S&P’s Russian Upgrade Years Away as Hopes Pinned on Budget

Russia’s wait to regain investment grade is set to last at least until 2017, S&P Global Ratings said, challenging the Finance Ministry’s view that tweaking fiscal mechanisms will pave the way for an upgrade.

While S&P lifted Russia’s outlook to stable from negative last week, its upgrade is unlikely in the “foreseeable future,” a period that may extend for three years, Christian Esters, senior director for sovereign ratings at the company, said in an interview in Moscow on Wednesday. He allowed that “a really positive surprise,” especially in oil prices, could hasten Russia’s escape from junk status.

Sovereign ratings aren’t only about “the fiscal picture,” Esters said. Although Russia still has assets stowed away in sovereign wealth funds -- at least “for the time being” -- economic growth projected at 1 percent to 2 percent next year “isn’t a lot.”

While investors have piled into Russian assets this year, the rating outlook underscores the uphill struggle facing the country as it emerges from its longest recession in two decades after the sovereign’s downgrades to junk in 2015 by S&P and Moody’s Investors Service. The move to stable by S&P -- the first positive action by a credit assessor in six years -- prompted Finance Minister Anton Siluanov to suggest that Russia will regain investment grade as it implements a program of fiscal consolidation over the next three years and introduces new budget rules to cap spending.

Bulgaria, Indonesia

S&P raised Russia’s outlook while maintaining its foreign-currency rating at BB+, the highest junk grade and on par with Bulgaria and Indonesia. Moody’s Investors Service has Russia at the same level, and Fitch Ratings ranks the country at its lowest investment score.

While credit ratings influence investor decisions and are a factor of the cost of funding, they aren’t always the determinant factor. Russia’s credit-default swaps, offering protection against the potential default of an issuer, currently trade at 214 points, less than half the level on Jan. 25, 2015, before S&P downgraded the debt.

The challenges facing the Russian economy range from its competitiveness and dependence on the export of commodities to the business environment and its “external vulnerability,” according to Esters.

“For the time being, Russia doesn’t really have -- or has a very limited -- access to international markets,” he said, adding that S&P’s base-case scenario assumes sanctions imposed over the conflict in Ukraine will stay in place for the next three years.

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