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Russia’s domestic ratings agency Russian Analytical Credit Rating Agency (ACRA) issued its first sovereign rating, awarding the country a long-term foreign currency credit rating at A- and local currency credit rating also at A-, significantly higher than the three leading international ratings agencies.
“Russia’s A- sovereign credit rating is supported by the low level and sustainable structure of public debt, strong external position, and an effective monetary policy coordinated with fiscal policy that significantly improves macroeconomic stability. The rating is constrained by the low potential for economic growth, limited diversity of 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,” ACRA said in a press release.
Set up in 2015, ACRA has become part of the woodwork and an ACRA rating is not just needed to issue ruble denominated bonds, but the Central Bank of Russia (CBR) has written into the regulations that local banks have to get at least an A grade rating from ACRA in order to hold a banking license.
At the same time thanks to the sanctions the big three international agencies have been slowly pulling back from the Russian market and chosen not to re-accredit themselves as local agencies with the CBR. Today about 50 of the top Russian companies maintain an international rating. ACRA has expanded and now rates some 200 Russian entities.
This is ACRA's second sovereign rating. Earlier this year it issued a sovereign rating for Switzerland, that seems to have been a benchmarking exercise on the part of agency as it works out its all important methodology. Many of ACRA's current staff have been poached from Moody’s.
Fair ranking
Russia’s credit ratings have been improving all year and all the main international agencies have Russia rate at an “investment grade” rating. But there has been a long running dispute between the Kremlin and the international ratings agencies, as the Russian government claim that the rock solid nature of its finances are not adequately reflected in its international ratings.
Currently Moody’s has Russia at Baa3 with stable outlook, Fitch with BBB with neutral outlook and Standard & Poor’s (S&P) with BBB- with stable outlook.
Moody’s last upgraded Russia from Ba1 (Positive) in January 2018 as the economy started to emerge from several years of recession. The lowest rating the country had was B3 in August 2008 following the collapse of the ruble that year and technical default on the government treasury bills, the so-called GKO state treasury bills (which have since been replaced with the OFZs). The highest the country has scored was Baa1 in March 2013 as economy bounced back from the 2008 crisis.
Fitch has been a lot more upbeat on Russia and has consistently ranked it with a treble B rating of one sort or another since 2004, as it take more account of Russia's low external debt and large currency reserves. The lowest rating it had was CCC in August 2008 following the currency meltdown. The highest rating was Baa1 in March 2013 thanks to the economic rebound that year.
S&P has also been fairly consistent on Russia’s rating. Its lowest grade was BB+ (negative) awarded in January 2015. The highest was BBB awarded in December 2008.
But ACRA has given Russia a significantly higher rating as Russia has never won a “A” level rating from any of the international ratings agencies despite having one of strongest macroeconomic fundamentals of any major economy in the world.
Russia - Rating agency
as of September 1, 2019
last change
Moodys (USD rating)
Baa3 (S)
02/08/19
Fitch (USD rating)
BBB (N)
09/08/19
S&P
BBB- (S)
23/02/18
The main use of sovereign ratings is as a tool for bond investors to judge the likelihood that a country will default on its bonds and so the rating plays a big role in pricing bonds.
There is actually a long standing argument over Russia’s ratings as a cursory glance at its fundamentals suggests that it is very unlikely to default on its bonds.
Analysts at Raiffeisen carried out a study several years ago looking at Russia’s macrofundamentals prior to the 2008 crisis and concluded that the country deserved a “A” rating thanks to its low debt and enormous gross international reserves (GIR), which were just shy of $600bn in those days.
Raiffeisen’s faith in Russia was borne out by the 2008 global crisis that saw the Russian economy go from 7% growth to a 7% contraction in the space of six months – a 14 percentage point contraction in a matter of months – yet neither the state nor the companies defaulted on their debt.
Indeed, even in the 1998 crisis – arguably an even more painful crash as Russia had almost no reserves in those days – technically speaking Russia didn't default on its $40bn worth of GKO bonds but simply placed a five-year moratorium on paying out on them placing them in special “S” accounts: a technical default. In the end after five years the state did make all the payments and as a scheme was introduced where GKOs could be swapped for equities, investors actually made money on them. It’s been one of President Vladimir Putin’s bête noirs: don't have debt, but if you do, always pay it off as fast as possible and never default.
How likely is it that if there was another global debt crisis that Russia would be unable to meet its obligations? The short answer is: extremely unlikely. Russia’s macro-fundamental position is one of the strongest in the world.
“Unlike many other sovereign governments, the Russian Government is well positioned to employ countercyclical budget and monetary policies. In view of this, the Russian economy is more resilient to possible external shocks. This room to manoeuvre is provided by the country’s relatively low level of general government direct debt, which amounts to 12% of GDP, and the relatively tight interest rate policy implemented by the Bank of Russia since the financial shock of 2014–2015,” ACRA said in its statement.
As bne IntelliNews has been reporting, Russia had covered its entire external debt dollar for dollar in cash in February, and more recently it can now cover its entire public debt, including regional and municipal debt as well as federal debt, dollar for dollar with its cash reserves.
On top of that the CBR has rebuilt its reserves, which were just shy of $530bn in September, with a large share of that in gold. That is equivalent to 13.8 months of future imports cover, whereas three months is usually considered sufficient.
And there is the National Welfare Fund (NWF), a rainy day reserve fund that can be used to supplement the budget spending in difficult years. The amount in the NWF just doubled in the summer, increasing by RUB4.105 trillion, to RUB7.868 trillion, and in dollar terms by $64.479bn, to $124.137bn, the Ministry of Finance reported on August 2. More importantly for the government, the size of liquid assets in the fund is now more than 7% of GDP, which means there are no restrictions on the government to spend any extra money that comes into the fund now.
The flip side to building up reserves has been to pay down debt. Since taking office Putin has rapidly paid down debt, paying off debts to IMF in his second term and then commercial debt to the so-called London and Paris Clubs. Russia’s gross public debt ratio fell to 14.0% of GDP in 2018 from 16.4% in 2015. While set to rise to 16.9% of GDP by 2024, according to the IMF, it will remain below the government’s conservative 20% of GDP debt ceiling.
“The strong external position is based on the fact that the volume of international reserves exceeds the country’s external debt and that of other sectors (107%), and part of external debt (26%) is denominated in Russian rubles. These reserves are more than sufficient to compensate for excessive exchange rate volatility and refinance the short-term foreign currency debt of Russian companies in the event of an adverse external financial situation, even for an extended period,” ACRA said.
Even if you add in corporate debt Russia still has a modest 84% of GDP total debt versus the emerging market average of 168% of GDP. This is in contrast with almost all the developed world nations where the sovereign debt is in excess of 100% nearly everywhere and the average total debt (including corporate debt) is a massive 266% of GDP in the developed world.
Still, ACRA also identifies the structural constraints on growth that the Kremlin are trying to fix with its 12 national projects. The agency bluntly states the potential for Russian economic growth is capped at 1.5-2% and significant acceleration of growth is unlikely in 2020 due to sanctions.
At the same time the declining working-age population, low level of export diversification, threat of new foreign economic sanctions, low labour mobility, and high domestic transport expenditures play a general role in constraining economic growth potential, ACRA said. But it is Putin’s political failure to create effective institutions that is the biggest drag on growth, says ACRA.
“The weakness of important public institutions poses a long-term risk to the creditworthiness of the Russian government. Strong, sustained presidential power has made it possible to introduce long-term guidelines for state policy and implement unpopular economic measures. At the same time, however, the duration of this period creates uncertainty and the risk of social tension as power will change in 2023–2024,” ACRA said.
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