Russian Investors Might Stay Without Ratings of Fitch, Moody's and S&P

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Fitch, Moody's and S&P, most likely, will not be accredited at the Central Bank, that is, their ratings on national scale will be invalid. However, they still will be able to assign international ratings, which are used in the global capital market

Invalid ratings

Fitch Ratings Agency does not exclude the possibility that it will stop assigning national scale ratings in Russia, Bloomberg writes citing the Head of Analytical Department at Fitch, Ian Linnell. This means that Fitch, most likely, will not create a subsidiary (now in Russia operates a branch office of the agency) and be accredited at the Central Bank, as required by the initiated last year law on rating agencies.

Thus, Fitch's national scale ratings will become invalid in Russia, but the agency will continue to assign global ratings at Russian companies. The creation of a Russian subsidiary means that the rating committee for making decisions on ratings should be in Russia, and not abroad, as it is now.

‘We do not expect that this (rejection of national ratings, – RBC) would entail significant consequences for our presence in Russia,’ said to RBC the Head of Communications at Fitch, Rebecca O'Neill. ‘The majority of Russian companies seeks to get both national and global ratings. We expect that the demand for international ratings would remain the same.’

Time for an ‘informed decision’

From accreditation and, as a result, from assignment of national ratings in Russia are also likely to discard the other two international agencies – S&P and Moody's. This is what a source close to the Central Bank told RBC. A source close to S&P confirmed to RBC that the agency is likely to refuse to create a subsidiary in Russia. According to a source close to Moody's, this agency may act the same way.

‘This issue was discussed at a meeting in the Central Bank in October 2015,’ told RBC at the end of last year a source at one of the international rating agencies. ‘The reasons are the requirements of Russian law and the implementation of the European regulator for delocalization.’ ‘The Bank of Russia continues to negotiate with all three agencies. They still have time to make an informed decision,’ told RBC a source close to the Central Bank.

‘Currently, the Central Bank of the Russian Federation continues to shape and improve the regulatory framework of rating agencies in Russia,’ said S&P's press service on request of RBC on the agency's plans for working in Russia. ‘We are in continuous dialogue with the Bank of Russia, including on the matter of establishment of a subsidiary in Russia, and eventually we will make a decision that will allow us to best carry out our activities in Russia and correspond to the current regulation of rating agencies.’

Direct conflict

The law on rating agencies comes into force in 2017. It requires for all international agencies to establish subsidiaries in Russia, if they want to assign ratings on national scale – those used within the country, such as in the placement of state funds or lending in the Central Bank.

The law also prohibits agencies to withdraw credit ratings assigned on national scale, in connection with the decisions of foreign authorities. This requirement leads to a conflict of laws: international agencies are forced to choose between the compliance with the Russian legislation and the legislation of countries where situated their headquarters (the US and the UK). ‘We, as a global company, which must comply with the US laws, are put in a situation where, in the case of sanctions against Russian clients, we would violate either Russian or international legislation,’ said Linnell in an interview with Bloomberg.

‘The new law requires the Central Bank of Russia to approve our decisions on assignment and withdrawal of national ratings. This would put our subsidiary in a direct conflict with our regulatory obligations at the level of the parent structure,’ added Rebecca O'Neill.

According to the law that comes into force in 2017, foreign rating agencies may operate in Russia either through branch offices and assign international ratings, or create a subsidiary in Russia, which would meet the new requirements of the Russian legislation and assign ratings on national scale. Due to the requirements of the new law, the expenses of international agencies should grow significantly, which may be economically impractical in a situation where there are no preconditions for the market growth.

Prior to the enactment of the law, the Central Bank announced that it would not take into account the lowering of ratings by the Big Three rating agencies, which they did after March 1, 2014, i.e. after the entry of Russian troops in the Crimea, and after December 1, 2014, when the Secretary General of NATO, Jens Stoltenberg, said that he supports Western sanctions against Russia and would like to see them joined by as many countries as possible.

Deputy CEO of National Rating Agency, Alexey Venchakov, believes that a number of requirements of the new law does not fit into the business strategy of international rating agencies. However, in his opinion, it would not seriously alter the proportion of rating services market of major players, as international agencies will still be able to assign contact ratings of reliability and creditworthiness from overseas offices. ‘The main outflow of customers in Russia will be at expense of the companies that have used a rating for regulatory purposes: to be able to invest pension savings, manage insurance reserves, and so on,’ explained Venchakov.

‘Creation of a Russian subsidiary would mean that an agency will have to start everything from scratch, create a service of compliance, translate into Russian internal documents. It means a lot of work and high expenses,’ previously pointed out in an interview with RBC CEO of Expert Rating Agency, Dmitry Grishankov, adding that most of the companies and banks use ratings of the Big Three in the external market.

RBC also requested official comments from Moody's, but has not yet received a response.

National scale ratings are an assessment of the risk of national issuers and their debt obligations in the conditions of a country. National rating scales characterize the level of the issuer's risk and probability of meeting its debt obligations compared to other issuers in the country. Ratings assigned on national scales of different countries are not comparable with each other. If an issuer gets, for example, the maximum credit rating on an internal scale of one country, and another issuer gets the maximum credit rating on an internal scale of another country, the levels of credit risk on them are likely to not match.

Global rating scale is designed for accurate comparisons of issuers from different countries, it takes into account the impact of direct and indirect risks and allows to compare any companies to each other.

RBC, 29/02/2016