The two most influential global rating agencies, S&P and Fitch Ratings are poised to announce the results their reviews of the country’s debt rating. Investors are hoping that S&P will make a one-step upgrade to the foreign-currency rating and put the sovereign back into investment grade territory, Bloomberg reports.
S&P has had a positive outlook on Russia since March, and with the economy growing and oil prices climbing, there’s sufficient reason for the bump to happen. Such a move would qualify the country’s government bonds again for most of the investment-grade bond indexes.
Fitch never cut Russia into junk rating, so an upgrade from S&P would meet the requirement for two investment-grade ratings. This should open the door to greater inflows from foreign investors, potentially extending the local bond market’s rally as well, the report says.
There are few places in the yield-starved investment grade world offering anything close to the near seven percent yields on 10-year domestic Russian bonds. For overseas investors, the currency risk looks to be abating, with the ruble’s volatility falling in recent years. Emerging market investors may also judge the considerable political risks are subsiding even as the March 18 presidential elections approach, Bloomberg columnist Marcus Ashworth says.
One big variable for the rating companies has been the sanctions on Russia, but a U.S. Treasury report earlier in February suggests they are unlikely to extend to government debt.
According to Asworth, the other big risk Russia’s economic reliance on oil. The recovery in crude prices certainly helps the fiscal balance, but the government hasn’t been profligate with the economic dividend. It maintains a very conservative forecast of less than $50 per barrel on its Urals crude benchmark.