Russia's prospects for a higher debt grade after entering theWorld Trade Organization may not materialize because of thecountry's investment climate and institutional weaknesses, ratingcompanies said.

Standard & Poor's, whose BBB rating has a stable outlook,doesn't anticipate “any immediate impact from WTO accession,” saidKai Stukenbrock, director of sovereign ratings in Europe, theMiddle East and Africa. Russia must tackle “institutionalweaknesses” such as the rule of law and corruption to reap the fullbenefits from WTO entry, according to Dietmar Hornung, a seniorcredit analyst at Moody's Investors Service

Prime Minister Vladimir Putin, who plans to return to theKremlin next May, has yet to take significant measures to diversifythe economy by improving the rule of law and reducing the role ofstate monopolies, Moody's and S&P said. None of the three mainrating agencies have upgraded Russia's debt score since the2008-2009 global financial crisis.

“The agencies kept Russia on hold due to uncertainty regardingthe pre-election fiscal policy and high concentration of GDP in theoil sector,” Barbara Nestor, an emerging-markets strategist atCommerzbank AG in London, said in an e-mail on Nov. 18. “WTO entryis very likely to be a relevant credit- positive factor. It's astructural benchmark.”

The world's biggest energy exporter is set to receive the finalapproval to join the WTO next month after 18 years of negotiations.Fitch Ratings, which has a positive outlook on Russia's BBB rating,says an upgrade may happen within two years, providing there isn'ta large drop in the price of oil.

Joining the Geneva-based body that sets global trade rulesshould drive bigger investment inflows, trade and highercompetition in Russia, Fitch analyst Charles Seville said.

The government is counting on an upgrade in its credit rating asmembership in the trade arbiter improves market access and luresforeign investment to reduce its reliance on energy exports, DeputyFinance Minister Sergei Storchak said in a Nov. 15 phoneinterview.

“Russia's entry into the WTO should be an additional argumentfor the rating agencies to consider upgrading our credit rating,”Storchak said. “It should be a signal for them that our country ismoving to develop its economic potential, diversify the economy andincrease its investment attractiveness.”

Putin on July 11 said Russia's debt grade is an “outrage” thatlifts corporate borrowing costs and increases risks. The nation'srating was last raised by New York-based Moody's in 2008 to Baa1,the third-lowest investment grade, one level above Brazil and fourbelow China. S&P on Aug. 31 affirmed Russia's BBB rating, thesecond-lowest investment-grade rate, on par with Bulgaria, Bahrainand Peru.

Brazil's credit rating was raised one level to BBB on Nov. 17 atS&P, matching a move by Moody's earlier this year. China wasupgraded to AA- at S&P in December.

The extra yield investors demand to hold Russian debt ratherthan U.S. Treasuries rose one basis point to 330, according toJPMorgan EMBIG indexes. The difference compares with 226 for debtof Mexico and 234 for Brazil.

Russia is “clearly underrated” because its state debt as apercentage of gross domestic product is below most developed andemerging economies, the Finance Ministry said in August. Itsdebt-to-GDP of 9.3 percent compares with 42.7 percent for similarlyrated Mexico, according to the ministry.

The cost of protecting Russian debt against non-payment for fiveyears using credit-default swaps rose one basis point to 250 basispoints on Nov. 18, up from 187 on Oct. 27, according to dataprovider CMA, which is owned by CME Group Inc. and compiles pricesquoted by dealers in the privately negotiated market.

The contracts pay the buyer face value in exchange for theunderlying securities or the cash equivalent should a government orcompany fail to adhere to its debt agreements. or company fail toadhere to its debt agreements.

“With strong budget execution this year,” for example “afull-year budget that is careful with the oil windfall despite theelections, and the prospect of lower reliance on the oil sector inthe future, the chances of Russia's upgrade would improve,”according to Nestor at Commerzbank.

The next parliamentary election is scheduled for December, threemonths before a presidential vote. Putin, who plans to swap jobswith his successor, President Dmitry Medvedev next year, made WTOmembership a priority during his first presidential term in2000.

Energy sales account for 17 percent of Russia's GDP and as muchas 40 percent of government revenue, compared with the share ofless than 10 percent for commodities in Brazilian GDP, governmentdata show.

S&P hasn't raised Russia's ranking since September 2006,when it awarded it a BBB+ rating, its third-lowest investment-grade rate. The company downgraded Russia one level to BBB onDecember 2008.

“WTO is a positive piece of news but we don't see muchimprovement in general in terms of economic diversification,”Hornung at Moody's said. “The risks are balanced, as indicated bythe stable outlook.”

Capital flight in Russia, ranked the world's most corrupt majoreconomy in Transparency International's 2010 Corruption PerceptionsIndex, may reach $70 billion this year, compared with a previousforecast for $36 billion of outflows, the central bankestimates.

Russian economic growth, predicted to reach 4.1 percent thisyear by the Economy Ministry, will slow to 3.5 percent in 2012,according to Moody's. The government forecasts 3.7 percentexpansion next year.

“Barring a big oil price fall, it's unlikely the rating willmove down and it may move up if they get through the next yearwithout a mishap,” Seville said in e-mailed comments. “The WTOmembership would be reflected in the rating in as much as it drivesbigger investment inflows, greater trade and stimulates moreefficiency, productivity gains and so on.”

Russia's membership in the WTO will lower tariffs, improveinternational access to Russia's services markets and attach theRussian government to a system of rules, according to the U.S.government.

With oil and gas, which account for more than half of Russianshipments overseas and are not subject to import restrictions inother countries, metals and chemical producers will gain as leviesto sell their products abroad decline, the World Bank said in areport last year.

Russian consumers also stand to benefit as import barriers arereduced, a step that will spur the flow of goods into the country,weakening the ruble and further helping exporters, the World Banksaid.

Improved market access and gains for exporters may bolsterPutin's plan to achieve faster growth of 6 percent to 7 percentannually. Joining the WTO may boost Russia's $1.5 trillion economyby more than 3 percent in the medium term, according to the WorldBank. GDP expanded 4 percent in 2010 after a record 7.8 percentcontraction the previous year.

“WTO entry — and the move to a more rules-based system ofeconomic governance — is definitely a positive for the credit, andstrengthens the case for an upgrade, particularly given that WTOentry has been uncertain, and so not 'in the price,'” Jacob Nell, aMoscow-based economist for Morgan Stanley, said by e- mailyesterday.

Bloomberg