As the US 'Big Three' rating agencies review and cut their operations in Russia, the field is clearing for the country's own entity, set up last year at the orders of the Kremlin as an alternative that can withstand "geopolitical risks".

"It should be a really independent agency, which would enjoy confidence of all market participants," President Vladimir Putin told the governor of the Central Bank of Russia (CBR), Elvira Nabiullina, when the idea was floated last August. "If we fail to cope with this task, the agency's creation will make no sense." 

The agency is called ACRA, which stands for Analytical Credit Rating Agency. Given the Kremlin's meddling or pervasive influence in every institution in its reach, it was not taken too seriously at first (some wag suggested adding a 'P' at the end). But the sparser ratings landscape could potentially cause that to change.

Citing its "own business reasons", Moody's Interfax Rating Agency (MIRA) said on March 18 that it has withdrawn all of its Russia national scale [country-specific local] ratings. MIRA specialised in credit risk analysis in Russia. Despite halting the national rating scale, Moody's Investors Service will continue to provide global scale ratings to customers in the country and in other states in the region, it said.

Fitch Ratings also said it will likely withdraw local ratings on Russian companies, while Standard & Poor's is "reviewing options available".

The key issue for Moody's and Fitch is having their Moscow branches regulated by the Russian government. Fitch said the new law would put its Russia subsidiary in direct conflict with its international regulatory obligations, although it was continuing a "constructive dialogue" with Russia's central bank.

"The rumour is that international rating agencies are not ready to operate in conformity with Russian legislation," Deputy Finance Minister Alexey Moiseyev said earlier in March. "As far as I know this isn't true. Agencies are ready to work within this regulation, which will enable them to further issue international scale ratings," he said.

The Kremlin has been complaining for years that Russia's rating by these agencies is too low,  arguing that the country has some of the best macroeconomic fundamentals in the world yet is rated below every single country in the EU.

Finance Minister Anton Siluanov said the Moody's decision to downgrade the sovereign rating to 'Ba1' in February 2015 was political. "I think Moody's assessment is not just extremely negative, but based on a very pessimistic outlook, which is unique today," Siluanov said.

     But with some $381bn in hard currency reserves, Russia has more than the equivalent of a year of import cover against the three months regarded as a safe minimum. And despite the collapse of oil prices, gross international reserves have been climbing this year.

External debt has also fallen to extremely low single-digit levels as a share of GDP. Likewise, unemployment is at record lows and inflation, while ending 2015 at 12.9%, was already down to 8.1% by the end of February and is expected to go lower over the year.

(Graphics via chartsbin.com)

However, Russia's continuing dependence on oil tax revenues leaves the economy vulnerable to external shocks. The lack of deep structural reforms has also killed off domestic fix capital formation, which has reduced Russia's growth outlook to 0.5-1.0% a year over the next four years, according to Alfa Bank estimates, hence the low international ratings.

'Wrong ratings prism'

Russia's view is that the ratings should not be a comment on economic strategy per se, but more narrowly an assessment of how likely the country is to default on its debt. Looked at through this prism, then Russia's ratings do seem extremely low. Even in 1998 the government didn't default on the principal of its Eurobonds, but rather imposed a five-year moratorium on payments (still, a technical default), and everyone got their money back in the end.

The Kremlin remains very sensitive over its ratings and ability to raise capital on international markets, because of all the leading emerging markets it is the only one to run an entirely open capital account, allowing investors to move money in and out at will and without charge.

Now the new local ACRA ratings agency hopes to step into the shoes of the wavering big three agencies together with the China-base Dagong Ratings agency that was set up in 1994 and already gives Russia an 'A' rating (very high credit quality) compared with Standard & Poor's 'BBB'. Dagong also gives China the highest 'AAA' rating compared with S&P's 'A+'.

ACRA will not be able to assign ratings earlier than in the second quarter of 2016, the head of the agency Ekaterina Trofimova said in December, while denying that the creation of the national agency was a result of the sovereign rating downgrade by the Big Three.

"Sovereign ratings were lowered before. Creating a new agency was not connected with it. From a methodological point of view there is a fundamental difference between the ratings on the international and national scale," Trofimova told the gazeta.ru news website.

She added that the political risks may be a component of the national sovereign rating only in the form of assessing the effectiveness of the institutional environment, the stability and predictability of the budgetary process and financial policies. "And in any other form, credit ratings should be outside politics, and the more political pressure," Trofimova said.

The Russian market will be the exclusive focus at ACRA's initial development stage, according to Trofimova. "We will then consider the possibility of reaching adjacent markets, primarily markets of the Eurasian Economic Union."

Russia short-changed?

In a study conducted six years ago, the Austria's Raiffeisen Bank International did its own risk assessment of the BRIC countries and also found that Russia was probably being penalised unfairly and deserved a rating one or two notches above its ranking at the time, as bne IntelliNews reported at the time.

"Two recent surveys have challenged the status quo and concluded that if the US and UK and sovereign ratings were judged on macroeconomic merits alone, both would receive massive downgrades: the US' 'fair' rating is 'AA' and the UK's 'AA-', according to the new privately owned Chinese rating agency Dagong Global Credit Rating and Austrian bank Raiffeisen International," bne reported in 2010. "On the flip side, the ratings of the fast growing Chinese economy should leapfrog that of the US to a rating of 'AA+', above that currently from Fitch Ratings, Standard & Poor's and Moody's Investors Service, who rate China 'AA-', 'A+' and 'A1' respectively."

Russia condemned its downgrades last year as politically motivated, as these pushed the sovereign below investment grade for the first time in more than a decade. The finance ministry and central bank plan to use ACRA to replace the so-called big three as their yardstick to measure credit quality of investments, reports Bloomberg.