Moody's, as expected, downgraded Russia from Baa1 to Baa2
Late on Friday, Moody's downgraded Russia’s sovereign rating from Baa1 to Baa2 with a 'Negative' outlook. Among the key factors, the rating agency mentioned the subdued mid-term economy growth prospects amid elevated geopolitical risks (meaning the lack of access to international capital markets by Russian borrowers, in our view). In addition, Moody's mentioned the decline in FX reserves was due to CBR interventions. Overall, we suppose Moody's decision is unlikely to impact the Eurobond market, since the step was highly expected (and probably even a little bit overdue), given that Moody's had the highest rating on Russia among the rating agencies. Therefore, now Fitch and Moody's have the same rating for Russia at Baa2/BBB, while S&P has BBB-. From a relative value perspective, Russian sovereign bonds have underperformed EM peers YTD. At the moment, the Russian spread against major LatAm peers stands at highs for the last 52 weeks. Simultaneously, Russia now trades close to Croatia (Ba1/BB/BB) and Hungary (Ba1/BB/BB+), so we expect any potential further downgrades are already priced in. At the same time, if Russia falls into the sub-investment rating group according to one rating agency, it might potentially spur some selling on behalf of 'IG only' funds.
Maxim Korovin, Tatyana Zueva
VTB Capital analyst
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