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. Last Updated: 07/27/2016

S&P Upgrades Its Rating for Russia

LONDON -- Credit rating agency Standard & Poor's said Friday it had upgraded Russia's sovereign ratings to BB-, a level it last had in 1997, from B+, assigning a stable outlook, citing reforms and improved budgetary discipline.

The move, which brings S&P's rating into line with other agencies, produced little reaction in the country's debt, with the 2030 Eurobond trading down 3/4 at 67-3/8, in line with weaker global markets.

The move brings Russia's rating back to the levels of 1997 as the country tackled Soviet-era debts in a $32 billion restructuring deal and shows how far the country has come since its August 1998 default.

S&P said in a statement it had raised Russia's long-term foreign and local currency ratings to BB-, three notches below investment-grade, from B+. It also affirmed the country's B short-term local and foreign currency ratings, and revised its rating outlook to stable from positive.

"The upgrade reflects improving governability in the Russian Federation and an enhanced debt management policy, as manifested by ongoing progress in passing important legislation and by continuing budgetary discipline," said S&P analyst Helena Hessel in the statement.

She cited the recent passage of a politically challenging bill on the purchase and sale of agricultural land, saying it indicated close policy coordination between the executive and legislative branches. "The change of management at the Central Bank has increased the prospects for the implementation of important banking reform and financial liberalization, while recent developments in the politically influential Gazprom also indicate progress in rationalizing Russia's energy sector," Hessel said.

Financial analysts said that ratings agencies continue to underestimate Russia, which boasts huge and growing foreign exchange reserves, a balanced budget and has few financing needs during a time of global market stress.

"I think Russia is one notch under-rated," said Philip Poole, head of emerging markets research at IMG.

"But the rating is running up, and that can be important for some of the more conservative funds who can only hold debt when two of the major agencies rate a country at this level," he said.

News of the rating upgrade came after Deputy Finance Minister Sergei Kolotukhin said Friday that Russia will probably abandon its plan to place a $2 billion Eurobond this year.

Analysts said that as Russia did not need the money, the postponement was not a surprise.

"General risk appetite is very poor, and if Russia was planning to do a very tightly priced issue to set a new benchmark, now is not the time," said Poole.

Russia's external debt currently amounts to $120 billion and is expected to decline to $116 billion to $117 billion by the end of the year. The government started 2002 with $129.5 billion in foreign debt.

Emerging market debt has been hit along with other assets in the recent financial markets turmoil, losing 1.17 percent in the year to date according to the industry benchmark, JPMorgan Emerging Markets Bond Index Plus.

Although Russia has held up well with a 12.79 percent gain this year, risk premiums over U.S. Treasuries are around 580 basis points (5.8 percentage points), more than Russia would wish to pay for nonessential borrowing.