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Russia Earns Investment-Grade Status - 2003-10-10

Russia has earned investment-grade status for the first time, potentially clearing the way for a new rush of capital to its markets, and leading some economists to say that the country has successfully turned the corner after the financial crisis of 1998.

Moody's Investors Service upgraded Russia's foreign-currency debt rating by two notches this week, essentially moving Russia from a speculative market to what is known as investment-grade status.

Analysts say the move could spark an influx of new foreign capital into Russia's markets, which have rebounded from the painful economic collapse just five years ago. Others say the Moody's rating can also be viewed as a symbol of confidence in Russia's stability as a nation.

Not so long ago, Russia was viewed as high risk among investors, and the Moody's upgrade took many market observers by surprise, such as Anton Struchenevski, of Moscow's Troika Dialogue brokerage house.

Mr. Struchenevski says his firm had not expected the move until at least next year, after Russia holds parliamentary and presidential elections.

The elections are key, he adds, because the results might yield a more populist Russian lower house, or State Duma, that could derail economic and political reforms.

In making the announcement, Moody's said the pace of reforms in Russia could well be affected, but not the general trends. It cited rising foreign currency reserves, five straight years of economic growth, and a budget surplus as reason enough for the upgrade.

The managing director of sovereign ratings at Standard and Poor's [S&P] in London disagrees, calling the rating premature. Konrad Reuss says Russia is still a long way away from meriting investment-grade status, in S&P's view.

"For us, really, an important investment-grade ingredient really would be that we see continued and more structural reforms, in particular in the banking sector, in the energy sector, which really means a demonopolization of Russia's economy," he explained. "And we want to see more public administrative reforms. All that really is important for us, because, at the moment, we think Russia's economy is still too vulnerable, too vulnerable to external shocks in particular, and [to] oil price decline."

Troika Dialogue's Anton Struchenevski in Moscow echoed Mr. Reuss's concerns about Russia's over-reliance on oil and gas gains.

"All Russian micro-economic successes happen[ed] on the back of extremely high oil prices in 2003," said Mr. Struchenevski. "These successes were not the result of wide micro-economic policy. So, the concerns on the ability of Russian government to handle [the] situation in pessimistic case, when, for example, oil prices are low, these concerns still remain."

Mr. Struchenevski says that while news of the Moody's upgrade triggered immediate gains in the market, continued investment over the long term will be secured only by improving the quality of Russia's public institutions. He also says the government needs to ensure greater protection of investors' rights.