IHS Markit upgrades Russia sovereign risk rating to investment grade

IHS Markit upgrades Russia sovereign risk rating to investment grade
As oil prices rise modestly, so do the value of Russia's exports
By Ben Aris in Berlin April 5, 2017

The risk rating agency IHS Markit has upgraded Russia’s sovereign risk to investment grade on the back of growing economic recovery and strong manufacturing and service sector growth.

The company, which also produces the IHS Markit PMI indices, says that swift policy action to deal with the economic downturn has delivered better state finances and supported new shoots of growth, that has at the same time been underscored by a modest rebound in commodity prices in oil and metal.

“Russia, along with other commodity exporters, has suffered under the commodity crash with finances deteriorating and growth evaporating,” IHS Markit said in a press release. “However, swift remedial policy actions and a modest rebound in commodity prices has enabled Russia to regain the lowest investment grade status.”

The company has just released its manufacturing, service and composite PMI numbers for March all of which point to growing economic momentum.

Russian manufacturing continued its strongest expansion since 2011 in March, with the Markit PMI score of 52.4, almost the same as the previous month’s 52.5, while positive sentiment amongst Russian manufacturers reached a 22-month high.

The service sector has been doing even better and has lead Russia’s economy out of recession. The services PMI was up to 56.6 in March, well above the 55.5 from the month before, and has consistently been higher than the 50 no-change benchmark since January 2016.

Services has also pulled up the composite index to 56.3 in March from 55.4 in February, but that is off a very strong January figure of 58.3, which was the peak value in the last two years.

In general, the composite PMI was below the 50 no-change market for almost all of 2015 but moved into positive territory in 2016, apart from a brief respite in July, and was clearly building momentum in the last four months of last year ending 2016 at 56.6.



These results fit with the government’s predictions for 1.5-2% growth this year after the economy returned to growth in the last quarter of 2016 of 0.3%, ending seven consecutive quarters of recession – the first of President Vladimir Putin’s administration. All of this has led IHS Markit to upgrade Russia to investment grade.

The international rating agency Standard & Poor’s (S&P) still has Russia rated as ‘junk’, but raised the outlook for the country’s sovereign credit rating to ‘positive’ from ‘stable’ in March, confirming its long-term foreign currency credit rating at ‘BB +’ which is one notch below the sought after investment grade. At the same time, the long-term credit rating in the national currency was affirmed at ‘BBB-’. Moody’s Investors Service ranks the country at the same level, while Fitch Ratings is the only one of the major ratings agencies that has maintained Russia’s investment grade rating, which it first obtained in 2003.

S&P, which raised Russia’s outlook to stable from negative in September 2016, cited stabilising growth in gross domestic product for its latest decision. “External pressures appear to have abated significantly over the last 12-18 months,” S&P said in a statement. “The positive outlook indicates that we may raise our ratings if the Russian economy continues to adapt to the relatively low oil-price environment while maintaining its strong net external asset position and comparatively low net general government debt burden.”   

IHS Markit concurs and highlights the recent rise in oil prices from around $40 a barrel to consistent prices over $50 since Russia signed up to and stuck to an Opec- brokered production cut deal have bolstered Russia’s case.

“Greater foreign exchange liquidity as oil prices regain some ground and net capital outflows dwindle have convinced us to restore Russia’s medium-term sovereign risk rating to minimum investment grade from the top of the speculative range,” said Charles Movit, senior manager, CIS and Europe at IHS Markit.

“Russia can expect some modest growth to resume over 2017,” Movit added. “Moderate further gains in oil prices and the return to economic expansion, albeit at much more moderate pace than seen prior to the global recession, will continue to support the sustainability of the country’s private-sector external debt. These developments will also ease the fiscal situation, preserving the country’s very modest public-sector debt to gross domestic product (GDP) ratio.”

IHS Markit highlighted the decision of the Central Bank of Russia (CBR) to free float the ruble early as oil prices tumbled at the end of 2014 as the decisive move that has cushioned the economy from the heaviest blows and allowed the regulator to preserve the country’s hard currency reserves, which currently stand at just under $400bn or about 24 months of import cover.

“Russia was swift to let the ruble fall and raise interest rates in the face of lower oil prices. The budget was also revisited to retrench capital outlays and limit the widening of the fiscal deficit, factoring into our upgrade of Russia’s debt,” added Jan Randolph, director of Sovereign Risk at IHS Markit. Unlike others, such as Nigeria and the smaller African and CIS energy producers whose policy road maps out of trouble have been slower and less clear, Russia, like Brazil, has had the advantage of being here before in the face of commodity crashes and knew what to do; painful and politically difficult though these policy response measures often are.”