Photographer: Andrey Rudakov/Bloomberg

Russia’s Post-Lehman Wait for Upgrade Seen Lasting Another Year

  • Most economists see no upgrade by three major credit assessors
  • Deficit at widest since 2010, government to increase borrowing

Russia’s first credit-rating upgrade since the collapse of Lehman Brothers Holdings Inc. will remain out of reach for at least another year, keeping it below investment grade from all but one major credit assessor as the government ratchets up borrowing in 2017, a survey of economists showed.

The sovereign’s ranking won’t rise over the next 12 months, according to 12 of 17 analysts in the Sept. 27-29 poll. Two economists each see an upgrade from junk by S&P Global Ratings and Moody’s Investors Service. Only one expects the same of Fitch Ratings, which currently has the country at its lowest investment level, while another believes it will actually downgrade Russia, according to the survey.

One casualty of the crash in oil prices and Russia’s longest recession in two decades has been its sovereign rating credentials, last raised in a one-step move by Moody’s in July 2008. Even before Russia’s descent into junk status in 2015, the rankings were a source of grievance to President Vladimir Putin, who’s called the marks given to his country an outrage that increased borrowing costs for both domestic companies and the government. Capping years of criticism, Russia has recently tightened rules for international credit assessors and formed a company of its own.

“Neither of the major rating agencies is expected to change Russia’s current sovereign rating any time soon,” said Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC. “Nevertheless, it is highly probable that Moody’s and Fitch will follow S&P and revert the outlook to stable.”

How Long?

Last month’s move 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. The company’s senior director for sovereign ratings said in a Sept. 21 interview that Russia may have to wait as long as three years for an upgrade.

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 has Russia at the same level. The country’s next sovereign review will be by Fitch on Oct. 14.

While credit ratings influence investor decisions and the cost of funding, they aren’t always the key factor. Russia’s credit-default swaps, offering protection against the potential default of an issuer, currently trade at 221 points, less than half the level on Jan. 25, 2015, before S&P downgraded the debt.

‘Muddle Through’

“The outlook for the state budget is challenging, but Russia can muddle through until 2018, when the next presidential elections are held,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “Nevertheless, possibly a downgrade may still happen from a rating agency other than S&P, but the market is unlikely to care too much.”

While the outlook for Russia’s recession-hit economy is improving, low oil prices remain a drag and no end is in sight for sanctions imposed over the conflict in Ukraine. For the first time this year, economists surveyed by Bloomberg were evenly split on whether the European Union will start easing its penalties in the next 12 months. Not a single economist expects the U.S. to do the same.

Already running the widest budget deficit in half a decade, the government is preparing a fourfold increase in domestic borrowing next year while also raising the limit on international debt sales back to $7 billion after a decrease to $3 billion in 2016. The deficit may widen to 3.5 percent to 3.7 percent of gross domestic product this year, beyond the earlier estimate of 3.2 percent, according to Siluanov.

Yield Hunt

Russia can realistically meet the higher target for external borrowing next year, according to the median estimate in the Bloomberg survey.

“Demand for Russian debt among foreign investors remains high due to an era of low interest rates,” said Nataliya Shilova, chief analyst at B&N Bank PJSC in Moscow. ‘Russia better use this opportunity to cover the budget deficit.”

The government completed its second Eurobond sale last month, following up on the Finance Ministry’s return to international capital markets in May that was boycotted by foreign banks and some investors. The new offering was made available for settlement via Euroclear Bank SA. The world’s biggest bond settlement system didn’t clear the notes sold earlier this year until two months later.

“With ample foreign exchange reserves and very low ratio of public-sector debt to GDP, now that the recent Eurobond offerings have broached the taboo of lending to the Russian sovereign, this amount should be doable,” said Charles Movit, an economist at IHS Markit in Washington.

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