Standard & Poor’s decided this week to lift the rating of Russia’s sovereign debt from BB+ to BBB-, the first notch on the investment grade scale. Moody’s and Fitch, the two other major credit agencies, had already raised their ratings.
Fidelity Investments describes the restoration to investment grade status this week, seven years after the default debacle of 1998, as “a remarkable turnaround.”
Paul Lavelle, a Fidelity fund manager and a holder of Russian debt, said the high oil price has helped the Russian Government to reduce its debt so significantly over the past year that the country was in fact a net creditor at the end of 2004.
“Investors are still wary because of the continued political and structural problems the country has faced, but now all three ratings agencies have upgraded the country to investment grade,” he says.
Recent decisions by Merrill Lynch and Lehman Brothers to incorporate Fitch’s ratings into their index methodologies have also helped elevate the status of Russian bonds in international markets.
“Fidelity’s fixed income team believe that the emerging markets story is far from over,” adds Lavelle. “Despite increased volatility and relatively tight levels, opportunities for selective investments are frequent for those with the right stock picking skills. These are treacherous waters, though, as the heightened political risks in Russia and the Ukrainian “revolution” vividly demonstrated. It’s not a one-way bet and going forward, creating value through emerging market exposure will require extremely good stock-picking skills.”
Lavele says Fidelity has exploited improvements in Russian debt over the past six months with a strong participation in the City of Moscow Euro bond, holdings in various VTB instruments (a state-owned bank) and investments in a number of telecom bonds. Ian Spreadbury, fixed income manager at Fidelity Investments, has a selective exposure to Russian and Ukrainian debt in both the Fidelity Extra Income and MoneyBuilder Income Funds.