• Decisions of the largest rating agencies (Fitch IBCA, Moody’s and Standard & Poor’s) to change/leave unchanged Russia’s credit ratings;
• A road show of a regular issue of federal eurobonds;
• The dismissal of the Russian government.

On the next day, however, it became known the Moody’s rating agency downgraded Russia’s rating from Ba2 to Ba3. When accounting for this step, Moody’s pointed out to economic aspects of Russia’s development. In particular, it pointed out to negative consequences caused by a rapid growth of domestic debt on the GKO/OFZ market and a consequent negative effect on Russia’s budget. In addition, representatives of the agency expressed an opinion that reduction of the Central Bank’s reserves, along with growth of a short-term debt, can significantly reduce Russia’s credit standing. A decline in international prices for oil, whose export is a major revenue earner for the federal budget, was an additional reason for the downgrading of Russia’s credit rating. Nonetheless, Moody’s step did not have a noticeable negative effect on the MinFin market. MinFin prices decreased by 1 percentage point within half an hour from this announcement and then grew again.

Such response was caused by two factors. First, Moody’s downgrading of Russia’s credit rating is in line with the assessment of Russia’s credit standing by Standard & Poor’s, the most competent rating agency, (BB-). At the end of March, Standard & Poor’s confirmed its credit rating of Russia and left its negative outlook unchanged. Second, under the existing market conditions most market participants regard credit ratings only as indicators and make investment decisions on the basis of a more thorough analysis. Therefore, there are no reasons for speaking about a negative short-term effect of this step on the MinFin market.

When considering rating agencies’ different approaches to the assessment of Russia’s financial risks, one should point out to a paradoxical situation. According to Standard & Poor’s and Moody’s, Russia’s credit ratings are BB- and Ba3, respectively. These ratings are two steps below Fitch IBCA’s rating for Russia (BB+) despite the fact that assessment techniques are similar. It seems probable that representatives of the Russian authorities managed to convince Fitch IBCA that downgrading Russia’s rating at the beginning of the year is inexpedient and failed to convince Moody’s.

According to Vedi’s experts, such a significant difference in ratings will hardly continue for a long time. It is quite probable that Fitch IBCA will downgrade Russia’s rating by at least one step in the next two or three months. In general opinion, prospects for upgrading Russia’s credit ratings will depend directly on the reform of Russia’s tax system in general and the adoption of Russia’s new Tax Code in particular.
 

It should be remembered that in the spring of 1997 the Russian government also issued eurobonds denominated in deutsche marks. At that time, the total borrowing amounted to DM 2 billion at 9% per year. The fact that the interest rate on eurobonds has not changed since the last year shows that investors’ attitude to Russian eurobonds is favorable. This, in turn, has a corresponding effect on the MinFin market.

The above-mentioned dismissal of the Russian government, which destabilized political situation in Russia, was the main event of the second half of March. Favorable attitudes of MinFin market participants, which ensured stable growth of prices during the greatest part of the month, changed significantly after the dismissal. A downward trend began to dominate the MinFin market, while most Western operators preferred to take a wait-and-see attitude and refrain from active operations until the resolution of the government crisis. In March, MinFin bonds earned their holders a yield amounting to 20 to 69% per year in US dollars depending on the tranche.
 

In the first half of April, the attention of Russian financial market participants will be drawn the domestic political crisis caused by the dismissal of the Russian government and the uncertainty that resulted from it. The longer the uncertainty about the composition of the new government continues, the more probable the formation of a strong downward trend on the market will be. Moreover, if the dissolution of the State Duma becomes probable, MinFin prices will decrease significantly. Such forecasts are based on the following considerations. The ahead-of-schedule elections to the lower house of the parliament will mean that Russia’s new Tax Code will not be approved in 1998. This will most probably lead to a downgrading of Russia’s credit rating and, as a result, yields on MinFin bonds will increase. In any case, another political crisis will significantly reduce foreign investments in Russian financial instruments, which have slightly increased recently.

In the second half of April, MinFin prices usually increase traditionally due to the approach of the day of coupon yield payments (May 14) and the end of period for the submission of coupons. Taking into account the above considerations, it can assume that a downward trend will most probably dominate the MinFin market until the appointment of the new Russian government. Market participants will pay much attention to comments on the formation of the new Russian government by IMF representatives. After the appointment of the new government (which may or may not take place in April), MinFin prices will be determined mostly by local factors. MinFin prices are likely to begin to increase closer to the end of the month.