Azernews.Az

By Bloomberg

Even as Russia teeters on the brink of losing its last investment-grade rating, the nation’s world- beating Eurobond rally looks unstoppable.

A cut to junk from Fitch Ratings at its review today would strip Russia of investment-grade rankings from all three international credit-scoring companies for the first time in a decade. Russia’s benchmark 2030 Eurobond continued this year’s 13 percent rally, beating every other developing-nation dollar bond.

With the cease-fire in eastern Ukraine limiting the risk of further sanctions and oil nearing this year’s peak, investors have been piling back into Russian securities, along with the nation’s lenders, flush with dollar loans from the central bank. Most of those investors restricted from holding junk-rated assets would have sold before the downgrades from Moody’s Investors Service and Standard & Poor’s, said Cyril Battini, a senior fixed-income analyst at Bank of Singapore.

“There’s been a huge rally in fixed income and it still has legs to go,” Battini said in Moscow on April 14. “These downgrades allow high-yield investors to come in and pick up.”

Fitch was the first to cut Russia’s rating this year on Jan. 9, when it reduced its credit score to BBB-, its lowest investment grade. By the end of February, S&P and Moody’s had gone a step further, downgrading Russia to speculative.

Reserves, Inflation

Inflation at the fastest pace since 2002 and international reserves near the lowest in eight years mean there’s “some possibility” Fitch will cut its rating to match peers, HSBC Holdings Plc analyst Reza-ul Karim wrote in a note to clients on April 14.

At the same time, political and economic risks are no higher than when Fitch cut three months ago, Karim said. Stabilizing oil prices and speculation the U.S. and Europe won’t ratchet up sanctions over Ukraine have turned the ruble into the best-performing currency worldwide this year.

While the economy is set for its first recession since 2009, it’s unlikely to match forecasts by Moody’s in February when it cut Russia to junk, according to Finance Minister Anton Siluanov. Moody’s estimated capital outflow will reach $400 billion in 2015-2016 and the economy will shrink 8.5 percent in that period, Siluanov said. The figures weren’t included in the rating company’s statement.

Positive Trend

Outflows slowed to $32.6 billion in the first quarter from $77.4 billion in the previous period, central bank estimates show. The economy is forecast to contract 4.1 percent this year, before expanding 0.5 percent in 2016, according to analysts surveyed by Bloomberg.

“I’ll be outraged if they cut,” Dmitry Dudkin, head of fixed-income research at UralSib Capital, said in e-mailed comments on April 16. “The trend is positive in almost all metrics.”

Investors often disregard ratings companies’ credit grade and outlook changes. Since Moody’s cut on Feb. 20, Russia’s Eurobonds have returned investors 9.7 percent, the most among emerging markets tracked by Bloomberg after Venezuela.

The yield on the March 2030 Eurobond jumped 3.46 percentage points from Russia’s incursion in Ukraine’s Crimea region to the peak of the market turmoil in December. The rate has fallen more than 4 percentage points since then to 3.62 percent, the lowest since June 2013.

“Forced selling was done even before the downgrades,” Bank of Singapore’s Battini said. “The selling started shortly after the invasion of Crimea.”