Diagnosis of the Day: Russia's Pre-Investment Condition

Is there anyone in Russia happy about Fitch's generous benevolence?
It has been long known that, although the West has almost objective instruments for evaluation of economic conditions, it all the same is very cautious with usage of financial instruments towards Russia. And this obviously happens not because such instruments are alien to the Russian economy and prove ineffective here. This happens mostly because the West is interested not in economic success as such, but in observance of the formal characteristics by established by Western experts and in political progress in Russia's top-level policy. For the most part, their estimation of the Russian economy's condition is still of a partisan and biased nature.

Recollect that as soon as Russia President Vladimir Putin voiced his solidarity with the American president in the sphere of the struggle against terrorism, the leading international ratings agencies immediately raised Russia's rating by two points. Increased oil prices allowed Russia to keep economic indicators within the fixed framework, even de spite of lots of faults in economic policy. Although no considerable changes have been made in Russia's economy, the soonest investment rating was spoken about. Russia expected that a gradual rise of the rating would soon start: Fitch promised to review Russia’s rating already early this year. And it did.

Yesterday the international ratings agency Fitch raised Russia's rating by two points to BB+. Experts, for whom the rating increase wasn't a secret at all, said that it was the highest rating in the whole history of the country. If we follow the logic of the situation's evolution, in about a year Russia will be given a valid investment rating. For the time being, the new rating of the Russian Federation places it alongside with Egypt, the Philippines, El Salvador and Kazakhstan.
It is interesting that, until recently, Fitch wasn't among the ratings agencies that had increased Russia's ratings. Last year the ratings agencies Moody's and Standard & Poor's raised Russia's rating by two points. Now both agencies are making no changes as concerning their last year's estimates. According to Standard & Poor's, Russia's rating is BB (outlook stable). Moody's states that the rating is Ba2 (outlook positive). Somehow or other, all the evaluations given to Russia reveal that its rating is still lower than investment-level.

It is considered that awarding an investment rating to a country allows it to attract more respectable, unblemished and cautious investors. It is well-known that many institutional investors (insurance companies, pension funds, etc.) have the right to invest only in those countries that have a rating no lower than investment-level. Experts say that conferring an investment rating on Russia would attract this kind of investor to the financial market, although this is not set in stone. At the same time, some experts, on the contrary, think that the rating raise will neither considerably increase the number of investors, nor make the inflow of foreign investments stronger.

Specialists at Fitch explain that their raising of Russia's rating by two points is due to the reduction of risks in debt servicing. This in turn was a result of Russia's high macroeconomic indicators and the restrained policy of the government. It is highly likely that analysts were very much impressed by the abrupt increase in Russia's gold and FOREX reserves due to favorable oil circumstances. It seems that the experts of the rating agency still disregard the fact that these very circumstances became a stimulus to greater inflation.

In any case, a great deal of problems now depend upon how soon the world’s leading agencies decide that Russia is "ready" for serious investments. The Fitch's rating of is stable, which means that the rating will remain unchanged for 18 months. Time will tell what will happen next. The Fitch specialists say that realization of structural reforms is the main condition of a further rating increase. But structural reforms are a long and rather unpredictable process. What is more, estimation of the results can be ambiguous. According to all estimates, Russia will be able to get an investment rating not earlier than in 2004, when presidential elections are to be held and a new government is to be formed.

It is quite clear that no structural reforms will be held in Russia till the next presidential elections. In such a situation, the Fitch experts give ratings based rather on political than on economic parameters. In other words, Russia will get a valid rating if it is decided that the country deserves it. It is not clear whether this new rating will help Russia attract long-expected foreign investments. It is sure that the new rating will help the Russian government borrow $6.8 billion on the foreign market, the sum that is scheduled to be borrowed in 2004-2005.