S&P Upgrade And Russian Markets' Reaction

Belatedly, on the S&P upgrade for Russian sovereign debt, here is a good primer from Bloomberg.

Markets' repricing was quick on the news when S&P upgraded country bonds from BB+ to BBB: Russian dollar- and euro-denominated bonds rose across the maturity curve. Russia's 2043 eurobond was up 1.4 cents to 115 cents in the dollar the day after the upgrade, while the 2026 issue was up 0.69 cents to 105 cents, and the 2027 issue was up 0.72 cents to 101 cents. 5-year CDS fell 5 bps to 103 bps.

This was not a watershed, however, as Russian bonds have been rallying (with some volatility) for quite some time prior, shaking off completely the end of January extension of the U.S. sanctions.

A neat chart via BOFIT shows the improvement in the state of Russian fiscal position:

Russia spent 3 years in 'junk rating' lock up, much of it due to the U.S. and EU sanctions, rather than to any adverse dynamic in Russian sovereign default risks.

As BOFIT noted, "S&P Global Ratings noted that Russia's macroeconomic policy has allowed the economy to adjust to lower commodity prices and international sanctions. The outlook for the Russian economy is stable. S&P's rating for Russian sovereign foreign bonds now matches that of Fitch, while Moody's continues to apply a junk rating (Ba1). ... The Russian government currently faces no compelling need to borrow from abroad as the current fiscal outlook is rather good thanks to the rise of oil prices and fiscal discipline."

In 2017, Russia witnessed an 18 percent rise in federal revenues, and an 8 percent increase in allocations to the Social Reserve Funds (spending from the funds rose 6 percent).

Russia retains the position, rather rare for any country, to be able to pay off its entire external government debt from its sovereign reserves.