International ratings agency Standard & Poor’s (S&P) upgraded Russia’s sovereign rating to 'BBB-' from 'BB+' with a stable outlook on February 24, returning Russia to the sought after “investment grade” rating category on the back of the end of a two-year long recession and several pleasant surprises that suggest the economy is growing faster than expected.
The S&P upgrade gives Russia a hat trick of investment grade ratings. Rival agency Fitch chose the same day to confirm Russia’s ratings at BBB- with a positive outlook, the agency said in a statement. The third major international ratings agency Moody's Investors Service rates Russia at Ba1, an investment grade, and upgraded the country’s outlook to positive from stable on January 25.
Among the good signs were Russia's solid fiscal performance, real progress in cleaning up the banking sector, surprisingly strong industrial production numbers, another set of strong PMI index results and an unexpected pick up in corporate borrowing. The official forecasts for growth and the federal budget deficit this year is a modest 1.5% and a painful -3.4% GDP respectively, but both those estimates are already looking way too pessimistic; many analysts are predicting at least 2.5% growth in 2018 and even Minister of Economy Maxim Oreshkin said during the Gaidar Forum in Moscow in January there is a good chance the federal budget will be in surplus by December.
“The upgrade reflects the track record of prudent policy responses that as allowed the Russian economy to adjust to lower commodity prices and international sanctions. [The government] demonstrated commitment to fiscal restraint and an enhanced fiscal policy framework have reduced medium-term risks of fiscal slippage. Finally, despite the ongoing clean-up of the banking system, the Central Bank of Russia (CBR) measures have preserved fiscal stability. Credit to the private sector has started to recover, which we view as a sign of improved monetary transmission,” the ratings agency said in a press release.
Investment grade opens doors to new moneyMarket players expect demand for Russian state bonds to increase as major international funds require two investment grades as a minimum to invest in a country’s financial instruments.
The investment grade status opens Russia up to a new class of investor like US pension funds that are not allowed to invest in junk graded assets. It will also cause an inflow of passive money by index tracking funds that also require investment grade sovereign ratings. However, both these inflows will be muted by the US sanctions on Russia.
Oreshkin welcomed the news, saying: “This opens a path for increased investment lending and expands the possibility of financing the infrastructure debt.” Oreshkin added that the floating exchange rate and careful targeting of inflation “significantly reduced the dependence of the Russian economy on oil prices."
The rerating of Russia represents a catch up with the government’s success in deal with the imposition of international sanctions in 2014 when Russia’s rating was cut to junk status.
Initially investors worried that Russia would not be able to meet its debt obligations – worries that only got worse when Russia was hit by the double whammy of the collapse of oil prices the same year. However, Fitch noted that the general government debt has since fallen to 15.5%,of GDP in 2017, one of the lowest in the BBB category, and that the government can easily meet these debts from the improving tax collections.
Recession overThe crisis is finally over and two years of economic contraction – the first backwards movement since president Vladimir Putin took office in 2000 – finally ended in 2017 as Russia’s economy returned to growth.
Preliminary figures from Rosstat show that Russia’s economy turned the corner in 2017 and GDP grew by 1.5%, which was slightly less than nearly all forecasters had expected thanks to a “technical recession” in the last part of 2017. Russia is recovering but the recovery remains fragile.
Now the pace already seems to be picking up. One of the pleasant surprises already in was a better than expected performance in industrial production, which expanded by a strong 2.8% in January y/y after contracting in both November and December, Rosstat said on February 16.
This backs up the PMI index results that measures activity in the productive parts of the economy. Business activity growth across the Russian service sector remained strong in January, despite the pace of expansion easing to a three-month low, according to a report by IHS Markit published on February 5. The IHS Markit Russia Services Business Activity Index stood at 55.1 in January, down from 56.8 in December, but still remaining above the no-change mark of 50.0 and indicating "a strong expansion in output among Russian service providers".
"The Russian service sector indicated a solid start to 2018, with strong expansions in output and new business," Markit economist Sian Jones commented., adding that anecdotal evidence of the survey links improved business activity to more favourable economic conditions and greater new order volumes...MUCH MORE.