welsh
Junkmaster
Could things be looking up for Russia? Here's an article from the Economist.
Just five years after Russia defaulted on its foreign debt, it has been upgraded to “investment grade” by Moody’s. But are Russian assets a fit home for the savings of widows and orphans?
PRESIDENT VLADIMIR PUTIN hinted last week that Russia’s debt might soon be re-rated, after five years in the financial wilderness following the country’s default in 1998. Even so, investors were surprised when, on Wednesday October 8th, Moody’s—one of the top three credit-rating agencies—raised Russia’s bond rating by two notches to investment grade. This is a vote of confidence in the country’s political stability and economic well-being, and means that many huge investment funds, which are limited by charter to putting their money only into investment-grade debt, are now free to invest there. It is just the latest sign of a growing enthusiasm for Russia, particularly among foreign investors. But is it premature? Moody’s main rivals, Standard & Poor’s and Fitch, certainly think so. They are expected to leave Russia's raings unchanged until the presidential election next spring.
The Kremlin reports on President Putin's meetings, posts statements and gives information on government policies. “Political resources on the net” has resources on Russia's politics, government and elections, including the recent election in Chechnya. The IMF posts economic research and statistics on Russia. See also the World Bank in Russia.
There has been an impressive run of good financial news from Russia since it hit rock-bottom in the late 1990s. After the sclerosis of the immediate post-Communist years, when the economy shrank year after year, national income has grown consistently since 1998, and growth is expected to be a sprightly 6% this year. Russia has benefited from the recent rise in commodity prices, particularly that of oil, from which it earns the bulk of its hard currency. After the shock of the default—at one stage Russia was paying 60% on three-month bills to fill its funding gap—Russia has embraced monetary rectitude. It has used the boom in tax revenues—it has run a budget surplus for the past three years—to pay down debt, which now stands at around 30% of national income. (In contrast, Japan is burdened with debts equal to 150% of national income.) Russia plans to create a “stabilisation fund” to set aside some of the windfall revenues from high oil prices so it can continue paying down debt if and when the oil price falls. This was one of the reasons for Moody’s decision to upgrade Russian debt.
Russia’s oil industry, which has been concentrated in the hands of a few super-wealthy “oligarchs” since privatisation under former president Boris Yeltsin in the mid-1990s, has dramatically increased its extraction rate. Russia is now the world’s second-largest exporter of oil and its position now threatens the OPEC cartel, which recently said that it will not cut its production quotas any further without similar action from non-members like Russia.
Foreign companies have signalled their faith in Russia by investing huge sums in its oil industry. BP, a British oil giant, is spending $7.7 billion on acquiring Tyumen Oil, despite a bitter legal row a few years ago over jointly owned assets. Once the takeover is complete, BP will have 13% of its capital employed in Russia. Shell, an Anglo-Dutch oil major, is expected to boost its investment in Russia and Central Asia to around $8 billion over the next five years, making the region one of its “heartlands”. There is now talk of the American oil giants moving into Russia too. Exxon Mobil is rumoured to be in talks to take a stake of up to 40% in YukosSibneft, Russia’s biggest oil company, which was the result of a takeover of Sibneft by Yukos.
The oil companies are not alone in rushing to invest in Russia. Foreign direct investment so far this year is already higher than the $7.8 billion attracted in the last 12 years put together. And the RTS stockmarket index breached its all-time high, set six years ago, earlier this month. The “spreads” on Russian bonds—ie, how much interest they earn above that earned by investing in American Treasury bonds—have fallen drastically since 1998 (see chart), and as a result of the Moody’s upgrade they fell a further 33 basis points (hundredths of a percentage point) on Wednesday to a record low of just 223 points. This plunge in the cost of borrowing for Russia’s government and companies should boost domestic investment.
Of course, Russia is not just an economic story. Investors have also been heartened by the way that Mr Putin has pursued a twin strategy of trying to make the country a safer place to invest through strengthening property rights, while seeking a closer friendship with the West, and particularly President George Bush. The depth of this relationship was shown by the invitation to Mr Putin to the presidential retreat at Camp David late last month, when Mr Bush referred to the Russian president as “my friend”. Mr Bush also seemed to endorse Russia as a stable investment prospect, saying: “I respect President Putin’s vision for Russia: a country at peace within its borders, with its neighbours, a country in which democracy and freedom and rule of law thrive.”
But there are many who question both whether this really is Mr Putin’s vision, and just how safe Russia is as an investment. Mr Putin did not agree to key American demands, such as one that Russia stop building an Iranian power station, which America suspects is designed to create nuclear weapons rather than electricity, as Iran claims. And Russia was hardly an ally of America’s in the war in Iraq, a country to which it has sold weapons in the past. Nor is Russia a beacon of democracy: in Chechnya last weekend, Russia’s preferred candidate won an election in which the three opposition candidates had been scared off. Russia’s campaign in Chechnya, where up to 200,000 out of a largely-Muslim population of 1m have died, has not been that of a benign democracy. Russia’s media is not free. And there are now fears over the independence of the judiciary. An investigation into Platon Lebedev, one of the biggest shareholders in Yukos, is believed to be politically motivated. It is thought to be a shot across the bows for Mikhail Khodorkovsky, Yukos’s biggest shareholder, who has expressed political ambitions that cut across the interests of the Kremlin.
Russia has been the subject of intense study by outsiders. The International Monetary Fund examined this spring whether the country merited an upgrade to investment grade for its debt. It concluded that: “the fundamentals do not quite warrant expectations of a two-notch upgrade to investment grade...Such an upgrade appears to require more of a track record in handling adversity (notably low oil prices), given the present political system, undiversified economy, and inadequate financial institutions." The Russian government seems to have persuaded Moody’s that it is on track to achieve all of these aims. But its rivals, and other influential voices, remain sceptical. They have history on their side
Just five years after Russia defaulted on its foreign debt, it has been upgraded to “investment grade” by Moody’s. But are Russian assets a fit home for the savings of widows and orphans?
PRESIDENT VLADIMIR PUTIN hinted last week that Russia’s debt might soon be re-rated, after five years in the financial wilderness following the country’s default in 1998. Even so, investors were surprised when, on Wednesday October 8th, Moody’s—one of the top three credit-rating agencies—raised Russia’s bond rating by two notches to investment grade. This is a vote of confidence in the country’s political stability and economic well-being, and means that many huge investment funds, which are limited by charter to putting their money only into investment-grade debt, are now free to invest there. It is just the latest sign of a growing enthusiasm for Russia, particularly among foreign investors. But is it premature? Moody’s main rivals, Standard & Poor’s and Fitch, certainly think so. They are expected to leave Russia's raings unchanged until the presidential election next spring.
The Kremlin reports on President Putin's meetings, posts statements and gives information on government policies. “Political resources on the net” has resources on Russia's politics, government and elections, including the recent election in Chechnya. The IMF posts economic research and statistics on Russia. See also the World Bank in Russia.
There has been an impressive run of good financial news from Russia since it hit rock-bottom in the late 1990s. After the sclerosis of the immediate post-Communist years, when the economy shrank year after year, national income has grown consistently since 1998, and growth is expected to be a sprightly 6% this year. Russia has benefited from the recent rise in commodity prices, particularly that of oil, from which it earns the bulk of its hard currency. After the shock of the default—at one stage Russia was paying 60% on three-month bills to fill its funding gap—Russia has embraced monetary rectitude. It has used the boom in tax revenues—it has run a budget surplus for the past three years—to pay down debt, which now stands at around 30% of national income. (In contrast, Japan is burdened with debts equal to 150% of national income.) Russia plans to create a “stabilisation fund” to set aside some of the windfall revenues from high oil prices so it can continue paying down debt if and when the oil price falls. This was one of the reasons for Moody’s decision to upgrade Russian debt.
Russia’s oil industry, which has been concentrated in the hands of a few super-wealthy “oligarchs” since privatisation under former president Boris Yeltsin in the mid-1990s, has dramatically increased its extraction rate. Russia is now the world’s second-largest exporter of oil and its position now threatens the OPEC cartel, which recently said that it will not cut its production quotas any further without similar action from non-members like Russia.
Foreign companies have signalled their faith in Russia by investing huge sums in its oil industry. BP, a British oil giant, is spending $7.7 billion on acquiring Tyumen Oil, despite a bitter legal row a few years ago over jointly owned assets. Once the takeover is complete, BP will have 13% of its capital employed in Russia. Shell, an Anglo-Dutch oil major, is expected to boost its investment in Russia and Central Asia to around $8 billion over the next five years, making the region one of its “heartlands”. There is now talk of the American oil giants moving into Russia too. Exxon Mobil is rumoured to be in talks to take a stake of up to 40% in YukosSibneft, Russia’s biggest oil company, which was the result of a takeover of Sibneft by Yukos.
The oil companies are not alone in rushing to invest in Russia. Foreign direct investment so far this year is already higher than the $7.8 billion attracted in the last 12 years put together. And the RTS stockmarket index breached its all-time high, set six years ago, earlier this month. The “spreads” on Russian bonds—ie, how much interest they earn above that earned by investing in American Treasury bonds—have fallen drastically since 1998 (see chart), and as a result of the Moody’s upgrade they fell a further 33 basis points (hundredths of a percentage point) on Wednesday to a record low of just 223 points. This plunge in the cost of borrowing for Russia’s government and companies should boost domestic investment.
Of course, Russia is not just an economic story. Investors have also been heartened by the way that Mr Putin has pursued a twin strategy of trying to make the country a safer place to invest through strengthening property rights, while seeking a closer friendship with the West, and particularly President George Bush. The depth of this relationship was shown by the invitation to Mr Putin to the presidential retreat at Camp David late last month, when Mr Bush referred to the Russian president as “my friend”. Mr Bush also seemed to endorse Russia as a stable investment prospect, saying: “I respect President Putin’s vision for Russia: a country at peace within its borders, with its neighbours, a country in which democracy and freedom and rule of law thrive.”
But there are many who question both whether this really is Mr Putin’s vision, and just how safe Russia is as an investment. Mr Putin did not agree to key American demands, such as one that Russia stop building an Iranian power station, which America suspects is designed to create nuclear weapons rather than electricity, as Iran claims. And Russia was hardly an ally of America’s in the war in Iraq, a country to which it has sold weapons in the past. Nor is Russia a beacon of democracy: in Chechnya last weekend, Russia’s preferred candidate won an election in which the three opposition candidates had been scared off. Russia’s campaign in Chechnya, where up to 200,000 out of a largely-Muslim population of 1m have died, has not been that of a benign democracy. Russia’s media is not free. And there are now fears over the independence of the judiciary. An investigation into Platon Lebedev, one of the biggest shareholders in Yukos, is believed to be politically motivated. It is thought to be a shot across the bows for Mikhail Khodorkovsky, Yukos’s biggest shareholder, who has expressed political ambitions that cut across the interests of the Kremlin.
Russia has been the subject of intense study by outsiders. The International Monetary Fund examined this spring whether the country merited an upgrade to investment grade for its debt. It concluded that: “the fundamentals do not quite warrant expectations of a two-notch upgrade to investment grade...Such an upgrade appears to require more of a track record in handling adversity (notably low oil prices), given the present political system, undiversified economy, and inadequate financial institutions." The Russian government seems to have persuaded Moody’s that it is on track to achieve all of these aims. But its rivals, and other influential voices, remain sceptical. They have history on their side
