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Standard & Poor’s Ratings Services has raised its long-term issuer credit rating on Russian Railways (RZD), the country’s vertically integrated railroad monopoly, to ‘BBB-‘ from ‘BB+’.

At the same time, the rating was removed from CreditWatch, where it had been placed with positive implications on September 22, 2005, due to the company’s improving business profile. The outlook is stable.

In addition, Standard & Poor’s affirmed its ‘ruAA+’ Russia national scale rating on RZD.

“The upgrade, which moves the company from the high-yield category to investment-grade, reflects RDZ’s improved business profile due to continued growth in national demand for rail transportation, driven by economic development and an improving regulatory framework,” says Standard & Poor’s credit analyst Eugene Korovin.


“In the medium term, RZD expects to improve its operating performance thanks to the anticipated transfer of loss making rail-passenger operations to a directly state-owned company, which should also gradually eliminate cross-subsidies from the freight segment.”
RZD’s medium-term financial risk will be mitigated by the company’s improving operational performance.


This improving performance will be supported by positive tariff regulation and ongoing economic development of the Russian Federation, which is building up strong demand for rail transport. Standard & Poor’s expects RZD’s financial profile to weaken in the medium term, as debt leverage rises from the currently relatively low levels for the rail sector, but to remain consistent with the low investment-grade category.

The rating and outlook also assume continuing favourable support from government policy. We expect material detrimental effects of governmental policy in the rail sector to be mitigated by shareholders. Tax contingencies could lead to a substantial downgrade if not mitigated otherwise.


In addition, lower ratings of the sovereign could lead to a downgrade. There is little upside potential for the rating over the next three to five years.