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. Last Updated: 07/27/2016

What Took Standard & Poor's So Long?

When Standard & Poor's finally decided to award Russia investment-grade status, well after their rivals had already moved, reaction from bankers and analysts ranged from downbeat to almost dismissive.

But S&P's lengthy fence-sitting may have been the inevitable result of the great importance it seems to attach to political risk compared to rival agencies Fitch and Moody's in evaluating a country's creditworthiness.

S&P's move Monday to rate Russia BBB-, one notch up from BB+, and to give it a stable outlook for its long-term foreign currency ratings, was welcomed though analysts said its timing made the ratings agency look like a Johnny-come-lately.

"This is long overdue and was long ago priced into the market," said James Fenkner, a strategist at Troika Dialog. Rival ratings agency Moody's Investors Service raised Russia to investment grade in 2003 while Fitch Ratings gave its investment-grade rating in late November 2004.

Particularly striking were apparent signs that S&P had agonized before taking the plunge.

"It was certainly not an easy decision," said Konrad Reuss, S&P's managing director for sovereign ratings in Europe.

"The key issue is how you weigh political risk in your analysis. Ratings is about relativities and, as far as political risk is concerned, when you look at investment-grade countries, Russia is one of the countries with the highest political risk."

The difficulty of weighing up Russia's creditworthiness is especially acute because its political risk profile has taken a sharp turn for the worse -- even though it has rarely, if ever, been in such a strong position to honor its debts.

Gold and currency reserves now stand at approximately $119 billion, exceeding public foreign debt of $112.9 billion last October.

But the government's destruction of oil major Yukos, whose main production unit, Yuganskneftegaz, was effectively nationalized in December, and a botched social welfare reform have rung alarm bells among investors.

"Toward the end of last year we saw a worsening as far as political risk is concerned: the way social reforms were poorly implemented, the demonstrations and confusing signals from policy makers," Reuss said.

Analysts at S&P have repeatedly said that what they see as the arbitrary use of the tax authorities to target Yukos, a company out of favor with the Kremlin, has cast a shadow over the rule of law and property rights in Russia.

The arrest in 2003 of Yukos' former chief executive, Mikhail Khodorkovsky, who is on trial for tax evasion, and the campaign against the company he founded were seen as Kremlin retribution for his political ambitions. For analysts at Moody's, political risk is important but a country's ability to honor its debts is paramount.

"Moody's is really focused on whether a government is going to pay its debt. The central issue is the ability and willingness to pay," said Pierre Cailleteau, senior vice president for sovereign risk in Moody's Paris office.

But he added: "Of course, that does not mean you do not take into account political risk."

Zsolt Papp, an economist at ABN-AMRO, said he believed S&P's credit ratings could be misleading because they disguised the agency's political risk concerns. The agency had tied itself into knots over Russia, he said.

"It's like the small sprint on a package. You get a headline rating and then you have to read the small print. I think they have to come up with two sub-ratings -- one on a country's ability to pay and the other on internal political risk," Papp said.

"I think Fitch and Moody's have just made life simpler for themselves. They look at a country's willingness and ability to pay, and that's it," he added.

But S&P's Reuss said the two issues -- political risk and creditworthiness -- were inseparable in any credit risk assessment.

"With Russia it really was a question of when the strength of the balance sheet outweighs the concerns we have on political risk. We have reached that point by now," he said.

But he cautioned: "If you have consistently high risk, at some point it will impact on a government's creditworthiness."