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. Last Updated: 07/27/2016

Russky Standart Sues Rating Agency

Analysts beware: If your outlook on a company is less than rosy, you could get slapped with a multimillion-dollar lawsuit.

Russky Standart, the country's third-biggest bank and No. 1 consumer lender, is suing a Western-owned rating agency for a potentially crippling $20 million after it issued a recent downgrade.

The case is prompting worries that financial analysts might pull their punches when commenting about Russian companies, thus impairing the quality of investment advice on the country.

In the lawsuit, Russky Standart, owned by vodka billionaire Rustam Tariko, is seeking $10 million in damages from RusRating and $10 million from one of its analysts, Yulia Arkhipova. The bank is claiming that Arkhipova's explanation of the downgrade to a reporter hurt its business reputation.

RusRating, the country's largest independent bank-rating agency, marked Russky Standart down from B+ to B last December. A week later, Arkhipova told weekly magazine Profil that the bank's public image had been a key reason.

"It's important for any bank not only to attract clients but to keep them," she was quoted as saying. "But once a client uses Russky Standart's services, he won't come back to them again."

Artyom Lebedev, chief spokesman for Russky Standart, said the lawsuit was "against the rating agency, as well as its analyst, who allowed a one-sided and groundless judgment of the bank's business."

RusRating CEO Richard Hainsworth said the bank was going after his agency specifically over the downgrade. "We cannot find any other explanation for this under the circumstances," he said.

Reached for comment Wednesday, Arkhipova said she stood by her opinions of Russky Standart and was continuing her work. But she added that her experience had made her wary of speaking with the media.

"We are still giving commentary, still expressing our views on various economic events and indicators," she said. "But it's not us and not the bank that will make the decision in this case. It's the court, and it could go either way."

If a Moscow court decides against RusRating during a second hearing in the case on July 17, the rating agency will face bankruptcy, Hainsworth said. It would also set a grim precedent for objective investment analysis and freedom of speech in Russia, he said.

Honest ratings are a vital part of the investment world, as they allow investors to gauge the risk of putting money into a company, said Alexander Batchvarov, head of international structured finance at Merrill Lynch in London.

"In the West, a rating agency is considered a publication company, a statistical organization which publishes opinions," Batchvarov said. "Their ability to express such views is protected under the laws of free speech."

Pavel Gritsevsky, a lawyer representing RusRating, said the precedent would be "fateful" if Russky Standart won.

"If all experts and all analysts are under this kind pressure, we can close the rating agencies, and not listen to any experts at all," he said.

Arkhipova's criticism of Russky Standart is shared by at least some of the bank's customers. Although it has the country's largest consumer loan portfolio -- almost $8 billion with 17.5 million clients, or more than 12 percent of the population -- it also has the worst complaints record by far.

Out of 892 consumer complaints to a government watchdog, the Federal Consumer Protection Agency, 723 were against Russky Standart, according to the agency's web site.

Many investors have a policy of not touching a firm with a rating lower than BBB, meaning that Russky Standart's grade at RusRating would put it on the verge of being cut off from millions of dollars in potential funding.

With stakes this high, companies have often cut off ties with the rating agencies they hired to rate them, said Olga Ignatieva, analyst at the Fitch rating agency.

But with RusRating, Russky Standart did not have this option, as the rating was not commissioned and was issued free of charge.

For the agencies that Russky Standart has hired to rate it, the bank has "great respect," Lebedev, the bank's spokesman, said in e-mailed comments late Wednesday.

"Standard & Poor's, Moody's and Fitch have all adjusted the rating of our bank exclusively toward the positive."

Taking RusRating to court over a little negativity was a bit extreme, said Merrill Lynch's Batchvarov. "I think the way for the court to establish best practice is to have this case completely thrown out, and in this way to discourage any other companies from filing such suits."

Others saw the case as an important landmark along Russia's road to becoming a mature economy.

"When all investment [analysts] come together and agree not to be bullied, then this problem usually goes away," said Chris Weafer, chief strategist at Alfa Bank. "It's a sign of a normal transition that emerging markets have to make."

In a separate landmark case, the Federal Consumer Protection Agency filed a class-action suit against Russky Standart in March on behalf of dozens of the bank's customers over hidden loan fees.

In addition to the 19 percent interest rate on a consumer credit, customers were being required to open separate accounts that came with extra charges amounting to 23 percent.

Oleg Prusakov, the head of the watchdog's consumer protection department, argued against Russky Standart in that case, calling the bank's treatment of its clients "blatantly deceptive."

The court sided with Russky Standart, however, citing ambiguities in the law.

And despite moves by the authorities to get banks to tighten up on hidden fees, new Central Bank rules that came into force Sunday leave at least one loophole: Lenders can still require customers to open the same kind of separate accounts that Russky Standart charged for.