Milestones : Not All Convinced By Russia’s Investment-grade Status


Russia has long been a destination for more adventurous investors, but at the beginning of last month it finally got the nod from a ratings agency. For the first time in the countrys history Russia gained a coveted investment-grade rating from Moodys.The move immediately boosted Russian stock prices and tightened its fixed-income risk premiums, but some investors feel the rating agencys upgrade may have been hasty.

Moodys raised its ratings on the Russian Federations foreign currency bonds and notes by two notches to Baa3, citing the countrys strong foreign reserve expansion (expected to hit $65 billion by year-end), healthy budget surplus and dramatic drops in debt-to- GDP ratios as among factors driving its decision. Moodys has broken away from the pack with its ratings change: Rivals Standard & Poors and Fitch are keeping their ratings unchanged for the moment.

Some market analysts, surprised by Moodys timing, are unconvinced. Among concerns are the December parliamentary elections and March 2004 presidential election, the outcome of which could slow momentum for structural reforms. Russias dependence on oil for federal revenues, some note, should also have tempered Moodys enthusiasm, as a drop in oil prices may threaten financial stability.

The reforms most important for the transformation of the economy away from its dependence on primary commodities have been lagging behind, notably reforms of the banking sector, natural monopolies and the civil service and public administration, said the IMF in a report issued after the upgrade.To Russias credit, the governments stabilization fund to cushion drops in oil prices is expected to reach $7 billion this year. Russias new rating should attract institutional investors, particularly pension funds, which invest only in top-rated securities, although many will almost certainly wait until after next years presidential results are in before they pile in. Russias 1998 default, after all, put one US-based hedge fund out of business and cost billionaire investor George Soros some $2 billion in losses.

Santiago Fittipaldi