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Russia: St. Petersburg Bonds Achieve High Credit Rating

  • Brian Whitmore

St. Petersburg, 2 April 1997 (RFE/RL) -- The Russian city of St. Petersburg has received excellent credit ratings from international ratings agencies, setting the stage for a coming Eurobond issue and possibly opening the way to increased foreign investment.

The ratings agencies Standard and Poor's and IBCA assigned the city respectively a "BB minus" and a "BB plus" grading last week. An RFE/RL correspondent in St. Petersburg reports that the ratings are the highest possible for a Russian city at this time, given that no city can receive a higher rating than the agencies assign Russia as a whole.

City finance committee Chairman Igor Artyemev welcomed the move, saying it shows the high reliability of the city's financial system.

In its assessment, Standard and Poor's called the economic outlook for St. Petersburg "stable," and cited as supporting factors the city's low debt, its growth potential as a cultural and educational center and transport hub, and the government's comprehensive fiscal and economic policies which it described as "at the forefront of Russian regional reforms." The agency also noted the city's fiscal strength as one of 10 donor regions to the federal budget, its good budgetary management and high foreign direct investment.

The other agency, IBCA, praised the city's "advanced program of privatization" and the "entrepreneurial success" of many businesses established in the city, most notably in "market oriented service industries."

It said there is support from international organizations and a proven record in attracting direct investment from abroad, with several well known multi-nationals now operating in the city.

Factors working against the St. Petersburg, according to Standard and Poor's, include moderate growth resulting from the ongoing restructuring of heavy industry, a large underground economy and tax arrears. The report also cited low incomes by world standards as well high subsidies for housing, utilities and transportation as negative factors, while recognizing that the administration is trying to address these issues.

The IBCA report said that the principal threats to the rating are those "which are common throughout Russia.

The key ratings for St. Petersburg come after Moscow and Nizhny Novgorod were awarded similar ratings by credit agencies last month. Both those cities, like St. Petersburg, are planning Eurobond issues soon. Analysts said that St. Petersburg needed to fare at least as well as those two cities in order for its bonds to be competitive.

St. Petersburg is hoping to use the money in part to reduce its municipal debt. Andrei Tsarikovsky, chief of staff to the finance committee, said that the city hopes to pull in between $100 million and $200 million on the first issue. Tsarikovsky said that the date of the first issue will depend in part on conditions on the world financial markets.

Maxim Arkhipov, bond trader for ING Bank in Moscow told RFE/RL that St. Petersburg's bonds should fare better than Nizhny Novgorod but worse than Moscow's on the European market. He said Moscow is the capital city and a business center, and many foreign investors are already there. "St. Petersburg is the second city but it is close to Europe and this is a big plus," he said. Alexander Morozov, an economist with the World Bank in Moscow agreed with that assessment.

Dmitri Piskolov, the head of the treasury department at ABN AMRO Bank in Moscow also said the city's bonds should perform well. "The rating reflects reality," said Piskolov. "St. Petersburg is not a business center like Moscow but it is a port with a lot of export and investment potential."

Piskolov said that while the rating will be good for the Eurobond issue itself, it will not result in any new major inflows of capital to the city. There would be a normal, steady flow of capital with no dramatic changes, he predicted.

Analysts agree that the market can easily absorb bond issues from Russia, Moscow, Nizhny Novgorod and St. Petersburg. Piskolov cited the high turnover of Brazilian, Venezuelan and Mexican bonds which are easily absorbed by the European market.

Many analysts said that the fact that St. Petersburg is using the bond issue to finance debt, rather than to support building projects as in Moscow and Nizhny Novgorod, could hurt its performance.

But the idea of using a bond issue to pay off debt did not scare off investors in the November issue of five-year Russian bonds which were snapped up by investors to the tune of $1 billion, far better than even the most optimistic projections had held. That bond issue marked Russia's return to the international markets for the first time since the Bolshevik Revolution of 1917.

Earlier this month, Russia held a second Deutsche Mark denominated Eurobond issue that netted 2,000 million Deutsche Marks ($1.2 billion).