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. Last Updated: 07/27/2016

3 Years On, Russia Hits Debt Risk Milestone

LONDON — Russia reached a milestone Friday when the emerging-debt market decided, for the first time, that it was less risky to hold its debt than that of emerging countries generally.

The risk premium for holding Russian debt rather than safe-haven U.S. Treasuries on the industry benchmark JP Morgan Emerging Markets Bond Index Plus was 899bp, compared with 901bp for the EMBI+ as a whole.

It was exactly three years to the day after the country's traumatic devalution and default Aug. 17, 1998.

The risk premium reversal in large part reflects concerns that Argentina, the largest EMBI+ component, may default on its debt, but analysts said it also showed huge improvements in Russia's creditworthiness.

"Since the default in 1998, Russia has seen a strong recovery in exports with the rise in oil prices, which has boosted its creditworthiness, and it has also started to implement serious reforms which has reinforced that," said JP Morgan analyst Francis Beddington.

Put simply, with only one Eurobond maturing this year, and very few payments next year combined with a whopping current account budget surplus, Russia offers the best risk/reward profile in the emerging-markets universe.

"Russia has been following a very strong fiscal path. They have a very strong current account surplus and are putting in a lot of the structural reforms that are needed," said Deutsche Bank analyst Mark Balston.

Russian debt had gained 30 percent this year prior to Friday's trade.

Russia's booming economy is a standout in the emerging-market universe, which is beset with concerns over default in Argentina and slow growth.

Analysts say that while Russia would undoubtedly be hurt by any Argentinian default, it should rebound more quickly due to the lack of intrinsic risk in holding its paper.

There are clearly risks in the oil price, on inflation and excess liquidity in the system, as well as risks that reforms may not be as entrenched as they appear to be, but analysts are bullish.