As the New Year approaches, Standard & Poor's (S&P) international credit ratings agency revised Russia's sovereign credit ratings to credit watch negative from negative. It said it could downgrade Russia to the non-investment-grade (speculative-grade bond, or junk bond) as soon as mid-January. Is this assessment based on indicators reflecting the real state of Russian economy? Or is it another politically motivated step taken by the West to disbalance the Russia’s financial system?
Nothing dramatic happened when the Moody's Investors Service delivered the first blow against the Russia’s stock exchange in October 2014 by downgrading the country’s rating. In its turn, Fitch Ratings does not exclude the possibility of downgrading the Russia’s sovereign rating till late January. There is a number of factors to negatively affect the Russian market, for instance investors locking in profits before the end of the year, recent speculative attack against the rouble and, of course, the economic sanctions which bleeded dry the banking system of Russia for a short time.
Meanwhile the Russia’s leading economic indicators make the attack against the country’s rating look irrational. First, the Russia’s Central bank, perhaps with a little delay, took effective steps to flood the banking system with currency liquidity. Second, the financial situation in the Russian regions has not deteriorated in 2014. By and large, it remained the same as last year. Third, the previous long-term rating downgrade by S&P in April 2014 did not have any substantial impact on the Russia’s market. Investors took into account the rating risks and the downgrade simply followed negative market expectations.
It should be remembered that the Russia’s S&P sovereign rating had fluctuated near the threshold grade till 2005. Nobody seemed to highlight the problem during the early 2000s, thanks to the fact that the Russia’s economy grew well. Now, what will happen if S&P will nonetheless revise the Russia’s sovereign rating in January?
Russia’s presidential economic aide Andrei Belousov believes that Standard & Poor’s is unlikely to downgrade Russia’s sovereign rating to a speculative level because this action will undermine the agency’s reputation. “They will then undermine their reputation because our real position corresponds to the investment-grade rating. Such decision will affect the reputation of rating agencies themselves, which was already undermined during the financial crisis,” the presidential aide said.
The Russian government does not cherish any illusions on account of “impartiality” of Western rating experts as the Obama administration officially unleashed the ongoing economic war. Just before the New Year Russian Economy Minister Alexey Ulyukaev made public the plan B to be enacted in case the country’s sovereign credit rating will be brought down to the so-called “junk’ level in early January: the Russian companies bonds may be bought out in foreign currency to secure the advance repayments of the corporate debts according to the covenants.
Even these surgical measures will hardly influence the S&P decision as Strategic Culture Foundation has already mentioned citing the example of Argentina’s default.
A politically motivated decision is the only explanation of the possible downgrade – there is a command given from above to intensify the attack against the financial system of a sovereign state. In these conditions there is no reason to believe the rating agencies decisions could be rational.
Just in case the agencies unexpectedly decide to be impartial, the Obama administration has trump cards up its sleeve. Since a long time the US Department of Justice has been suspicious of Standard & Poor’s activities alleging that S&P was engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS). The influential US Securities and Exchange Commission (SEC) went as far as to offer the imposition of moratorium on the S&P’s access to equity ratings. The US government could also remember the rating agencies’ sudden “attacks of sleepiness” during the 2008 wave of bankruptcies.
The stabilization of the situation on the Russia’s national market is the real reason for launching a second wave of financial measures to contain Russia. The ongoing attack against the sovereign rating of the Russian Federation and the ratings of corporate borrowers should be perceived as an element of general strategy to disbalance the Russian currency market and provoke the bargain sales of rouble-denominated assets. As we know, the US prosecutors investigating the S&P case are the ones to say the final word on the amount of compensatory fine to be paid by the rating agency. Under such circumstances the agency just cannot refuse the Obama’s request “to play” with Russia’s ratings.