The Analytical Credit Rating Agency Issues its First Credit Rating to Russia

In 2017 I introduced the Analytical Credit Rating Agency to the literature – the article is available here, and the pre-published version here. I also discussed the Russian rating arena in an article for Financial Regulation International, entitled ‘Rating Creditworthiness in Russia: A Microcosm of Inherent Issues within the Credit Rating Industry’. As a result of these investigations, there were a number of concerns raised regarding the perceived integrity of the ACRA and how important it was that its rating were to be deemed impartial. This month, the agency produced its first sovereign rating to Russia and this is then the perfect opportunity to review the agency.

The largest concern for the agency was its perceived independence, with my article concluding that ‘the latest endeavour by an “outsider” to influence the credit rating industry will, arguably, result in failure. In the non-profit sector the issue is funding, and now in the for-profit sector the issue is rapidly becoming about perceived independence from political pressure’. Russia had declared that it would be ready to use the ACRA as a yardstick for its investments and that, in time, the agency would be able to showcase the creditworthiness of Russian debt to the outside world. In fact, since the annexing of Crimea and the subsequent withdrawal of the international rating agencies, ACRA has become the central agency in Russia with the Central Bank insisting that its banks obtain at least an A-grade rating from ACRA to be licenced. Fast forward two years, and the results of the agency’s first sovereign rating provides little comfort. The report in the press notes that the agency’s rating of Russia’s long-term foreign currency credit rating, and its local currency credit rating, are ‘significantly higher than the three leading international rating agencies’ - both categories were rated at A-. However, the rating commentary does reveal that the agency is attempting to be outwardly unbiased, especially when it states that ‘the rating is constrained by the low potential for economic growth, limited diversity if exports, lack of transparency of the Russian Government’s obligations to a number of state-owned companies, weakness of institutions, and the threat of new sanctions capable of limiting investment and hindering technology-based cooperation and trade with potential foreign partners’. It is quite a damning commentary, but yet the rating remains significantly higher than the Big Three.

Yet, this raises an important question. Russia have never received an A-grade rating from any of the Big Three, despite ‘having one of the strongest macroeconomic fundamentals of any major economy in the world’. The sentiment being offered by Putin is that the Big Three are overly harsh with Russia and that this stems from the US-centricity. The news report states how Russia has been performing particularly well given the circumstances, with a number of the country’s reserves developing strongly in recent years. This leads to the questioning of whether the Big Three’s analysis is either a. politically motivated, b. incorrect, or c. borne of a lack of real access that the ACRA seems to have no real problem with. Whilst US-centricity is an issue in the credit rating field, it is likely not as impactful as one may believe, and would be extraordinarily difficult to prove even if it was. The Big Three may be incorrect in their assessment, with the oligopolistic dynamic at fault for that incorrect analysis being spread across the board, but the Big Three have vastly more resources than ACRA and their traditional accuracy within the sovereign field do not suggest that they are all wrong. Whilst the Big Three have all withdrawn from Russia’s marketplace, more or less, they still have access to plenty of data and have had a presence in the country for a long time – it is incredibly unlikely that things have miraculously changed since the agencies began to withdraw.

The reality is that whilst ACRA have gained some credit for their rating commentary, and have a press report and some research to support their position, it is still that as soon as ACRA had the chance to rate Russia, it rated it a number of notches above the rest of the Big Three. Whilst its first sovereign rating was only a benchmark – ACRA rated Switzerland first – this is really their first big rating. Regrettably, the commentary will not be enough to remove suspicions that ACRA is simply a government rating agency masquerading as a private independent rating agency. Therefore, whilst it will be of use internally within Russia, that will likely be the extent of its usefulness. We have seen recently that China suffered from an internal credit rating market, and have sought to resolve those issues by allowing S&P into the country. It is not unforeseeable that, at some point, Russia will have to do the same.

Keywords – credit rating agencies, Russia, ACRA, Business, @finregmatters