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. Last Updated: 07/27/2016

Economy Gaining 'Institutional' Lift

Better-than-expected credit ratings granted to Russia by international rating agencies and a positive initial reaction to Gazprom's share offering overseas shows that Russia is becoming increasingly integrated into world financial markets alongside other "normal economies," economists said Tuesday.


But even though the credit ratings may help to bring down domestic interest rates, the government must continue its strict fiscal policies as poor revenue collection threatens to undermine the international gains, analysts said.


Financial markets were upbeat on Monday's news of the credit ratings by Moody's, Standard & Poor's and IBCA that put Russia above Argentina and Brazil and close to East European states such as Poland and Hungary.


Russian dollar-denominated Vneshekonom debt jumped four points on the news Monday and held on to the gains Tuesday, while prices for dollar-denominated MinFin bonds climbed some three points, Reuters reported. Stocks and bonds also rose.


"The ratings are quite good and encouraging," said Charles Blitzer, chief economist of the emerging markets group with the Donaldson, Lufkin and Jenrette investment bank in London.


"This is yet another signal that the world financial institutions rate Russia as a normal country," said Roland Nash, chief economist at Renaissance Capital.


Although not investment-grade, the ratings reflect the strong fundamentals of the Russian economy, analysts said.


"The rating is probably fair, because Russia has an asset base matched by no other," said James Fenkner, head of research with CentreInvest.


In another sign of growing foreign interest, Gazprom's international share offering that began Monday -- potentially the largest ever international equity offering by a Russian company -- has drawn a positive response from investors, although the pricing of the issue is not yet clear, market sources said.


This week's developments follow in the vein of increasing international recognition of Russia's emerging market economy. Last month the International Finance Corporation launched a Russia share index and announced that it would include Russia in its global composite index by January next year. Also last month the Basle-based Bank for International Settlements, known as the central bankers' central bank, said it would admit Russia and other emerging economies as new members.


Russia now expects to join the Paris Club of government creditors shortly, Finance Minister Alexander Livshits said Monday, Reuters reported. Such a move could bring in hefty annual debt payments from countries that Russia lent money to in the Soviet era.


But Monday's international credit rating may be an even larger step forward in the country's attempts to attract and reassure foreign investors, Livshits said.


"Today's event is even stronger. In the [longer] perspective this is huge money," Livshits said, according to Segodnya.


A Western economist said recent developments show that investors and institutions in the West are gradually moving away from an emphasis on individual political figures, like President Boris Yeltsin, as the only guarantor for the future of reforms.


Instead the focus is shifting toward economic structures and institutions.


"The Russian economy is now gaining institutional momentum," said the economist, who asked not to be identified.


Political concerns, especially over Yeltsin's health, continue to loom large for investors, however.


"Russian political uncertainties have hampered economic performance and slowed the transition to a more efficient market economy," Moody's said in a statement following its BA2 Eurobond rating Monday, Reuters reported.


Despite the good news from abroad, the Russian government faces continuing problems in living up to its revenue targets.


According to new figures released by the State Tax Service, the federal budget received only 45 percent of planned revenues in September, Prime-Tass reported Tuesday.


During the first nine months of the year, the budget has raised 75 percent of planned revenue, the news agency reported.


If the budget deficit widens, the government will have to step up borrowing, including on the domestic debt market where yields are still above 50 percent annually.


"A good international rating is one part of the puzzle to bring down real interest rates," Blitzer said, but he added that it must be followed by an improvement of fiscal discipline and a further opening of the market in ruble-denominated government securities.


The favorable international credit rating, however, grants the government new possibilities to raise funds abroad, for example through a Eurobond issue expected by November this year, economists said.


"With the rating, Russia will pay a lower interest on the Eurobonds than expected," Blitzer said.


But the effect is also likely to trickle down and boost the standing of Russian companies seeking to raise capital on international markets, the Western economist added.