For market insiders there were multiple signs that Moody's was cooking something, but those willing to bet would expect rating upgrade to investment grade coming after elections, somewhere in Q1 following not the current, but the next rating review. Plus S&P said earlier that it had no immediate plans to upgrade Russia to investment grade. Hence Moody's decision took market by surprise, making Russian credit news splashing over headlines of global financial press.
This article has been written to advise IndexAtlas clients and partners on what key developments to watch following the rating upgrade.
When Oligopoly Status Backfires
Few issuers in the world love credit rating agencies - the power of what is essentially global rating oligopoly is immense, and seeing rating agencies fighting each other is a rare occasion.
Well, this is apparently what happened in Russia. Moody's historically had been first to establish the foothold on Russian market, when in early 90s its parent Dun & Bradstreet ventured early in Russia and established a substantial office in Moscow selling BIR reports and introducing Russia market to the way global industry runs the credit checks. Financially, particularly after 1998, this D&B experience was not a major success, but Moody's learned on the back of its parent about many aspects of doing business in Russia before its major competitor, S&P moved in.
Standard & Poor's did everything by the book, investing heavily in the country and building high profile presence offering multiple information and rating products on both global and domestic scale. By the time of surprise Moody's announcement, two rating agencies strategies could not be more different - Moody's still did not have a proper office in Moscow and was a part of strategically questionable joint venture with Interfax, while S&P had a major local operation and great visibility on domestic financial markets.
Whatever the credit quality rationale of Moody's investment grade decision was, commercially it made a lot of sense - catching market and its global competitor by surprise, Moody's gained a critical competitive advantage over S&P by being able to offer Russia's top notch borrowers at least an opportunity to obtain the investment grade rating, this not being possible with S&P capping the Russia's highest possible rating within speculative grade zone. By all means it now makes a lot of sense for Russia's local governments, financially sound and well organized government owned companies like Transneft and major exporters like Yukos Sibneft to invest more in their relationship with Moody's, and for a time being prioritizing work with this organization over relationships with S&P. While Moody's is not always a substitute to S&P, plus in current situation the market will even more demand second opinion of the McGraw & Hill sub, Moody's will definitely get high on the agenda of Russian corporate leaders, a great return on what appears to be not necessarily a high risk decision of raising country status to investment grade.
Things to Watch
FDI Will Surge
Whatever the true reason for Moody's rating upgrade was, dramatic improvement of Russian credit quality or tactical business move or both, it helped to break the vicious circle. Corporate strategists around the world can now have a good reason to lower discount rates for calculation of NPV of their Russian investment decisions and will have much more comfort in selling Russian strategy to their boards. Danone, Mobil and Chevron are only few of many major corporate giants sitting on the sidelines, some of them will start moving in already before year end, and others will squarely put Russia on their priority list for next year.
We anticipate dramatic increase in foreign direct investments in 2004-2005 following the Moody's decision of October 8, 2003.
Bond Market Will Rally, Russia Will Borrow More
In the hindsight, Russia's Government decision to stay away from global debt capital markets for most of 2002 and 2003, and advice to do so to major Russian government owned corporations was a very good decision. For Russian Government and prime credits like Transneft entering global capital markets now, after Moody's announcement, is going to be a totally different ball game than for Gazprom and Yukos approaching the market in Q3 of 2003. Moody's rating decision will broaden investor universe and tighten the spreads on sovereign and prime rated corporate bonds helping to establish unseen benchmarks for Russian corporate debt and making domestic bond markets to see certain decrease in supply of domestic bonds from quality issuers.
Stock Market Will Rally
With the bull market on the run for over 18 months now, Russian stocks will now get the "second breath", as we say in Russia - upgrade to investment quality will not only justify the current historically high valuations of most of the Russian stocks, but will form a solid base for investment banks to argue for target price increase and higher upside for Russian stocks, already re-priced dramatically from their 2000-2001 levels.
New Chance to Grow Export of Russian Manufacturing Goods
This would be the least obvious but perhaps the most sustainable consequence of investment grade rating, if only Russian industry will take the chance. So far exporting Russian manufacturing goods and even defending the home turf was a challenge for Russian industrialists - offering commodity items in global trade like customer financing, performance guarantees and so forth was either impossible or coming at a cost significantly higher than the one for global peers. Armed with ECA (export credit agencies) financings, European and North American manufacturers were able to squeeze Russian manufacturers out of most of global markets without the need to lower much the price for their products. Now, with country obtaining investment grade rating, Russian manufacturers can try to win some of their lost market back, provided of course they keep their own finance in order and invest in technology and service catch up.
Major Concerns Going Forward
Today is a good, festivity like time for Russian capital markets, a rare occasion, almost like winning the World Cup in football (something Russia yet never did). Hence we do not want to spoil the party and talk a lot about the things that are still wrong in how Russia runs its economy. And still, this celebration of investment grade award would be a much better party to enjoy if not the bitter feeling of widespread corruption and lack of accountability that presides over modern Russia these days. It's nice of course that we at least can have an investment grade.
IndexAtlas Limited is an investment advisory firm with offices in New York, Moscow, Kyiv and Istanbul, for more information -- go to www.indexatlas.
