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Russia: Ratings Upgrade Gives Investment A Boost

A major Western ratings agency has raised its opinion of Russian government bonds, saying that holding Russian debt is now relatively safe for investors. The move confirms Russia's recent economic revival and could pave the way for more investment in the country.

Prague, 17 October 2003 (RFE/RL) -- The U.S.-based ratings agency Moody's has raised its investment opinion on Russian sovereign debt, saying the country's debt is now "investment grade." In other words, it's a relatively safe investment.

Moody's, the world's second-biggest ratings agency behind New York-based Standard & Poor's, cited steady growth of the Russian economy since the 1998 default. It also pointed to Russia's budget surplus as well as the creation of a stability fund to support debt payments should oil prices fall.

Moody's said the political situation in Russia appears stable, election results are fairly predictable, and that the Kremlin has tightened control over the regions.

Roland Beck is a Russian economy expert at Deutsche Bank's research group. He says the upgrade is important because it will bring in investors who until now have been restricted from investing in Russia. Many funds have rules that prohibit investing in countries that are not "investment grade."

"Obviously, a decision by Moody's now opens the way for more asset allocations to be directed into Russian assets, even though the other big rating agencies still maintain a 'non-investment-grade' rating, but obviously the step by Moody's was quite important," Beck said.

The upgrade will also make it cheaper for Russian companies to raise money, since the interest rates that companies must offer investors to entice them to buy the debt will now be calculated from the lower sovereign rate.

Beck from Deutsche Bank explains, "For international investors, the sovereign rating is also a ceiling, meaning that [it will also affect private borrowers]. So now, Russian private borrowers can also take advantage of lower borrowing costs. And we observe already more private issuers coming into market and enjoying lower [interest rates] such as Sberbank, which is expected to issue a bond in these days."

Financial markets reacted quickly to the upgrade. Russian bond prices rose and the ruble reached its highest point against the dollar in two years.

Paul Westin of Aton Capital in Moscow said the upgrade played a role, but that investors are also reacting in part to relatively high oil prices, which brings more cash into Russia's treasury.

"A very strong rate was triggered by Moody's. This sort of got into speculative attack. The Russian ruble is affected by two things, in addition to Moody's. One is the oil price. Secondly, the dollar has weakened against the euro, which also affects the ruble. The second half [of the year] in Russia is a period when imports are normally about 20 percent higher than in the first half. But the Moody's decision triggered the speculation. Now, it is likely to correct itself," Westin said.

Experts say the upgrade -- and the continuing positive news about the Russian economy -- will lead to increased foreign investment. It may even be enough to reverse the recent capital flight from Russia in the wake of some recent corporate scandals.

Beck says, "It's likely to have a positive impact on the capital flows. There was an encouraging sign earlier this year that some of the flight capital started to return to Russia. That was a little bit disrupted during the summer when the Yukos [oil company] affair started. Some of the positive trends were reversed. And now, we'll see how much capital will indeed come back and whether this trend is really going to last."

Peter Westin of Aton Capitals is even more optimistic: "In the second quarter [of the year], we actually had capital [leaving] Russia, net. The capital flight that has been reported for the third quarter is triggered by two aspects. One is the elections. There are certain exporters that would like to bring back money until the election results are clear. The investigation into Yukos has triggered additional capital flight. But at the same time, when the elections are over -- as long as we have the results that most people expect and [we] don't have any surprises on the reform front -- large chunks of money flowing out right now are likely to come back to Russia."

Attention is now turning to the other big ratings agencies, like Standard & Poor's. They are not expected to reassess their position on Russia until after the elections. If they follow Moody's lead, investors will have even more reason to put their money into Russia.