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. Last Updated: 07/27/2016

Market Status Seen Lifting Bonds

LONDON -- The U.S. decision to acknowledge Russia as a market economy is a further step in the country's financial rehabilitation and should ultimately boost Russian bond prices, analysts said Friday.

Russian bonds have not yet reacted to the news because they were stymied by a slump in Brazilian debt last week. The U.S. Commerce Department said in a statement Thursday that it had recategorized Russia and would backdate its new status to April 1.

"It fits into the picture of long-term credit improvement," said Borislav Vladimirov, emerging Europe debt strategist at UBS Warburg in London.

"The political stability and the institutional framework which has been put together ... is clearly enhancing long-term investment projects," he said. The European Union has also recognized Russia as a market economy in recent weeks. As well as the economy announcements, the North Atlantic Treaty Organization and Russia, former Cold War enemies, launched a new forum for security cooperation called the Russia-NATO Council.

Although bonds did not react immediately to the news, the long-term picture should further boost Russia's important energy sector.

"Russia's clear strategy is to be the main energy provider for the region. As a result, Russia will continue to be positive," said UBS's Vladimirov.

Russia's dramatic economic turnaround since 1998 has been profoundly influenced by energy prices. These have been high since Russia's crisis, but the country has not been able to export as much crude and natural gas as it would like, due in part to lack of investment after 1998, Vladimirov said.

"If you add it together with the other things we have had, it supports positive sentiment," said Zsolt Papp, head of Eastern Europe Middle East and Africa Economics at ABN Amro. Russia's debt, although troubled by jitters in broader emerging debt markets, has outperformed its peers.

Since its mid-April peak, the industry benchmark, J.P. Morgan's Emerging Market Bond Index plus, has fallen in value by more than 5 percent. During the same period, Russia's segment of the index has risen 1.5 percent.

Russia's benchmark 2030 dollar global bond was at 70.375 percent of face value Friday, up nearly 22 percent year to date.

The change means Russia now faces only one more legal hurdle from the United States before it can join the World Trade Organization -- a Cold War-era law sanctioning countries with harsh emigration regimes known as the Jackson-Vanik amendment. U.S. President George W. Bush has already said he wants to "graduate" Russia out of this sanctioned category.

Analysts estimate Russia might gain $4 billion per year as a result of WTO accession.

Although the new status should lead to higher prices long-term, the boost is not as important as an increase in ratings by one of the big three agencies, said UBS's Vladimirov.

"It has not as much impact as a move to investment grade, which is UBS's long-term view," he said.

An investment-grade rating would open the door for Russia to gain access to a much larger pool of investors than it can at present, resulting in much cheaper borrowing for the country.

For example, Hungary, which is rated investment-grade by all three major agencies, would pay around 4.8 percent for five-year dollar borrowing, given the current trading level of its 2006 dollar bond benchmark. By contrast Russia, which is below investment grade, would pay around 8.36 percent to borrow over five years, given where its five-year benchmark, the 2007 dollar bond, is trading.

But Russia is a long way from investment grade at present. Credit agency Standard & Poor's has the country at B+, four notches into speculative grade, while Moody's Investors Service and Fitch Ratings assign it Ba3 and BB- grades, respectively. Both these ratings are three rungs into "junk" territory.