Valdai Club

After protracted periods of relative consensus, all three rating agencies differ in terms of their assessment and views on Russia.

Rating agencies serve a crucial purpose in the world economy – they provide a sense of risk and direction for investment flows across the globe, they are the street lights in the ever growing volume of traffic in global financial flows. Distortions in market signals tend to amplify the imbalances that inevitably arise across various segments of international financial markets and indeed some of the crises episodes in the past decade – from the global financial crisis of 2007-2008 to the subsequent aftershocks of the European sovereign debt crises – may have turned out to be more acute due to credulous faith in the ever-lasting stability of “safe havens” of the developed world.

After the shocks of the past decade things may have started to change in the realm of the world’s leading rating agencies. The ratings of the developed economies started to become more nuanced and differentiated – more weight appears to be granted to such fundamental issues such as leverage in state and private sectors of the economy. Furthermore, some of the emerging markets, including Russia, came out with plans to launch their very own rating agencies that with time may undermine the monopoly of the big three. Finally, it also appears that not all of the agencies are singing from the same song-book and there do appear to be differences of opinion among the big three even with regard to such “consensus stories” such as Russia.

Indeed, in recent weeks despite the somber state of the global economic backdrop, Moody’s raised its long-term credit rating outlook for Russia from negative to stable. The rationale provided by the rating agency for the revision in Russia’s outlook was the progress in stabilizing Russia’s finances. On the other hand, Fitch affirmed its negative outlook on Russia with the credit rating at BBB-, while S&P retained its BB+ rating for Russia with a negative outlook – in both cases the rationale for the decision was the high volatility of the rouble as well as the likely fast pace of depletion of Russia’s fiscal reserves.

As a result, after protracted periods of relative consensus, all three rating agencies differ in terms of their assessment and views on Russia – one of the agencies changes its outlook to stable, another one keeps Russia’s rating at investment grade but with a negative outlook, while the third one retains the sub-investment grade rating together with a negative outlook. While the difference in opinion is not radical, it does point towards greater differentiation of views on Russia and leaves open the possibility of a turnaround in the cycle of rating revisions back towards the much coveted “investment grade” level. The key question at this stage is what will it take from Russia to effect such a turnaround in its sovereign rating?

It seems that for the credit rating agencies the key indicator in the near term will be Russia’s growth performance as well as the state of Russia’s budget. On the growth front, the moderation in the scale of capital outflows together with lower interest rates that are likely to come out of the CBR may propitiate the recovery in investment. In the fiscal sphere the recent measures by the government to look into expenditure cuts to limit the size of the budget deficit at around 3% of GDP may also be positively perceived by the credit rating agencies. In case Russia’s government starts to target a rules-based approach to fiscal policy, in which the lower level of the budget deficit allows to preserve fiscal reserves (stored in the Reserve fund and the National Well-being Fund) for longer, the prospects for further upward revisions in Russia’s sovereign rating may indeed improve.

The main constraint on the recovery in Russia’s sovereign credit rating is the lingering dependency of the economy on oil prices – this is fully exemplified by the current episode of the slide in Brent, which is generating elevated volatility in the rouble and poses risks to fragile signs of recovery. There is also the electoral cycle, which is likely to narrow the government’s scope for maneuver next year in lowering fiscal outlays, most notably in the social sphere. Last but not least, the rating agencies will need to look beyond the stereotypes and the “enlightened consensus” with respect to Russia’s economy and focus squarely on key fundamentals and changes in economic policy direction. Alas, the current reality is that the mist of the “enlightened consensus” together with elevated volatility in global financial markets may continue to cloud Russia’s rating outlook for some time to come.