia, rated BBB by Standard & Poor’s, cost more than those for Turkey and Indonesia, both ranked three steps lower at BB, and the Philippines, which has a BB- grade. Russia swaps were cheaper as recently as May 18.
While Kudrin’s July 2 prediction that Russia may earn a higher rating is backed by the lowest debt level among the Group of 20 nations, the government’s foreign-currency bonds fell 1.3 percent last quarter on concern slowing global economic growth will curb demand for oil and gas. Russia swaps would have to drop by more than 30 percent to match contracts on Thailand, rated one step higher by S&P at BBB+.
“We don’t think there’s likely to be an upgrade in the foreseeable future,” said Nigel Rendell, a senior emerging markets strategist in London at RBC Capital Markets. “We’ve got a pretty nervous external backdrop with global growth and Russia is still very much a one-trick pony with the oil. We’re saying sit on the sidelines.”
Urals crude, Russia’s top export earner, tumbled 15 percent in the past three months to $70.83 a barrel as budget cuts by European governments and China’s efforts to curb inflation increased speculation growth in global demand may stall. Manufacturing growth from China to the euro region and the U.S. slowed in June, reports showed last week.
“We expect Russia’s financial rating to be raised after the end of the crisis, and thereby confirm again the stability of our financial system,” Kudrin said at a conference in Yalta, Ukraine, according to a July 2 transcript of his remarks on the Finance Ministry’s Web site. Pavel Kuznetsov, a spokesman for Kudrin in Moscow, declined to elaborate on the comments.
Russia’s budget deficit may fall to 5.4 percent of gross domestic product this year from 5.9 percent in 2009, the government said last month. The country needs an oil price of $90 to $100 a barrel to balance its budget, Neil Shearing, an emerging-markets economist at London-based Capital Economics, wrote in a May 18 report.
Russia’s government debt at 7.7 percent of gross domestic product this year compares with an average 80 percent for G-20 countries, International Monetary Fund estimates show. Turkey’s debt will reach 50 percent of GDP this year, IMF projections from November show.
The extra yield investors demand to own Russia’s government bonds over U.S. Treasuries rose 131 basis points, or 1.31 percentage points, in the second quarter, according to JPMorgan Chase & Co.’s EMBI+ Index. The so-called yield spread fell one basis point to 2.80 percentage points as of 9:59 a.m. in London.
Russia’s last credit-default swap price of 194 basis points compares with 190 on Turkish debt, 178 for Indonesia, 168 for the Philippines and 129 for Thailand, according to CMA in New York. A basis point on a contract protecting $10 million of bonds from non-payment for five years is equivalent to $1,000 a year. Investors use the contracts to hedge against losses on debt or speculate on creditworthiness.
Need to Diversify
Yields on Russia’s dollar bonds due in 2020 fell four basis points today to 5.45 percent, the lowest level in a week. The ruble strengthened 0.2 percent to 31.0899 per dollar. Non- deliverable forwards, which provide a guide to expectations of currency movements as they allow foreign investors and companies to fix the exchange rate at a specific level in the future, show the ruble weakening to 31.2772 per dollar in three months. RTS stock index futures expiring in September climbed 1.8 percent.
Kudrin said in January that the government’s sale of international bonds may spur credit-rating companies to boost Russia. S&P, Moody’s Investors Service and Fitch Ratings have kept their rankings unchanged since Russia issued $5.5 billion of debt in April, returning to world capital markets for the first time since defaulting on ruble debt 1998.
S&P said it’s looking for evidence the government is committed to broadening the economy for its rating to improve.
“The outlook on Russia’s rating is stable, this pretty much says it all,” Frank Gill, a London-based credit analyst at S&P, said in an interview yesterday. “We’ll continue to look at the government’s commitment toward policies which would help to diversify the economy. There’s little evidence so far.”
Russian Silicon Valley
Moody’s has concerns about Russia’s “institutional strength, and to some extent economic strength,” Dietmar Hornung, a senior credit officer in Frankfurt, said in an interview. Moody’s rates Russia Baa1, or the third-lowest investment grade.
“The stable outlook speaks to our view for the next 12 to 18 months,” Hornung said.
Credit-default swaps are volatile and Fitch Ratings focuses on “credit fundamentals,” Edward Parker, the company’s London- based head of emerging Europe, said in an e-mailed response to questions from Bloomberg News.
“Fitch views the return to economic growth, decline in inflation, stronger than expected performance of the banking sector and move to greater exchange rate flexibility as positive developments,” Parker said. “However, the steep fall in GDP during the crisis highlighted various structural weaknesses and the increase in Russia’s non-oil budget deficit leaves it vulnerable in the event of another drop in oil prices.”
Russian President Dmitry Medvedev plans to build a Russian version of Silicon Valley for technology companies and make Moscow a global financial hub to reduce the country’s reliance on oil for government revenue and economic growth. The government will use tax incentives and other free-market economic policies to turn the country into a destination for innovators from around the world, he said at the annual St. Petersburg International Economic Forum last month.
It may be years before the plans have an economic effect, said RBC’s Rendell.
“These efforts take many years to implement and see through,” he said. “Oil and gas are so plentiful that other things get pushed to the back burner.”