What Will A Higher Investment Rating Bring Russia?
Standard & Poor's decision to award Russia an investment grade status with a stable outlook for its long-term foreign currency liabilities had long been expected.
Feb 04, 2005
Standard & Poor's decision to award Russia an investment grade status with a stable outlook for its long-term foreign currency liabilities had long been expected. After all, Moody's assigned the country an investment grade in October 2003, and the Fitch rating agency followed suit last November. Nevertheless, some market players predicted that S&P would not move until spring, as the agency is considered to be very conservative.
However, Russia's macroeconomic statistics were stable last year. According to the Economic Development and Trade Ministry, GDP increased by 6.7%, industrial output by 6%, and investments in fixed assets by 11%. Although the growth rates of these indicators fell slightly compared with the 2003 figures, the dynamics remain positive, which means macroeconomic indices remain good.
Meanwhile, the Stabilization Fund has accrued huge sums and the Central Bank's gold and hard currency reserves have broken every previous record. This somewhat reduces the risks of the budget's dependence on the foreign trade situation. Considering that oil prices are likely to remain high, this virtually precludes any danger that Russia may fail to honor its obligations.
Sergei Suverov, the head of Gazprombank's Market Analysis Center, believes last year's legislative progress may have influenced S&P's decision. Amendments to the law on bankruptcy, the adoption of a new law on credit bureaus, measures to develop the banking system and the reform of the United Energy Systems have all helped strengthen the market system in Russia. In addition, the President' instructions to develop new economic zones and technoparks to diversify further the economy has had a positive effect on the investment climate. The rating agencies have long pointed to the Russian economy's insufficient diversification, the expert noted.
Investment-grade status is obviously good news for the market, as Russian banks and companies can borrower cheaper and for longer in the West. Deputy Prime Minister Alexander Zhukov has said the agency's decision to raise Russia's rating to investment grade will promote the inflow of investments to the economy, while Finance Minister Alexei Kudrin believes the higher credit rating proves that the country's financial system is becoming stronger.
At the same time, Western investors are guided not only by credit ratings, but also by the overall investment climate and political risks when they make investment decisions. In the opinion of Alexei Savatyugin, the director of the Finance Ministry's financial policy department, the move to raise Russia's rating to investment grade will hardly help to attract significant foreign investment to the Russian economy. In their forecast, the S&P experts pointed to growing political risks and a slowdown in reforms, which could prompt the rating to be taken down a peg.
When Fitch gave Russia an investment grade last year, experts thought it would
encourage an influx from Western investment funds that require a country to have an investment grade from at least two major rating agencies to open a credit line for it. Nevertheless, these funds are not hurrying to increase their lending limits for Russia.
Meanwhile, loans dominate the structure of foreign investment, while long-term foreign participation in companies' capitals in the form of direct and portfolio investments is still minimal. According to the Economic Development and Trade Ministry, as of late September 2004, the total accrued foreign capital in the Russian economy stood at about $73.4 billion, with direct investments accounting for 40% and portfolio investments for 2% of the total. It seems foreign investors are more inclined to credit Russian companies than increase their participation in authorized capital, which means a significant increase in foreign investment in shares is hardly possible in the near future.
Konstantin Korishchenko, the deputy chairman of the Central Bank, believes S&P's decision to raise Russia's long-term rating to investment grade will not lead to any great celebrations on the financial markets, as it will not result in any considerable inflow of foreign currency to the Russian market. The rating came against the backdrop of the growing constraining factors on the inflow of foreign investment into Russia, in particular, greater investor interest in South-East Asia and an expected rise in the value of money due to America's Federal Reserve decisions.
S&P's decision can be viewed as an effort to support Russia on its way to the full-scale liberalization of the economy. It is no coincidence that the state's efforts to cut back its social functions, in particular, welfare reform, were lauded in the agency's report.
MOSCOW (RIA Novosti economic commentator Nina Kulikova).
However, Russia's macroeconomic statistics were stable last year. According to the Economic Development and Trade Ministry, GDP increased by 6.7%, industrial output by 6%, and investments in fixed assets by 11%. Although the growth rates of these indicators fell slightly compared with the 2003 figures, the dynamics remain positive, which means macroeconomic indices remain good.
Meanwhile, the Stabilization Fund has accrued huge sums and the Central Bank's gold and hard currency reserves have broken every previous record. This somewhat reduces the risks of the budget's dependence on the foreign trade situation. Considering that oil prices are likely to remain high, this virtually precludes any danger that Russia may fail to honor its obligations.
Sergei Suverov, the head of Gazprombank's Market Analysis Center, believes last year's legislative progress may have influenced S&P's decision. Amendments to the law on bankruptcy, the adoption of a new law on credit bureaus, measures to develop the banking system and the reform of the United Energy Systems have all helped strengthen the market system in Russia. In addition, the President' instructions to develop new economic zones and technoparks to diversify further the economy has had a positive effect on the investment climate. The rating agencies have long pointed to the Russian economy's insufficient diversification, the expert noted.
Investment-grade status is obviously good news for the market, as Russian banks and companies can borrower cheaper and for longer in the West. Deputy Prime Minister Alexander Zhukov has said the agency's decision to raise Russia's rating to investment grade will promote the inflow of investments to the economy, while Finance Minister Alexei Kudrin believes the higher credit rating proves that the country's financial system is becoming stronger.
At the same time, Western investors are guided not only by credit ratings, but also by the overall investment climate and political risks when they make investment decisions. In the opinion of Alexei Savatyugin, the director of the Finance Ministry's financial policy department, the move to raise Russia's rating to investment grade will hardly help to attract significant foreign investment to the Russian economy. In their forecast, the S&P experts pointed to growing political risks and a slowdown in reforms, which could prompt the rating to be taken down a peg.
When Fitch gave Russia an investment grade last year, experts thought it would
encourage an influx from Western investment funds that require a country to have an investment grade from at least two major rating agencies to open a credit line for it. Nevertheless, these funds are not hurrying to increase their lending limits for Russia.
Meanwhile, loans dominate the structure of foreign investment, while long-term foreign participation in companies' capitals in the form of direct and portfolio investments is still minimal. According to the Economic Development and Trade Ministry, as of late September 2004, the total accrued foreign capital in the Russian economy stood at about $73.4 billion, with direct investments accounting for 40% and portfolio investments for 2% of the total. It seems foreign investors are more inclined to credit Russian companies than increase their participation in authorized capital, which means a significant increase in foreign investment in shares is hardly possible in the near future.
Konstantin Korishchenko, the deputy chairman of the Central Bank, believes S&P's decision to raise Russia's long-term rating to investment grade will not lead to any great celebrations on the financial markets, as it will not result in any considerable inflow of foreign currency to the Russian market. The rating came against the backdrop of the growing constraining factors on the inflow of foreign investment into Russia, in particular, greater investor interest in South-East Asia and an expected rise in the value of money due to America's Federal Reserve decisions.
S&P's decision can be viewed as an effort to support Russia on its way to the full-scale liberalization of the economy. It is no coincidence that the state's efforts to cut back its social functions, in particular, welfare reform, were lauded in the agency's report.
MOSCOW (RIA Novosti economic commentator Nina Kulikova).