In 1998, Russia defaulted on $40 billion of domestic debt and underwent a painful currency devaluation, which helped roil international capital markets. The Yeltsin government managed to weather the crisis, but its credibility was badly dented, both at home and among international investors. That was then. Things have changed. On October 24th, Moody’s raised Russia’s rating from Baa3 to Baa2 and we expect that Standard & Poor’s (BBB-) and Fitch (BBB-) will follow over the next two to three months. A few days later, Russia’s economy minister German Gref announced his country is expected to have a net inflow of capital for the first time since 1994. It should also be added that while Russian sovereign debt is disappearing from the market due to buybacks, a growing number of Russian corporate and bank issuers are issuing debt in international capital markets.

Clearly one factor in making Russia a "success" story is the recent oil and commodities boom. The country has used that money to repay debt, stimulate economic growth -- it has grown at 5.9% for the first nine months of this year -- and build up its foreign exchange reserves in excess of $165 billion. The expectation is that foreign exchange reserves will end 2005 at $180 billion compares to less than $14 billion in reserves in October 1998. The ratio of government debt in Russia to its GDP also decreased to 16% from 150% in 1998. Along these lines, in August Russia repaid early $15 billion owed to the Paris Club of creditor nations, and paid $3.3 billion owed to the International Monetary Fund in January. The government is also talking of prepaying another $8-10 billion to the Paris Club before the end of the year. In addition to repaying debt, Russia is also putting money aside in a special Stabilization Fund. For the first 10 months of 2005, the government's budget surplus was $49.3 billion.

While Russia’s credit picture has improved considerably from the dark days of 1998 and is likely to continue along that track -- as we expect that oil prices are going to remain above $50 a barrel over the next couple of years -- there is another part of the rise of Russia that should be noted. First and foremost, the Putin government is increasingly authoritarian in its approach to governance. Although the form of democracy is still in evidence – with elections and some degree of press freedom - the government and its allies hold real power. Anyone who challenges the Kremlin, like ex-chief of Yukos, Mikhail Khodorkovsky, who talked about challenging Putin for the presidency, runs the risk of ending up in prison and having his or her assets seized by the government.

Another factor that must be taken into consideration is that Russian nationalism is back. This is evident in two ways – the state’s push to consolidate the oil and gas industry under its wing via Gazprom, and by creating a list of oil, gold and copper reserves which it considers strategic and which will be off limits for foreign investors. The issue of nationalism is also evident in the move to reduce debt; by drastically cutting external debt, Russia is slicing down its dependency on the outside world, in particular with the West. Putin and his advisers clearly understand that economic strength is an additional form of power, something that their Communist processors never fully grasped (at least until it was too late). There are other examples – Russian foreign policy is increasingly more assertive in Central Asia and the Middle East, with Putin's efforts to resolve international community problems with Syria and Iran being one example.

Russian nationalism is potentially a double-edged sword. While it provides motivation for the Kremlin to strengthen the economy and pushes the ratings up, it also carries with it the potential for other problems, more political in nature. Only time will tell where the balance between positive and negative lies.