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What rating are you mine? Why Fitch upgraded Russia's rating and what's in it for us is themes of the day 21.08.2019 at 21:10

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Agency Fitch upgraded Russia's credit rating a week later, after the United States announced new sanctions. Why there is nothing strange?

Two worlds

Agency Fitch upgraded long-term Issuer default rating of Russia to "BBB" by returning it to the level of 2014. To sum up the assessment that our country has received from all three leading rating agencies — S&P, Moody's and Fitch — that Russia is now on par with Kazakhstan, ahead of Romania and Uruguay and is still inferior to Colombia, Indonesia and Thailand, said the head of the Department of securities with fixed yield of UK "Opening" Dmitry kosmodemyansky.

the news of the rating upgrade was received in Russia with a certain bewilderment: too rich background information last weeks negative news. Russia's economy for the year will be in recession, a quarter of children live below the poverty line, the OECD reported a fall in business activity in Russia, the United States announced a second round of sanctions, Moscow has faced a political crisis on the eve of the fall elections... Why the reality outside does not coincide with a positive assessment of experts and who to believe?

everyone has their own Truth

If very briefly, the answer will be that we and the experts the rating agencies look at different things. "Credit rating is an opinion about the credit risk level, the opinion of the Agency regarding the ability and likelihood to timely and fully meet its financial commitment on the part of the Issuer", — says the head of the Luxembourg office of a consulting company KRK Group Nikita Ryabinin. That is, for credit rating have a value above all those economic factors that affect a country's ability to pay its debts, continues QBF senior analyst Oleg Bogdanov.

And these factors may not reflect the quality of life of citizens, because the level of income does not affect the country's ability to pay its debts. "For example, gold reserves (gold and foreign currency reserves. — Approx. ed.) can grow, while falling incomes of the population, the population may become poorer, but this does not mean that the state could not pay off foreign debts," says senior analyst of "Coface Russia" Anna Kokoreva. "The Fitch rating is purely an investment and does not assess the social situation, level of wealth, or joy of the people, social stratification, or other criteria," concludes the founder of the international platform for financing small and medium businesses "Karma" Yury Gugnin.

so what are these criteria, based on which Russia raised the rating? And how this increase is deserved?

Quantity and quality

"Sovereign ratings primarily reflect the probability of fulfillment by the country of its debt obligations, — says Dmitry kosmodemyansky. — This probability consists of two factors: capacity to repay debt and willingness to do it. In the context of the possibility of Russia practically out of the competition. The ratio of public debt to GDP one of the lowest in the world on volume of gold reserves the country is in the top 5, reserves cover annual imports by more than half. As for the desires, then, apparently, the rating agencies are not so sure in the current leadership and quality management in the long term, so Russia gets an average rating is quite low compared to other countries on "democratic values", whatever that means."

it is important to make a clarification: in its assessment, Fitch relies on two types of criteria: quantitative and qualitative. In the final report on the development of Russia's rating Fitch gives the following quantitative indicators:

GDP per capita. The growth of GDP. Inflation. The overall balance of the consolidated budget. The ratio of debt to GDP. The ratio of total external debt (public and corporate) to GDP. The current account and foreign direct investment.

"in Almost all quantitative criteria in Russia everything is in order: size of debt to GDP one of the lowest in the world, foreign exchange reserves exceed the national debt 11 times, corporate debt is also very modest in size compared to other countries", lists Yury Gugnin.

There is also qualitative criteria. "Sovereign rating Agency questionnaire consists of more than one hundred items, many of which are not quantitative, but qualitative, depending on the evaluation of a particular analyst a precarious substance, such as freedom of speech", — says Dmitry kosmodemyansky. In the final report of the quality indicators entered into the following groups:

the Flexible budget financing. Sustainability of public debt. The external vulnerability. The strength of the banking system. Political risks / uncertainty. Macroeconomic Outlook, reliability and consistency. Business environment and competition. Other factors (sanctions, etc.).

"the Only factor that was strange and frightened investors, is the sanctions imposed against Russia after 2014: there were concerns that they would seriously undermine the economy of our country, — says Oleg Bogdanov. — This did not happen. The macroeconomic situation remains stable, all positive balances, international reserves are at maximum levels. Therefore, the Agency Fitch and has decided to increase the rating. No doubt that Russia will fulfill all its financial obligations, no." From Dmitry kosmodemyansky: "All agree that from a credit point of view, Russia is almost the best in the world, analysts disagree is whether the political situation in the country pulls the rating down".

However, increasing the rating, Fitch analysts noted some trends that concern them. First and foremost is the slowing growth of the economy. Experts downgraded its assessment of this indicator. "Weak growth prospects are unfavourable factor for credit — Fitch analysts wrote in a release about the rating increase. Growth slowed markedly in the first half of 2019 (0,7% compared to the same period of the previous year, according to estimates of the Ministry of economy). Although more rapid execution of budget expenditures, the recovery in private consumption and improved external demand will drive the acceleration of growth to 1.2% in 2019, Fitch expects that growth will average 1.9% in 2020-2021 years, below the median forecast of 3.1% for "BBB".

the fly in the ointment

If you do not take into account low for countries with "BBB" rating indicators economic growth other indicators of our country looks very advantageous against the background of its neighbors in the group. For example, we can close the current payments in foreign currency available reserves over 13.6 per month, twice the median for 'BBB'. In addition, we have the lowest group figure of national debt (14.9% of GDP in 2019). What prevents our country to take a step up? Those quality indicators.

When forming the final assessment, the Fitch experts also take into account environmental, social and governance factors. And here Russia is sadly low. These factors are evaluated on a 10-point scale. So, the parameter "Demographic trends" Russia has been the scoring point 3 stating that "demographic trends are one of the factors contributing to the weak performance of the economy and growth potential in the medium term". Slightly better — 4 points — priced options such as "Civil rights and freedoms", "International relations and trade" and "creditor Rights". "Five" (but all for the same 10-point scale) we supplied for "Political stability and political rights" and "Rule of law, quality of institutions and regulation and control of corruption."

Analysts say that the country is prone to geopolitical risks and sanctions "can keep flexibility with the sovereign in terms of attracting funding in the future and have a negative impact on macroeconomic stability, business environment and growth prospects".

the Fact there is No ranking — no money

How important is the rating to investors? Will Russia increase of a rating to attract more money into the country?

"the world's leading Ratings agencies when making investment decisions is crucial, — says Oleg Bogdanov. From the rating depends on what proportion of their capital the investor will invest in a particular asset. If you raise the rating of the country the level of investment in bonds of this Issuer increases automatically."

And the rating upgrade helps in General to increase the flow of money into the country. "Usually, the credit rating of the country positively affects the possibility of attracting investors who invest in debt instruments and in shares," says Nikita Ryabinin.

Moreover, the rating upgrade is able to further support the Russian market and the ruble, adds Exante managing partner Alexey Kirienko.

that principle in the opposite direction. "For example, many funds have the ban on the purchase of shares and bonds of the country, which goes from the category of "investor" — the Director of the sales office of the company "BCS" Vyacheslav Abramov. If the rating is poor, nobody will give cheap loans to this country or its companies supplements Nikita Ryabinin.

And still look out the window...

However, if the latest news from Fitch we are unlikely to see a strong inflow of investment. "It is worth noting that the rating of Russia to the increase was already in the "investment" area, so the increase from "BBB-" to "BBB" is unlikely to fundamentally change the situation and open access to Russian securities for new funds," — says Alexey Kirienko.

moreover, with regard to Russia are currently deciding might be other factors. "Improving the credit rating is a necessary condition for expanding the circle of potential investors, but not sufficient for decision-making on the part of investors, — says Nikita Ryabinin. — News background and actual actions of the government are key when making investment decisions. For example: after the summer events in Moscow, in private conversations and IT managers of venture capital funds suggests that put on hold projects that were actively discussed in 2019".

What next?

Raising the rating, Fitch outlined the factors, development of which will depend on our rating destiny. So, the rating upgrade in the future may be affected:

the prospects for higher growth while maintaining the improved macroeconomic stability; continue to strengthen fiscal buffers and buffers external savings, e.g., as a result of sustained high oil prices and unexpected income; the improvement of structural indicators, such as quality control standards.

At the same time, there are factors which will pull the country rating of Russia down. Fitch will include in their number:

the imposition of additional sanctions that would affect macroeconomic and financial stability, or prevent payment of debt service; changes in policy that could affect its reliability and the progress made in terms of macroeconomic stability — for example, because of the low growth prospects in a long time; the reduction of the sovereign balance sheet on a continuous basis, for example, due to the materialization of contingent liabilities from large public sector.

I Wonder what factors are more likely to be realized?