Putin’s Russia Trading as Junk Awaits Downgrades to Match

By Natasha Doff

As rating companies weigh cutting Russia’s investment-grade status as soon as today, traders of credit-default swaps are already treating the nation as junk.
The cost of insuring Russia’s bonds against non-repayment for five years jumped 72 basis points this year to 547, according to data compiled by Bloomberg. That makes the nation’s debt the fifth-riskiest globally, above speculative-grade countries including Lebanon, Egypt and Portugal.
While Societe Generale SA said that Fitch Ratings, which ranks Russia two levels above junk, will probably cut by one step today, Standard & Poor’s signalled last month it may drop the country below investment grade within 90 days. With plunging oil prices and sanctions over President Vladimir Putin’s support for Ukraine separatists tipping the economy into a recession, the nation’s low levels of public debt and foreign-currency war chest probably won’t prevent a downgrade.
“I see a very high probability of a downgrade,” Olga Budovnits, a credit analyst at Union Bancaire Privee in Zurich, said by e-mail on Jan. 7. “There were massive and
rapid changes to Russia’s economic outlook in the last three months, driven by oil prices. This has caused a massive ruble devaluation, inflation and reduced access to credit.”
Russian government bond yields are among the highest in emerging markets at 7.1 percent for dollar debt due September 2023. That’s above the 5.9 percent on Lebanese notes maturing the same year. Lebanon is rated B- by S&P, six steps below Russia’s BBB- grade.

Disregard Ratings

Investors often disregard ratings companies’ credit grade and outlook changes. Ten-year French yields, which were above 3 percent when S&P knocked the country from the top AAA rating in January 2012, fell to a record low 0.7 percent this month.
“Russia could still avoid a downgrade to sub-investment grade given that the central bank has plenty of foreign-exchange reserves,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by phone on Jan. 7. “S&P’s decision will be dependent on whether or not we see some progress on Russia’s negotiations with the European Union on the situation in eastern Ukraine.”
Ukrainian President Petro Poroshenko said on Jan. 1 he’ll meet Putin, German Chancellor Angela Merkel and French President Francois Hollande in the Kazakh capital Astana on Jan. 15 for talks on how to resolve his nation’s standoff with Russia.

Soros Warning

Billionaire financier George Soros said in an article for the New York Review of Books on Jan. 7 that the Ukraine conflict posed a bigger danger to Europe’s economy than Greece, and called on the West to step up financial assistance for the government in Kiev.
Russia’s ratings are supported by the government’s budget surplus and Europe’s second-largest foreign-exchange reserves, according to a Dec. 18 statement by Fitch. Russia’s currency holdings fell $113 billion in 2014 to a five-year low of $399 billion as the central bank tried to slow the currency’s 46 percent weakening against the dollar last year.
To save its reserves, the central bank brought forward plans to allow the ruble to free float in November. The currency weakened 2.4 percent to 61.7550 per dollar today as Brent crude traded at its lowest level in more than five years on a closing basis, as of 12:51 p.m in Moscow.
“Russia is already trading like a non-investment grade credit,” Marco Ruijer, who helps oversee $7 billion of emerging-market debt at ING Investment Management in The Hague, said by phone on Jan. 7. A Fitch cut by one level “is already priced, but prices will go lower if S&P downgrade,” he said.