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. Last Updated: 07/27/2016

For Investors, Moody's Upgrade Is a Done Deal

As Moody's rating agency reviews its sovereign debt rating for Russia, analysts say a potential upgrade is already priced in to the bond markets by investors anticipating the move.

Moody's Investors' Service announced in mid-October it was placing Russia's foreign currency ratings under review for upgrade. It currently has a Ba3 rating on Russia's sovereign debt, or debt guaranteed by the government. Analysts expect an upgrade to take Russian sovereign bonds -- which are classified as "junk grade," or high risk -- to just under "investment grade," considered relatively risk free.

David Frohriep, Moody's assistant communications manager for Europe, said the agency is aiming to conclude the review over the next few weeks.

The review is focusing on the sustainability of the fiscal and balance-of-payments positions, fundamental trends in investment and productivity growth in the nonresource-based sectors of the economy, according to a statement issued by Moody's in October. Monetary and exchange rate policies and the agenda and timetable for structural reforms are also under scrutiny, it said.

Russia's current Ba3 sovereign rating puts it alongside Peru, Jamaica and Jordan. A one-notch upgrade to Ba2 would hoist it to the level of Guatemala, Colombia and Fiji. Standard & Poor's and Fitch both have put Russia's long-term sovereign rating at BB minus, which is their equivalent of Moody's Ba3. S&P's director Helena Hessel last week confirmed the agency may review Russia's sovereign rating in December.

The potential upgrade by Moody's is already priced in to current levels by the market, so its effect will not be too dramatic, said CentreInvest macroeconomics analyst Anastasia Andronova. Bond prices rose in the weeks after the news, she said, "so after Moody's decision the debt market might correct downward: Russia's foreign debt market is slightly overvalued now."

NIKoil fixed income analyst Boris Ginzburg said the effect of a higher rating would be felt more acutely on foreign markets than domestic ones, as Moody's guidance is more closely followed externally. He said the anticipated move was another positive step toward Russia gaining investment-grade status, but that even after a one-notch upgrade the country's sovereign debt would still be classified as junk grade. Many investment organizations are limited to putting money only into investment grade papers, he said.

An upgrade would also act as a strong incentive for foreign-based investors to put money into Russian stocks, said NIKoil world markets analyst Alexei Kazakov. He said the domestic stock market could expect a significant positive knock-on effect.

Washington-based independent investment adviser Colin Odell said the effects may be more tangible long-term, and was skeptical on whether a credit agency upgrade was an accurate indicator for the future behavior of the market.

"Moody's isn't necessarily a predictor of future success or failure, more of a recognition of recent successes and advancement," he said. "The economic reality in the marketplace decides itself. Moody's and others only react. Russia is on the upswing, so they just validate it as it goes along."