S&P raises Russia’s rating to investment grade, Fitch sees positive outlook

S&P raises Russia’s rating to investment grade, Fitch sees positive outlook
Standard & Poor’s Global Ratings agency has raised Russia’s long-term and short-term sovereign credit rating to BBB-/A-3, while Fitch has reaffirmed the country’s investment grade level with a positive outlook.

Russia’s rating has been raised from a speculative BB+ to investment grade BBB- by S&P’s Global Ratings agency, which also lowered the outlook on the Russian economy from positive to stable. The Fitch Ratings agency, however, has increased its outlook to positive, reaffirming Russia’ investment grade.

“The upgrade reflects the track record of prudent policy response that has allowed the Russian economy to adjust to lower commodity prices and international sanctions,” S&P said in a statement.

“The Positive Outlook reflects continued progress in strengthening the economic policy framework underpinned by a more flexible exchange rate, a strong commitment to inflation-targeting and a prudent fiscal strategy,” said Fitch. “This policy mix is contributing to improved macroeconomic stability and, together with robust external and fiscal balance sheets, increases the economy's resilience to shocks.”

Russia’s Economic Development Minister Maksim Oreshkin welcomed the news, saying the decision will further contribute “to capital inflows,” according to TASS. “This opens a path for increased investment lending and expands the possibility of financing the infrastructure debt.” The minister noted that Russia was able to achieve a positive outlook because of the country’s implementation of a responsible macroeconomic policy. Oreshkin also said that the floating exchange rate and careful targeting of inflation “significantly reduced the dependence of the Russian economy on oil prices."

Finance Minister Anton Siluanov, meanwhile, has welcomed the news as a “logical and expected” step, emphasizing that Russia’s economy has “adapted very quickly to new conditions” and “shows positive growth rates.”

“Given the forecasts of socio-economic development, budgetary design [and] balanced fiscal policy, Russia has long deserved an investment rating,” Siluanov said. “Market investors have previously objectively assessed the observed economic recovery, and Russia's debt obligations have long been quoted at an investment level.”

Fitch Ratings noted the work achieved in narrowing the federal budget deficit. “Fitch forecasts that Russia will record a fiscal deficit of 0.6% in 2018 (outperforming the budgeted 1.3% deficit), reflecting higher-than-budgeted oil prices, continued non-oil and gas revenue growth and expenditure restraint.”

Russia’s general government debt ratio declined to 15.5% of GDP in 2017, among the lowest in the BBB investment grade category, Fitch reports. It also noted that Russia's external balance sheet has strengthened, with growing capital inflows.

“International reserves rose to $433 billion in 2017, reflecting capital inflows, higher-than-budgeted oil prices leading to a higher current account surplus and increased gold holdings,” Fitch pointed out.

Last week, Russia’s Finance Ministry expressed the hope that US-based Fitch and S&P will objectively assess the Russian economy.

“I would like the rating agencies to objectively look at the situation. One can see that Russia overcame the difficult times, that we are conducting a very effective monetary and credit policy, that the country is back in economic growth, [which is] slightly less than we planned, but that is growth, anyway,” Siluanov told reporters, on the sidelines of the Russian Investment Forum in Sochi last week. “We do not have any problems with servicing and repayment of debt,” he added.

Sanctions introduced by the US and its European allies against Russia in 2014 had many investors worried about whether Moscow would be capable of repaying its debts. However, according to Fitch, “imminent risks” now “appear to have eased,” following the publication of a US Treasury report in early February that “argued against targeting sovereign debt instruments due to potential negative effects for US and global financial markets.”

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