Russia Affirmed at BBB by S&P as Putin Wait for Upgrade Drags On

Russia had its credit rating
affirmed at BBB, the second-lowest investment grade, by Standard
, dashing the government’s hopes for the country’s first
upgrade in five years before a potential $7 billion bond sale.

Weak institutions and the budget’s reliance on oil revenue
continue to offset the country’s robust public finances, SP,
which kept the outlook at stable, said in a statement released
today. Russia was last upgraded to Baa1 at Moody’s Investors
Service in July 2008.

The world’s largest energy exporter has had its ranking on
hold since SP cut it in December 2008 and Fitch Ratings did the
same the next year after crude prices plunged. Russia seeks to
boost the debt grade no less than two steps to A- by 2016 and
another level to A by 2020, according to a government plan
approved in March.

“The ratings remain constrained by structural weaknesses
in Russia’s economy, in particular the strong dependence on
hydrocarbons and other commodities,” SP analysts including Kai Stukenbrock in Frankfurt said in the statement. “Further
constraints are the weak political and economic institutions
that impede the economy’s competitiveness, investment climate,
and business environment.”

The extra yield investors demand to hold Russia’s debt
rather than U.S. Treasuries sank four basis points to 235,
compared with 227 for debt of Mexico, according to JPMorgan
Chase Co.’s indexes.

‘Exhort, Argue’

The move marks a setback for the government as it considers
its first Eurobond offering in more than a year. The authorities
were prepared to “exhort, argue, explain” that Russia was
prime for a bump in the credit rankings, Deputy Finance Minister
Sergei Storchak said May 21 as the country’s rating was put
under review for a possible change or confirmation.

Russia’s low debt and deficit levels are insufficient to
win the country a rating increase because of corruption and weak
rule of law, Moody’s said March 28. Fitch Ratings affirmed
Russia in August, saying “more reforms” to improve the
business climate and governance, as well as to strengthen the
financial industry, would be rating positive.

Moscow-based Expert RA awarded the country an A- grade in
March. In 2011, President Vladimir Putin called Russia’s
rankings an “outrage” that increased borrowing costs for both
domestic companies and the government.

Russia sold $7 billion of debt last year, attracting $24
billion of bids. The yield on the country’s dollar bond due
April 2042 dropped seven basis points, or 0.07 percentage point,
today to 5.295 percent after peaking at 5.755 on June 24.

Opposite Direction

Yields on sovereign securities moved in the opposite
direction from what ratings suggested in 53 percent of 32
upgrades, downgrades and changes in credit outlook last year,
according to data compiled by Bloomberg published in December.
Investors ignored 56 percent of Moody’s rating and outlook
changes and 50 percent of those by SP. That’s worse than the
longer-term average of 47 percent, based on more than 300
changes since 1974.

Russia’s economy, which grew 10-fold in dollar terms in
1999-2012, is forecast to expand 2.5 percent this year, SP said
in today’s statement. That would mark the slowest growth since
1999, excluding a contraction in 2009.

SP said the budget will “gradually” move into deficit,
with the fiscal gap reaching 1.7 percent of gross domestic
product by 2016. Current-account surpluses will probably
disappear by 2015 as rising imports outpace export growth,
according to the rating company.

‘Firm Control’

Putin, shaken by anti-government protests that started in
December 2011 before his election to a third term in the Kremlin
the following year, “retains firm control,” SP said.

“We do not expect a credible challenge to his rule before
the end of his term,” SP said. “We do not expect the
government to decisively and effectively tackle the long-standing structural obstacles to stronger economic growth over
our forecast horizon, which include high perceived corruption,
comparatively weak rule of law, the state’s pervasive role in
the economy, and a challenging business and investment

The central bank’s leadership change this month isn’t
putting the monetary authority’s “wide-ranging operational
independence” under threat, according to SP. Elvira Nabiullina, Putin’s former chief economic aide, became chairman
on June 24.

“Exchange-rate flexibility is increasingly providing an
important buffer to mitigate the impact of shocks, such as a
drop in the oil price, on the Russian economy,” SP said. “The
effectiveness of monetary policy is constrained by a
comparatively small ruble fixed income market.”

To contact the reporter on this story:
Olga Tanas in Moscow at

To contact the editor responsible for this story:
Balazs Penz at

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