Investors React as Russia Emerges From 3 Years at Junk: Roundup

(Bloomberg) -- Russia shed its junk status on Friday after S&P Global Ratings boosted the credit score of the world’s biggest energy exporter to investment grade.

Finance Minister Anton Siluanov touted the decision as proof the economy had adapted to lower oil prices and international sanctions. Now that Russia has a non-speculative ranking from two international agencies, more conservative investors such as pension funds and insurance companies will be able to invest in the country’s foreign debt, he said.

Russia Gets First S&P Upgrade in Over Decade

Here’s what investors and economists are saying about the impact on Russian markets.

Tom Levinson, Chief FX & Rates Strategist at Sberbank CIB:

• “This will likely trigger benchmark re-weighting demand for Russian external debt and also result in fresh demand from more conservative investors. The amount though is unclear, given that Russian paper has been trading at investment grade levels for some time”
• Russia’s “hugely popular” local-currency state debt was already at investment grade “so nothing has technically changed in this respect”
• “While S&P’s upgrade confirms the credibility of Russia’s macro and fiscal policies and should boost sentiment surrounding Russia assets, we do not expect it to trigger major fresh inflows into ruble-denominated assets”
• Levinson says ratings decision is “supportive” for Sberbank’s 55 rubles-per-dollar target. The Russian currency strengthened 1.1 percent to 55.9175 against the greenback as of 1:42 p.m. in Moscow on Monday

Takeshi Yokouchi, a senior fund manager in Tokyo at Daiwa SB Investments Ltd.:

• The upgrade is certainly a positive for the Russian assets and they are likely to extend gains as general market sentiment is quite solid. Having said that, the action seems to have been priced in the markets to some extent, so further gains solely due to the upgrade may be limited from here
• It is not easy to re-enter the Russian bond market as there aren’t many international institutions’ ruble-denominated papers and the liquidity is not so great. Accessing Russian sovereign debt isn’t a problem, but in many cases, Daiwa SB’s funds invest in AAA bonds to limit any country risks and only take currency risks
• “We will watch market conditions and yield levels, and if the yields reach a level where Japanese investors deem attractive, we will add ruble-denominated notes in our portfolio” 

Oleg Kouzmin, an economist at Renaissance Capital in Moscow:

• “The Central Bank and Finance Ministry delivered probably the best possible response to a fall in commodity prices and western sanctions”
• “We would expect Russian Eurobonds to rally on Monday, especially the long-dated papers. We think the upgrade is likely to have a positive impact on the ruble and Russian equities too”

Vladimir Miklashevsky, senior economist at Danske Bank A/S in Helsinki:

• “Many investors have been looking hungrily” at Russian state debt, but have been restricted from buying due to Russia’s junk status
• “Demand will pick up, especially for longer-maturity paper. Several billion dollars will certainly flow in after Friday’s decision, both into state debt and the ruble”

Dmitry Dorofeev, a fixed-income portfolio manager at Alfa-Capital:

• “Russian sovereign Eurobonds have long traded with the same yield as countries that are ranked at investment grade, so the reaction of bonds and markets will be positive, but one shouldn’t expect to see a significant rally”
• “Inflows may increase, but not by much. But of course it’s a pleasant event and an upgrade from Moody’s may come in the second half of the year”
• “If you compare us with Mexico, which has an A3 rating from two agencies, we could certainly join the single A category. But this is more likely to happen in 7-10 years if a balanced monetary and fiscal policy is maintained. And much will depend on the political backdrop”

Charles Robertson, chief economist at Renaissance Capital:

• “The upgrade has been justified by economic fundamentals for at least two years in our view, but sanctions risk hung over the rating like a wet rag”
• “It should broaden Russia’s appeal to more investors, but others might take the opportunity to take profit on what has been a good trade for a few years already”

Bogdan Zvarich, an analyst at Freedom Finance:

• “There will be increased demand for Russian bonds and a drop in Eurobond yields. It won’t be a steep drop though”
• “Some investors bought Russian bonds to bet on gains from a rating upgrade. So the increased demand will clash with speculative profit taking. And that will limit the gains”

Marcin Lipka, a senior analyst at Cinkciarz Pl in Warsaw:

• “The reaction will be very muted on Monday, without any significant moves for the ruble or for bonds. The situation in Russia now is fairly stable, and this is a confirmation from the agency to the stability in the country”
• “The two major major issues, the most volatile ones at the same time, remain the oil price and geopolitical developments on sanctions. They will remain the focus at least in the medium term”

Fabio Scacciavillani, chief economist at the Oman Investment Fund:

• “This is definitely positive for the Russian government, and a substantially positive reaction in markets should follow. Still, it’s difficult to gauge or project the exact impact in terms of yields or currency move”
• “The upgrade, as is often the case, is a backward looking approval of the state of the economy. It’s forward looking to a lesser extent”

John Espinosa, manager of TIAA-CREF International Bond Fund in New York:

• “The upgrade can open up the Russian Eurobond and local government bond market to further portfolio inflows” 
• It’s a “stamp of approval” for debt investors, especially as other large emerging-market countries remain below investment grade
• “The move recognizes Russia’s sound macro-economic position and the prudent fiscal and monetary policies that fixed-income investors tend to prefer”

Blaise Antin, head of emerging-market sovereign research at TCW in Los Angeles:

• “It becomes investible again for certain types of institutional investors that exited the country when it lost the investment-grade ratings several years ago”
• “Those flows should be positive for Russian yields going forward”
• It “probably helps” the ruble
• Moody’s outlook review in January has boosted expectations “they will also upgrade Russia to investment grade later this year”

--With assistance from Yumi Teso

To contact the reporters on this story: Olga Voitova in Moscow at ovoitova@bloomberg.net, Filipe Pacheco in Dubai at fpacheco4@bloomberg.net, William Mathis in New York at wmathis2@bloomberg.net.

To contact the editor responsible for this story: Alex Nicholson at anicholson6@bloomberg.net.

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