Photographer: Andrey Rudakov/Bloomberg

Moody's Raised Russia Outlook Ahead of U.S. Treasury Report

Updated on
  • Moody’s keeps long-term rating one step below investment grade
  • Ratings company cites signs of more institutional strength

Russia’s credit outlook was lifted by Moody’s Investors Service on Thursday, days ahead of the expected release of a U.S. Treasury report discussing debt sanctions.

Moody’s raised Russia’s outlook to positive from stable and kept its long-term rating one notch below investment grade at Ba1, according to a statement. The ratings company cited increased signs of institutional strength as well as economic and fiscal resiliency after shocks from oil prices to sanctions. 

“Russian authorities have forged pragmatic monetary, exchange rate and fiscal policy responses to the recent crisis,” Moody’s analyst Kristin Lindow said in a statement.

Russia’s rating could face downward pressure if its credit metrics or external position deteriorates so that its ability to absorb another oil price shock diminishes, according to Moody’s. The ratings company said another risk is more sanctions that could impair the lending capacity of Russian banks to the government and companies.

In Moscow, Finance Minister Anton Siluanov welcomed Moody’s move, saying “All the necessary conditions are in place” for an upgrade not just of the outlook but of the rating itself this year. He cited “the macroeconomic stability that has taken hold in the Russian economy due to restrained fiscal policy, the free-floating ruble and inflation targeting.”

The possibility of the Treasury report discussing the impact of imposing sanctions on sovereign debt has driven investors into shorter-dated notes. The spread between Russia’s two- and 10-year debt is near its most positive since 2014 as foreign traders offload longer-maturity notes.

Markets had already priced in improvements in Russia, based on the country’s low level of external debt, high oil prices and benefits from the ruble, according to Sean Newman, a money manager at Invesco Advisers, which oversees $5 billion in emerging-market debt.

“The market was already pricing Russia back to investment grade and this is just confirming it,” Newman said.

Another worry for investors in Russia is rising inflation, which could bump up yields by as much as 50 basis points this year, according to Manulife Asset Management. The government’s ruble-denominated state debt handed investors a return of 20 percent in dollar terms last year, the fifth-best performance in emerging markets, as the global hunt for yields outweighed the risk of new U.S. penalties.

— With assistance by Ksenia Galouchko, Olga Tanas, Artyom Danielyan, Natasha Doff, and Anna Andrianova

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