Sochi Binge Undermines Putin Outrage Over Rating: Russia Credit

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Workers use shovels to clear snow from the spectators stands in the finish area at the Laura Cross Country and Biathlon Center in Rosa Khutor on February 19, 2014, during the Sochi Winter Olympics. (AFP Photo/Odd Andersen)

Moscow. The cost of hosting the Sochi Winter Olympics calls into question Russian President Vladimir Putin’s description of his country’s credit rating as an “outrage.”

While Russia’s total sovereign debt is the second-lowest of 50 countries tracked by Bloomberg, the Olympic cost overruns highlight one of the country’s biggest financial weaknesses — the lack of independent government institutions that can curb corruption and keep spending in check, according to Moody’s Investors Service and RAM Capital SA.

Russia is spending 1.53 trillion rubles ($43 billion) on infrastructure and the games to host the 22nd Winter Olympics, now in their second week, compared with an original budget of $12 billion.

“Cost overruns happen to many Olympic hosts, but the extent was significantly larger in Russia,” Thorsten Nestmann, a Frankfurt-based analyst at Moody’s, said by phone on Feb. 11. “More public-sector efficiency, lower levels of corruption and better rule of law could help improve ratings.”

Russia’s public debt amounts to 11 percent of gross domestic product, compared with 35 percent for Thailand, which shares the country’s Baa1 grade at Moody’s, the third-lowest investment level.

The cost to insure Russian debt against non- payment with credit-default swaps stood at 185 basis points on Feb. 18, compared with 142 for Thailand.

Cost Overruns Sochi’s sports-related costs of about 142 billion rubles exceeded the original plan by 130 percent in real terms, Moody’s estimated in a Feb. 4 report.

Non-sports related costs of about 982 billion rubles were 77 percent above target, it said. Russia’s Finance Ministry didn’t respond to an e-mailed request for comment yesterday.

The Sochi Olympic host may have to spend as much as $7 billion more in the next three years to maintain venues and other new infrastructure around Sochi, two officials involved in the planning said last week.

That’s about what Canada spent in total on the Vancouver Olympics in 2010.

The yield on Russia’s December 2019 ruble bond has climbed 69 basis points this year to 8.04 percent, compared with little change for local debt of Brazil, ranked the same at Fitch Ratings at BBB.

Russia and members of the Eurasian Economic Community in July 2011 called for the creation of an independent rating company to loosen the hold of US agencies.

Putin said the same month that he’s an “ardent supporter” of the plan because Russia’s low credit grade is an “outrage,” lifting corporate borrowing costs and increasing risks. ‘High’ Corruption Russia’s long-term ratings were affirmed by Moody’s at Baa1, the third-lowest investment grade, with a stable outlook, according to a statement dated March 27.

Moody’s hasn’t changed the country’s credit score since a one-step upgrade in July 2008, the last time a rating company improved Russia’s ranking.

The benefit of the country’s “low” debt is counterbalanced by “weak” rule of law and “high” levels of corruption, according to Moody’s.

Standard & Poor’s cut Russia to BBB, the second-lowest investment grade, in December 2008 and Fitch did the same in February 2009.

The world’s biggest energy exporter was ranked the most corrupt nation among the Group of 20 advanced economies in Transparency International’s 2013 Corruption Perceptions Index.

‘Minimal’ impact

“Wherever there are major construction projects there will be cost overruns and the spending will be difficult to track,” Richard Segal, chief of credit strategy at Jefferies International in London, said by e-mail on Feb. 18. “This excess spending occurred over several years, and if it wasn’t on the Olympics, most of it would have been spent on something else.”

The costs of the Sochi Olympics are less than 2.5 percent of Fitch’s 2013 GDP estimate for Russia, according to a Feb. 5 note.

The ratings company sees the impact from the games on the nation’s finances as “minimal,” it said. The yield on Russia’s dollar bonds due April 2020 dropped two basis points to 3.67 percent by 12:17 p.m. today in Moscow.

The extra yield investors demand to hold Russia’s dollar debt rather than US Treasuries rose one basis point to 237, according to JPMorgan indexes.

Russia’s three-year budget puts spending at 14 trillion rubles in 2014, including 2.3 billion rubles for Olympic projects — barely enough to cover the utility bills, according to the Construction Ministry in Moscow.

The deficit is forecast to reach 390 billion rubles in 2014, or 0.5 percent of GDP, without including the new Olympic outlays that are being debated.

Lack of clarity in government decisions “is the most difficult thing to deal with,” Ogeday Topcular, who oversees $300 million of assets as a money manager at RAM Capital SA in Geneva, said by e-mail on Feb. 18. “Sochi is one example how the government functions, how it takes decisions to spend such huge amounts of money.”

With assistance from Evgenia Pismennaya

Bloomberg