Moody’s foresees U.S. sanctions on new Russian debt, but says Moscow can withstand more

By Polina Nikolskaya and Zlata Garasyuta

MOSCOW (Reuters) – The United States is likely to impose sanctions on holdings of new Russian sovereign debt but Moscow’s own budget rules make Kremlin finances more resilient to even harsher restrictions, Moody’s Senior Vice President Kristin Lindow said.

Moody’s raised Russia’s sovereign outlook to positive from stable in January, saying there was growing evidence of institutional strength and signs of higher economic and fiscal resilience.

Lindow told a conference in Moscow this week that Moody’s could lift Russia’s sovereign rating to the investment grade as early as next year.

In an interview with Reuters, Lindow said Russia’s commitment to fiscal discipline was the key element for the possible rating upgrade.

Under its budget rules, the finance ministry buys foreign currency for state reserves to an amount that is equal to the extra oil and gas revenue that Russia earns when prices for its Urals oil blend exceed $40 per barrel.

The price of Urals hovered at around $75 per barrel on Friday and has been well above the $40 level ever since August 2016.

“The government doesn’t spend everything that it has coming in as (it gets) more revenue and it’s able to build reserves with that,” Lindow said.

“With borrowing requirements so low, it can be resilient to the impact of more severe sanctions than we are anticipating.”

Lindow described the likelihood of sanctions on buying Russian’s new sovereign debt for U.S. investors and investors based in the United States as very high.

“But there is a threat that they (sanctions) could be more extensive … So sticking to the fiscal rule becomes that much more vital,” Lindow said.

The Russian government has so far managed now to give in to pressure from those policymakers who would like it to raise the oil price factored into the fiscal rule, Lindow said.

Apart from the ban on holding new Russian sovereign debt, U.S. lawmakers proposed other punitive measures, such as restrictions on dollar transactions for Russia’s major banks.

The sanctions package, known as the “bill from hell” and designed to punish Moscow for what Washington described as malign activity, is expected to be discussed after the elections to the U.S. Congress in November.

Russia has repeatedly denied any wrongdoing.

Rising oil prices are helping Moscow to rely less on borrowing as the budget is on track to receive more money that is set to spend.

“What it (government) does need to borrow … can be financed in the domestic capital market. So they don’t need foreigners, foreign participation in their auctions,” Lindow said.

The exodus of foreign investors from Russia’s sovereign bonds, known as OFZs, that was seen earlier this year amid threats of new sanctions risks was probably over by now, Lindow said.

The share of foreign investors among holders of Russia’s bonds was at 25.8 pct as of Oct. 1, according to the central bank, the level more or less stable over the last couple of months.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.