Russia’s low debt and deficit levels are insufficient to win the country its first credit- rating upgrade in almost five years because of corruption and weak rule of law, Moody’s Investors Service said.
“With respect to the post-crisis growth potential, it’s clearly constrained by a weak rule of law and the high corruption levels,” Dietmar Hornung, a Frankfurt-based analyst for Moody’s, said in a phone interview today. “We appreciate that Russia’s fiscal and external debt metrics look favorable compared to other countries in the Baa rating category.”
Russia’s long-term ratings were affirmed by Moody’s at Baa1, the third-lowest investment grade, with a stable outlook, according to a statement dated March 27. Moody’s hasn’t changed the country’s rating since a one-step upgrade in July 2008, the last time a rating company improved Russia’s ranking.
With cushions such as the rainy-day Reserve Fund mired below pre-crisis levels relative to the size of the economy, Russia has grown more susceptible to external shocks, particularly in case of a sustained drop in oil prices, Moody’s said. Still, the decision to allow a more flexible exchange rate has softened those risks, according to the report.
Russia’s dollar-denominated Eurobonds due 2022 rose, reducing the yield five basis points, or 0.05 percentage point, to 3.285 percent as of 2:09 p.m. in Moscow. The yield has advanced 56 basis points from a record low of 2.7216 on Jan. 3.
The cost to insure Russian debt for five years using credit-default swaps advanced nine basis points to 166, the highest since August 30, 2012, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.
While Moody’s has kept Russia on hold since before the collapse of Lehman Brothers Holdings Inc. in September 2008, rivals Standard & Poor’s and Fitch Ratings both issued one-step downgrades. S&P cut Russia to BBB, the second-lowest investment rank, in December 2008 while Fitch followed with a similar move in February 2009.
To win an upgrade, Russia will need to show improvements in “institutional strength, the level of corruption, the rule of law,” Hornung said. “Structural improvements are needed, and that’s the challenge.”
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