Russian Eurobond Spreads over US Treasuries: The Game Is Not Over… The Show Must Go On…

Russia has finally obtained full investment rating, after S&P, following Moody’s and
Fitch, upgraded the country’s rating to an investment grade early last week. A longexpected
event has taken place.
On the expectations and the fact of investment rating assignment to Russia by S&P,
Russian Eurobond spreads over US Treasuries have narrowed by approximately 20-
25 bp over the last three weeks. However, even after considerable narrowing of the
Russian country spread over the last three weeks, as well as over the last 3-6 months,
there remains significant further spread narrowing potential.
We have compared Russian Eurobond spreads to these of several categories of
“ВВВ-“ and “ВВ+”-rated liabilities. Russian Eurobonds are still being traded at
wider spreads over US Treasuries than US corporate bonds, even those rated
speculative “ВВ+” !!!
The spreads of long “ВВ+”-rated bond (comparable with the Russia-30 in duration)
are now 190 bp. Meanwhile, the spreads of long “BВВ-”-rated bonds (comparable
with the Russia-30 in duration) are now 150-160 bp. The Russia-30 spread over US
Treasuries is now 210 bp.
We estimate further Russian Eurobond spread narrowing potential to be at least 20
bp in the short term (we expect the Russian spread to reach and then become
narrower than that of “BB+”-rated US corporates), and we expect the spread to
narrow by 40-50 bp in the medium term within the frame of Russia’s current credit
rating.
We also deem it possible that Moody\'s and Fitch will raise Russia’s rating by another
degree after Russia has agreed the conditions of early redemption of its debt to the
Paris Club. This would create preconditions for further Russian country spread
narrowing.
According to all its debt and budgetary parameters, Russia now already meets the
criteria of an “A”-rated country (3 grades above the current level). Meanwhile,
further rating upgrades are prevented by political reasons. For more details, see our
strategy in the debt market for 2005.
We do not rule out that Russia’s country spread may present investors with a nice
surprise over the next one or two years by narrowing faster than Russia’s credit
rating is going to be upgraded. We expect the Russia-30 spread over US Treasuries
to be in the range of 150-170 by the end of 2005.