Moody’s upgrades Russia to investment grade: we expect neutral impact
Last Friday Moody’s upgraded its sovereign credit rating Russia from Ba1 to Baa3, a lowest investment grade with stable outlook. Moody's believes that Russia's stability as a sovereign borrower has decreased significantly. FX reserves cover 80% of the external debt which is main rationale for the rating action. At the same time Moody’s believes that the probability of introducing new sanctions in the coming months is high. New sanctions may include restriction for the US people to buy new debt (probably) and hold it (possibly). Russia now has an investment rating from all three leading rating agencies. While it’s positive news we believe that implications for RUB and government bonds are neutral. As most managers assign investment grade status based on the decisions of the of the two of the Big-3 agencies, we expect that inflows of new funds will be limited. In the last couple of months govt bonds have surged and have already surpassed pre-April 2018 market highs based on favorable global factors, higher oil prices and decreased fears of new sanctions. So the decision was mostly expected and priced in. In the past rating decisions of the major agencies had a poor timing in terms of the future market direction. Currently main risks for holders of the Russian govt debt are not economic fundamentals or soverign ability to service the debt but geopolitical tensions and possibility of new sanctions. Recent tensions beetwen the US and Russia in terms of Nicholas Maduro support is new factor of risk. At the same time full investment grade status can be positive for some Russian corporate bonds.