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Comment of Andrey Solovyev, Global Head of DCM at VTB Capital, for Bloomberg

24 June 2012
Russia Deserves Rating Upgrade Above Spain, Italy, Storchak Says



 June 25 (Bloomberg) -- Russia’s sovereign debt rating should be upgraded at least two steps because its weaknesses are overblown compared with higher-rated countries, Deputy Finance Minister Sergei Storchak said.
 “It’s clear we should be at least one step from an A rating,” Storchak said in an interview at the St. Petersburg International Economic Forum on June 22. “We’ve more than earned that, even with our continued dependence on energy markets. Many countries that have higher ratings have their own dependencies, which are no less significant.”
 The world’s largest energy exporter has had its credit grade on hold since Standard & Poor’s cut it in 2008 and Fitch Ratings did the same the next year after crude prices plunged. Revenue from oil and gas accounts for half the government’s income, leaving the budget at risk from external shocks.
 Russia is rated BBB at S&P and Fitch, their second-lowest investment grade and thee rungs below an A rating. The country is ranked Baa1 at Moody’s Investors Service, its third-lowest investment grade.
 The yield on Russia’s dollar bonds due 2017 has fallen 11 basis points to 3.154 percent this month compared with a gain of 32 basis points to 5.686 percent for Italian dollar debt. Italy is ranked two grades higher than Russia at Fitch and one grade higher at Moody’s and S&P.
  Putin ‘Outrage’
President Vladimir Putin slammed Russia’s ratings as an “outrage” last year and called for the country to set up its own agency to counter the influence of S&P, Moody’s and Fitch. The rating companies were “too quick” to give some countries their top credit grades and now all borrowers are suffering from the downgrades, Storchak said.
 “Now they’ve started the procedure of revising them down, and that’s pressuring everyone,” he said. “Perhaps it’s better late than never, but it’d be nice to know how and why it’s happening.”
 Spain’s rating was cut three steps by Moody’s to Baa3 on June 13 as it plans to borrow 100 billion euros ($126 billion) from European Rescue funds to bolster its banks. The yield on the country’s 10-year debt climbed to a euro-era record 7.158 percent five days later. Russia’s dollar Eurobonds due 2022, which are rated the same as Spain at Fitch and a rank lower at S&P, yielded 3.988 percent on June 18.
 Russia sold $7 billion of Eurobonds at record-low rates in March, three weeks after Putin won presidential elections, in the biggest sale from an emerging-market government since 2009.
 The country’s 30-year dollar debt has rallied since the offering, cutting the yield 60 basis points to 5.199. The yield on euro-denominated Italian bonds due in 2042 has surged 87 basis points to 4.939 over the same period.
 “We see strong demand for Russian risk,” Andrey Solovyev, global head of debt capital markets at VTB Capital, said in a June 22 interview. “We can see a lot of money relocation out of so-called developed markets.”
 Plans to introduce a budget spending cap next year based on a long-term oil price won backing with the International Monetary Fund and should help Russia’s outlook, Storchak said.  “For them it’s a positive factor,” he said. “Ultimately, it’s about creating the foundation for the economy to be stable from various kinds of risk and unexpected changes in the market.”
 Starting 2013, Russia will use the average price for Urals crude from the previous five years to calculate a cutoff level for spending, Finance Minister Anton Siluanov told reporters in St. Petersburg yesterday. The average will be expanded annually by a year until 2018, when a permanent 10-year average would be used.
 The measure is “more flexible” than the Russian government’s previous budget rule, Economy Minister Andrei Belousov told reporters yesterday. Urals crude, Russia’s main export blend, has averaged $113 a barrel so far this year, below the $115 price used to calculate the budget. Urals has fallen 11 percent to $88.95 this month.
 The budget may end the year with a 1.5 percent deficit should the average oil price sink to $100, Siluanov said. Oil would have to hover just above $90 a barrel for the rest of the year for that to happen, he said.
 Russia had a surplus of 0.8 percent of gross domestic product last year after higher oil prices boosted revenue. The government now projects a 0.1 percent deficit for 2012, compared with a 1.5 percent gap initially projected. Turmoil on external markets won’t force Russia to revise the amount of debt it plans to sell, Storchak said.
 “The state borrowing plan is known, nothing’s happening to it,” he said. “When the market allows, we borrow, and when it doesn’t, we announce that the auction wasn’t held.”

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